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124 • Microfinance for Bankers and Investors several current initiatives are addressing these gaps and providing opportuni-ties for interested parties looking to enter this market. MFIs forgo core banking systems when they see the software as too com-plex and expensive and do not recognize how it can help them in the short and long run. Many MFIs lack internal IT departments capable of supporting such systems. Early microfinance giants, including BRAC, Grameen Bank, and Bank Rakyat Indonesia, grew to over a million clients with manual systems—often boxes of cards, one for each client. For years, their only computers were at the regional and national offices. But that was in the 1980s and early 1990s. Today, manual systems are uncompetitive except for nonregulated MFIs with only a few thousand clients. As institutions grow, they evolve through stages: from manual loan tracking, to Excel spreadsheets, to a customized microfinance application, and finally to a core banking system. Three paths for increasing systems efficiency for small financial institutions are becoming clear, each suited to a different level of institution. Small MFIs and credit unions can employ open-source solutions. Medium-sized institu-tions can collaborate to consolidate back-office operations into one format that an IT provider can work with, possibly combined with some outsourcing. And larger MFIs can outsource most of their IT functions. All of these options present business opportunities for technology compa-nies, as long as providers take into consideration a few characteristics that have previously fragmented the MFI software market. MFIs use different lending methodologies, not only from mainstream banking, but from each other, and can be very resistant to suggested adjustments. They operate with many different languages, regulatory requirements, and operations. MFIs also vary in institutional form, scale, and sophistication, from NGOs to credit unions to commercial banks. Furthermore, since MFIs serve lower-income people, they tend to be cost sensitive. For instance, small- and medium-sized MFIs might not be willing to pay more than $200,000 for a core banking system because of constraints on financial resources. Large MFIs tend also to look for solutions below the $500,000 mark. Core banking system providers must price their products accordingly or provide a combination of software and outsourcing services that could help lower the overall banking system ownership costs for MFIs. The Grameen Foundation, with support from the Omidyar Network, led the creation of an open-source core banking system called Mifos, which aims to increase the use of core banking systems by unregulated and small MFIs. This solution is being used at Grameen Koota, an Indian MFI, as well as MFIs The Technological Base: Payment Systems and Banking Software • 125 in Kenya, Tunisia, the Philippines, and other countries. SunGard and IBM have contributed to system development and implementation. At first, system development and technical support was done on a pro bono basis, but as more MFIs use Mifos, for-profit opportunities for providers and consultants who can tailor Mifos for specific national or company use may arise. The project identifies local technical support providers who wish to learn the system as a business opportunity. Open-source software can be adapted by software devel-opers in-country, and a Web-based community supports rapid adoption and ongoing improvements. Some providers, such as Temenos and i-flex, provide standardized global banking applications for MFIs. Temenos was founded in 1993 as a software provider to the financial-services industry. It has sold core banking systems to nearly 600 financial institutions, from large commercial banks to small MFIs in 120 countries. It adapted its software to MFIs by offering a scaled-back, cheaper version of its mainstream product. Only a few strong vendors are needed to serve this mid-range microfinance market. With this move, Temenos assured itself a profitable niche. Some of the world’s large commercial banks have realized that they can achieve efficiencies by outsourcing their IT operations to application service providers (ASPs), prompting ASPs such as i-flex and Tata Consulting to look at the MFI market. Salesforce.com has developed an information manage-ment system for MFIs called Salesforce Microfinance Edition. This on-demand software, available over the Internet, tracks payments, manages work flow, and analyzes client data. We expect that the ASP model will become increasingly common in the next few years. Opportunities exist for IT providers to help MFIs transition to any of these options. Many MFIs do not have the expertise necessary to undertake such upgrades. Even MFIs with reasonable systems need help expanding their oper-ations to remote areas in a cost-effective way. Front-end solutions such as point-of-sale devices, cards, and cell phone banking must be integrated into their main core banking systems, providing opportunities for companies that can support such integration. The need for software for MFIs has created opportunities for small soft-ware companies. Purchase of equipment, training for staff, upgrading, sys-tem maintenance, and new product development all represent opportunities for local and international IT specialists. As microfinance grows, the demand for efficient software and systems grows. And as software, IT platforms, net-works, and hardware become more sophisticated, financial services improve and expand. 14 BUILDING THE MARKET FOR INVESTING IN MICROFINANCE any committed professionals are dedicating themselves to integrating the market for microfinance investment into international capital mar- kets. The hallmarks of a mature microfinance investment market will include ready availability of high-quality information about MFIs, a wide range of investors, and active trading with ease of entry and exit. When this day comes, MFIs will be able to raise funds at favorable costs that accurately reflect their risk and return profiles. Information for Investors:Advisors, Data,and Ratings The biggest issue in market creation is getting the right information into the hands of prospective investors. Wall Street professionals are accustomed to clicking on Bloomberg.com for an instant flood of data. But there is no micro-finance page on Bloomberg. When The Economist took its first serious look at microfinance in 2005,1 it complained about the lack of data and the obscure metrics that meant something to microfinance mavens but nothing to standard investors. Frustration almost jumped off the page. For their part, MFIs “grew up” responding to donors’ information needs. Only recently are they learning to understand how investors use information • 126 • Building the Market for Investing in Microfinance • 127 to make decisions. At first, MFIs with nonprofit origins may even have greeted investor requests for information as “none of your business” or as signaling lack of trust. The information infrastructure now developing to support microfinance is multifaceted, including a central data source (the Microfinance Informa-tion Exchange or MIX), mainstream and specialized investment advisors, investor associations, and rating agencies. This chapter takes us on a quick tour of the players. Investment Banking Services Investment bankers deepen the market not only by placing securities but also by helping investors and MFIs understand each other. If they are to reach investors, MFIs need the expertise provided by advisors, as well as the legiti-macy that partnering with mainstream players provides. As for the advisors, Investment Dealers Digest puts it bluntly: “As history shows, any time a new asset class emerges, Wall Street stands to profit handsomely from underwriting new securities and selling them to brokerage clients.”2 Citibank, Deutsche Bank, and J.P. Morgan are among the major invest-ment advisors that have launched microfinance units. These, together with specialized emerging markets and microfinance advisors like BlueOrchard and Developing World Markets, were key players in each of the international microfinance deals described in this book. If not for Citibank, for example, Mexican institutional and private investors would never have been interested in the Compartamos bond issues in 2004 and 2005. And Credit Suisse was instrumental in the success of Compartamos Banco’s IPO in 2007. The motivation behind the move into microfinance by investment banks is complex, and not purely profit-driven. Asad Mahmood of Deutsche Bank, one of the bankers who has been at this longest, insists that microfinance would not receive such corporate commitment if not for the social mission. The scale of the industry is simply too small, he argues, and will remain small compared to other industries for some time. While investment banks expect to make money from the microfinance deals they design, they might make even more putting staff to work in other sectors. On the other hand, one cannot dismiss the com-mitments to microfinance as mere image-building or conscience-calming. Investment banks are attracted for reasons that include penetrating emerging and frontier markets, the attraction of working at a cutting edge of finance, and 128 • Microfinance for Bankers and Investors tapping into the growing social investment movement. Following the U.S. financial crisis, we can add making countercyclical investments to the list. Perhaps one of the strongest motivations includes building a motivated workforce. Many of the investment banking staff working on microfinance love what they are doing. They go to interesting places, solve challenging prob-lems, and make a difference to people in need. Individuals like Mahmood follow personal passions and act as internal entrepreneurs to build corporate commitment. Insightful top leaders respond because they understand how a microfinance practice could enhance their company’s ability to attract and retain proud, motivated employees. Microfinance Investment Vehicles The vast majority of international investment in microfinance takes place through microfinance investment vehicles (MIVs): debt and/or equity funds that specialize in microfinance and sometimes other forms of social investing. At the end of 2007 there were 91 MIVs with $5.4 billion under management.3 The growth of these MIVs are a significant part of the larger phenomenon of “impact investing,” which encompasses renewable energy, community devel-opment, and other investible activities with social or environmental benefits. Microfinance investing has developed somewhat independently of other forms of impact investing, but linkages are increasing.4 The growth in the number and size of MIVs was exponential through 2007. MIV investments more than doubled from 2006 to 2007. Most (78 percent) of the investments are in debt; however, equity investments are increasing faster. At least seven new equity funds were established in 2005–2007. This growth momentum continued through mid–2008 but was curtailed with the financial sector crisis in late 2008. Eastern Europe and Latin America receive the bulk of the investments, though South Asia and Africa are beginning to attract more investors. MIVs have been traditionally structured as debt funds in order to attract investors not prepared for emerging and frontier markets that fall below an investment-grade rating. During the heyday of collateralized debt obligations, debt products were structured in tranches to meet the different risk appetites of investors. The structured finance vehicles created by BlueOrchard (BOLD I and BOLD II) and Developing World Markets (Microfinance Securities ... - tailieumienphi.vn