Live Blogging: MF and the Global Meltdown

For me, the highlight of the conference thus far was the session titled “Global Meltdown and Microfinance: Implication for the Sector.” The following is a description of the proceedings:

Characters

Vijay Mahajan (moderator of session and Chairman of BASIX)

Vikram Akula (CEO of SKS)

Eric Savage (Managing Director of Unitus Capital

Nancy Barry (President of Enterprise Solution to Poverty)

Robert Annibale (Global Director Microfinance, Citigroup)

Mahajan introduces the session with his usual playfulness and joie de vivre. He explains that for this session there will be no presentations, but rather, he hopes, a frank discussion.

Annibale begins by stating his belief that the investment community’s view of MF has not changed due to the financial crisis. It is simply that there is tight liquidity in general, and this will inevitably have some affect on funding. Collaterized debt obligations, and other forms of structured debt, will likely become less popular because of the bad name they have acquired from the sub-prime crisis. Finally, he argues that a deceleration of growth might be good for a sector that is possibly overheating.

Akula speaks next. He claims that he is going to be a contrarian, but then goes on to say exactly what I would have expected, that microfinance clients will not be affected because they are “decoupled” from the formal financial sector. He gives three reasons for this: 1) clients are not integrated into greater economy 2) members have high returns on investment, so just a marginal decrease won’t hurt them badly 3) poor people can over come anything (again, these are Akula’s opinions, not mine). He brings up other instances in history, such as the financial crises in Indonesia and Latin America, which demonstrated this decoupling. Akula’s last piece of evidence that members are not being affected is that SKS borrowing data for October was as strong as ever.

Barry begins her response to Akula by bluntly stating that she hopes he is wrong because perhaps less funds will give MFIs the opportunity to reassess their activities. She explains to Akula that the fact that borrowing for SKS is up is far from clearly correlated with the economic health of his clients, and that in the example of Indonesia, the primary source of funding for BRI, Indonesia’s market leader, was the savings mobilized from their clients (which is not true for most Indian MF providers). She relates her experience speaking to SEWA bank clients that had recently expressed difficulties with selling their products. She continued to go on a bit of tangent by discussing her issues with the current predominant model of MFIs. Her feeling is that these MFIs are having little impact because they don’t know how to do anything else but lend, and have very little depth (SKS was clearly implicated as being an MFI of this type). She hopes that this global economic slowdown might give MFI CEO’s like Akula a moment to take pause and consider whether they were truly doing all they could towards poverty alleviation.

Savage brought things back towards the original question of the session, and suggests the global meltdown will have an effect on MFIs because the rates they can lend at will almost surely rise. He believes that major bankers no longer trust their ability to judge what types of loans are correlated to the global market, and that will generally make them more cautious. He ends by suggesting that he still sees MF as a fantastic place for investment.

Mahajan then comments that he thinks that we still do not know what the impact of the global crisis will be, and that it may still be a year before it has consequences for MF in India.

Annibale notes that Indian MF is a bit insulated because so much of its funding comes from within India. (For better or worse, and this time for the better, conservative regulation assures this dominance of local funding). He thinks that the crisis might also force MF to diversify funding sources and focus on bringing down operating costs.

Akula jumps in to suggest that although the amount of money that is available is unlikely to change, the composition of the recipients might. He believes that small and medium sized MFI could get squeezed, while large MFIs (like SKS, who received 75 million in equity last week) might even find funding easier to garner. In response to Barry, he claims that he would love to be able to take savings, but it is not possible considering current regulations. He also responds to Barry that he thinks big group lenders such as SKS can both move up market and grow, at the same time as increasing depth (citing SKS massive health insurance scheme as an example).

Barry reacts to this by railing against the “radical uniformity” of the major group lenders. She challenges organizations that she admires like SEWA Bank and BASIX, which she believes have true multi pronged strategies, to become national “gamechangers” by attempting to expand. She even directly recommends to Akula that he reconsider SKS’s approach so that his organization could become the “gamechanger” she believes Indian MF needs.

I have left out a bit of what discussed for the sake of brevity, but I believe these are the essentials. Following the session, I had a bit of a debate with some of my CMF colleagues. I am quite sympathetic to Akula, and they were greatly impressed by Barry. It was comforting to know that “radical uniformity” is not such a problem within our organization. I hope that some of my colleagues will chime in to discuss their interpretations of this discussion, and what I have misrepresented.