The Billion Dollar Question: Are IPOs in Microfinance a Sign of Being Progressive or Simply Greed?
An IPO stands for Initial Public Offering of common stocks or shares of a public limited company. Micro Financial Institutions are mostly engaged in financial lending to smaller borrowers and have a stated social aim of helping to alleviate poverty- can these two opposing concepts work in tandem or are they diametrically opposed to each other? When commercially orientated companies make the big decision to have an IPO, their main aims are usually to mobilize capital for further expansion and possibly (as in the case of Facebook) in some instances may have been forced to go down this route by the regulatory authorities as a secondary market has been inadvertently created for their high demand shares. On the other hand, when an MFI makes this decision, their aims are to increase the capital for lending to their clients: or do they have other aims in mind? This may be become clearer when we look at two MFIs that have had IPOs in the recent past; Banco Compartamos of Mexico and SKS, the largest MFI in India. Compartamos went for an IPO in April 2007. The issue was oversubscribed 13 times and in the first day of trading in Stock Exchanges, the share price surged 22% from the issue price. This company was created in 2000 and the original investors amassed profits of $450 million, by selling just 30% of their stakes, as a result of the price escalation in the public market, which was almost at a crazy 1,150% of the book value of shares! Interestingly, Campartamos was originally a non-profit organization, prior to 2000 and received enormous government subsidies, for their "social service" of helping poor women of the region by providing them with loans for their businesses. After Compartamos went public, it started to generate significantly higher profits than it did previously. This was mainly because they increased their interest rates to keep their shareholders happy and ended up charging an effective interest rate of almost 86% interest per annum - more than three times what normal banks charged. The returns on equity were as almost high as 50% at their peak. As a consequence, the shareholders of Compartamos, who were mostly institutional investors and Private individuals, enjoyed huge profits. In contrast, the people whom the bank had set out to help, the poor women in the rural areas did not see any real benefits, if anything they struggled more with the repayments on their loans as a result of the increase in interest rates. Similarly SKS Microfinance Ltd. - aptly nicknamed by critics as Compartamos II - went the same way. Its IPO for $347 million was oversubscribed by 13.8 times. The issue of 13.77 million shares to public and retail investors was exclusive of 3.02 million shares, reserved for anchor-investors - meaning financial giants. Again, their stated objective was - lending finance for the rural poor - small farmers, vegetable vendors, weavers and the like. SKS boasted of 7 million clients already and by 2012 that will be extended to 15 million clients. After the IPO and subsequent Board room coups that ensued, it was like Compartamos all over again: Interest rates increased and particularly in Andhra Pradesh, the incidence of suicides of borrowers increased. On further investigation, it was actually found that the bank's credit officers had encouraged the borrowers to take out life insurance as collateral for their loans, which means that on their death, SKS would actually get the loans repaid in full. The vital question in both cases is who ultimately benefits from an IPOs? The IPOs both resulted in higher effective interest rates, so that the firms could reach their profit targets set by their new shareholders, who obviously expected dividend for their equity. While it is indeed important for microfinance institutions to become self- sustaining and not be shackled by inadequate donor funding, it does raise the question that if their stated aims are to alleviate poverty through providing loans to the 'unbanked' can this work hand in hand with mainstream finance such as IPOs? From the two examples so far, my answer would be a strong reaffirming no!Kanini Mutooni Article Source: [http://EzineArticles.com/?The-Billion-Dollar-Question:-Are-IPOs-in-Microfinance-a-Sign-of-Being-Progressive-or-Simply-Greed?&id=6024408] The Billion Dollar Question: Are IPOs in Microfinance a Sign of Being Progressive or Simply Greed?Comments [0]
