Ramesh S Arunachalam
Hugh Sinclair’s recent book has already stimulated my interest in a topic – regulation of micro-finance investment vehicles (MIVs) - that has been much neglected. Please see previous articles that raise the issue of regulation and supervision of MIVs in a general sense (Why blame the MFIs alone?; Should not microfinance investment vehicles be judged by the same standards set for retail MFIs?; and Regulation and Supervision of Micro-Finance Investment Vehicles: An Urgent Task for Central Banks and Regulators Globally!)
Now, as noted earlier in the above articles, by its very nature, regulation and supervision of MIVs is likely to be very complex because of the diverse legal forms that MIVs assume, the vast geographies that they operate from and the diverse countries/institutions that they invest in. Anyway, let us examine the available data on the subject before we come to any kind of conclusion on the matter.
As noted from the Table above, the 142 MIVs listed in the Syminvest database are from 22 countries.
In terms of countries with number of MIVs greater than or equal to 5 (>=5), there are seven countries – namely, Luxembourg, United States, The Netherlands, France, Cayman Islands, India and Mauritius. These seven countries together account for around 77.46% (or 110 of the 142) of the MIVs
And, these 110 MIVs control over 94.21% of the total assets (of all 142 MIVs) and 94.27 % of the micro-finance assets (of all 142 MIVs). Three other points are in order here: a) for the 110 MIVs, micro-finance assets constitute 68.87% of their total assets; b) some of the MIVs in the group of 110 have not reported their micro-finance assets to the Syminvest database (like the 5 MIVs incorporated in Mauritius; and c) some of the MIVs have neither reported their total assets or their micro-finance assets (like the 6 MIVs from Cayman Islands). The above caveats notwithstanding, the larger implications are the following:
a) A very significant number of MIVs (110 or around 77.46% of all 142 MIVs) are incorporated in the above seven countries;
b) These MIVs control total assets of around 6.63 Billion US $ and this number is likely to increase when the MIVs from Cayman Islands report on their portfolio
c) These MIVs control total micro-finance assets of around 4.56 Billion US $ and this number is likely to increase when the MIVs from Mauritius and Cayman Islands report on their micro-finance portfolio
OK, the above analysis clustered countries with greater than or equal to 5 MIVs in a country and then, did the analysis.
Hereafter, we look at the total assets controlled by the MIVs in a given country and then, sort countries on the basis of their total asset value using a specified criterion (say US $ 50 Million in total assets).
As noted in Table 2 below, in terms of total assets greater than US $ 50 million, there are 6 countries – namely Luxembourg, The Netherlands, United States, Belgium, Germany and Italy. The six countries have 96 MIVs (of the total 142) and these control about 96.59% of the total assets of all 142 MIVs and 97.97% of the micro-finance assets of all 142 MIVs.
Likewise, as noted in Table 3 below, we list countries (all of its MIVs included) that have a certain minimum micro-finance portfolio and also a certain percentage of their total assets in the micro-finance portfolio. Two criterion have been chosen here for segmenting the countries: a) they must have greater than 25 million US$ as their micro-finance portfolio; and b) they must have over 50% of their total assets in micro-finance assets. There are seven countries – namely, Luxembourg, The Netherlands, United States, Germany, Belgium, Liechtenstein and Italy – having a total micro-finance portfolio greater than 25 million US$ and over 50% of their total assets in micro-finance portfolio. Again, these 7 countries have a total of 97 MIVs. These 97 MIVs, in turn control 97.29% of the total assets of all 142 MIVs and 98.72% of the micro-finance portfolio of all 142 MIVs.
Taken together, irrespective of whether the number of MIVs (>=5) is used as a criterion or whether their total assets (>50 million US$) is used as a factor or whether the size of micro-finance portfolio (>25million US$) and its proportion of total assets (>50% of total assets in micro-finance portfolio) is used as a differentiating input, the key countries where MIV activity appears to be flourishing are the following countries given in Table 4 below:
One interesting aspect from the above table is that irrespective of the criterion chosen, the top three countries are Luxembourg, The Netherlands and The United States – these three countries account for: a) 86 (almost 60.6%) of the total 142 MIVs; b) 93.13% of the total assets of US $ 6.63 Billion US $; and c) 93.84 % of the total micro-finance assets of US $ 4.56 Billion
Therefore, as a start, it may be prudent for regulators in all of the countries - given in Table 4 above and especially, Luxembourg, The Netherlands and The United States - to start looking at the MIVs physically incorporated in their countries/territories and/or operating from there. For starters, this would result in a huge number/proportion of the MIVs being regulated and supervised. In a subsequent article, I look at data for regulating/supervising the fund managers/sub-advisors of these MIVs.
And before I sign off, I would like to humbly suggest that Parliamentarians from these countries, just as in United Kingdom, may want to start analyzing laws that: a) incorporate these MIVs, and b) regulate/supervise them - so that the kind excesses witnessed in India (in the years 2008 – 2010) and elsewhere are not traced to their shores. It is one thing to claim to fight poverty and enhance access to finance in another country; it is entirely another thing to let the investment vehicles run amok (with little or no regulation) and with little regard for what impact their investments have on the poor people (in other countries).
Here it must be noted that even reports like the recent CGAP report on MIVs (http://www.cgap.org/p/site/c/template.rc/1.9.57511/) look merely at growth or decline of investments in micro-finance and the reasons therein. There is very little (or perhaps even no) mention of what impact these investments have on the local low income (rural and urban) economy and excluded/poor people. Here are some examples;
a) In fact, the CGAP report carries the word clients on five occasions and these are all in the disclosures page – under the heading – “Important Disclosures” (last but one page);
b) The word impact is not there in the report and impacted is used three times with references to the following – “slightly impacted the reported volume of capital flows” (page 3), “impacted PE flows in 2011” (page 4) and “impacted by the crisis that erupted in the state of Andhra Pradesh in October 2010” (page 7); and
c) The word poor occurs twice and it is in CGAP’s name - Consultative Group to Assist the Poor (in the copyright page)
And look at some of the conclusions drawn in the report:
a) Investments reported in Asia mainly included deals in India (92 percent of the total volume in the region) with a few other transactions in Pakistan, Indonesia, and Cambodia. Despite the microfinance crisis in the Indian state of Andhra Pradesh, India had 19 deals closed and priced, amounting to over US$88 million compared to 10 deals that amounted to over US$45million in 2010. (Page 6 of the CGAP report)
b) Overall, the microfinance PE market experienced stronger activity in 2011, picking up from 2010, with an increase in the volume of transactions. However, some lingering effects of the crisis remain, and 2011 saw the continued compression of valuation multiples for MFIs and LIFIs from the highs in 2009. We believe there is a wider convergence trend between the valuation of emerging market banks and microfinance providers, be it specialized MFIs or LIFIs. For 2012, we do not expect microfinance equity valuations to decouple significantly from the valuation of emerging market banks. We expect valuations to be stable in most markets, with the exception of SSA and certain countries of LAC, which could see some increase in valuations. (Page 14 of the CGAP report)
That said, now that regulation and supervision of MIVs is being debated seriously, I sincerely do hope that governments and regulators in all these countries (where MIVs tend to flourish) start looking inward as to their own system of regulation/supervision and bring in the least required regulation/supervision and minimum standards for MIVs to operate responsibly….that alone can usher in an era of responsible finance…in the host countries in Asia, Africa, Latin America and elsewhere…and then cases like LAPO will hopefully be far and few and in the distant past…