Deutsche Bank’s Investments in Micro-Finance Institutions (MFIs): In Tune With Its Own Global Micro-Finance Strategy?

Ramesh S Arunachalam

Folks, the last few weeks have indeed been a revelation on how investors operate in the international supply chain of micro-financing. Courtesy Hugh Sinclair and his controversial book, we have received a lot of insight into the functioning of MIVs and other investor(s) like Deutsche Bank.

In fact, commenting on Deutsche Bank’s Micro-Finance Investments, Hugh Sinclair notes[i]:

“Deutsche Bank has recently acquired 9.15% of the shares of Indian MFI SKS, which is a bank I question substantially in the book. It would be hard to defend any claim that Deutsche Bank were unaware of the claims about SKS given the adverse publicity the institution has received. Criticism involves the IPO process and personal enrichment of a few individuals and private investors; abusive debt-collection practices, leading to explicit mention in the SERP report regarding client suicides; and most recently, “massive problems” with their life insurance practices, amongst other criticisms. Deutsche presumably found such factors compatible with their ethical practices.

Therefore, I believe that there are genuine concerns about the role of Deutsche Bank in the battle to reduce poverty. I believe there are valid reasons to support the case that their due diligence is not as thorough as it could be. I believe there are fundamental contradictions between the claims made in the SMART Campaign (which Deutsche Bank endorse and support financially) and Deutsche Bank‘s subsequent actions. I believe that the MIVs are largely (not entirely) responsible for a significant part of the adverse activities of some of the less scrupulous MFIs globally, not simply in India, by providing fuel for the fire and turning convenient blind eyes when it suits them.

I also await a formal response from Deutsche Bank in this regard, and I would like to hear Asad Mahmood's defence of the claims made in this book, and his explanation of the recent SKS investment. I assumed they may be shaken into acting more ethically in response to the book, but in my personal opinion, the fact that they now invest in an institution such as SKS, and did so via a tax-efficient investing vehicle based in Mauritius, leads me to a personal conclusion:

There is little evidence of concern for the welfare of the poor; profit is the driving force (acquiring equity in SKS following a 90% fall in share price); and their actions are inconsistent either with the best wishes of the investors in their fund (assuming these wishes to be social impact rather than profit) or those of the poor. This is my personal opinion, others are free to disagree.”

What is increasingly convincing me that, what Hugh Sinclair has been saying may indeed be a “correct” representation of reality as far as investors like Deutsche Bank are concerned, is the recent investment by Deutsche Securities Mauritius Limited in SKS Micro-finance Ltd, India’s only listed micro-lender. The investment that I am referring to is the purchase of shares worth Rs. 779 Million (US[ii] $ 13.90 Million) by Deutsche Securities Mauritius Limited in SKS Microfinance. As the Bombay Stock Exchange (BSE) lists under “Disclosures under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011”     (http://beta.bseindia.com/corporates/Sast.aspx?scripcd=533228), it is indeed true that Deutsche Securities Mauritius Ltd acquired (on 25^th July 2012) through a QIP allotment, 9.5 Million Shares in SKS Microfinance Limited. The original table from the BSE site is reproduced below.

And a Times of India article[iii] commenting on the above transaction, observes that:

“Interestingly, Deutsche Securities Mauritius held 3.82% stake (27,61,174 shares) upto March 2012 but had exited the company during the April-June 2012 quarter as per shareholding data available on BSE. Deutsche Securities re-entered India's only listed MFI player through the QIP that was offered at a price of Rs 75.4 per share, a discount to the then prevailing stock price. CLSA (Mauritius) Limited too has picked up 9.15% in SKS through the QIP and was allotted the stake last week. The QIP issue had opened on July 12 and closed on July 17, with SKS mopping up a total of Rs 230 crore through the Rs 165 crore QIP issue….SKS, which was once India's largest MFI player, has been strapped for cash after it was plunged into losses by the AP MFI crisis that was triggered in mid October 2010 by the Andhra Pradesh government clampdown on MFI lending after a string of borrower suicides rocked the state due to the alleged strong arm tactics of MFI agents.”

Now, what do we know about Deutsche Securities Mauritius Limited?

According to available secondary data in the internet[iv], Deutsche Securities Mauritius Limited, is incorporated in Mauritius with Registration No. INMUFD175508 valid up to 06 - JAN – 2014. According to other information available across the internet[v], Deutsche Securities Mauritius Limited is said to operate as a subsidiary of a Singapore based company called Deutsche Asia Pacific Holdings Pte Ltd.

Deutsche Asia Pacific Holdings Pte Ltd, as a company, is said to engage in financial futures, options broking, stock broking, foreign exchange trading, and provision of related financial advisory services. Deutsche Asia Pacific Holdings Pte Ltd is said to have been formerly known by the name – ‘Deutsche Morgan Grenfell Asia Pacific Holdings Pte Ltd’.

And going further up the ladder, we find that Deutsche Asia Pacific Holdings Pte Ltd is said to be operating as a subsidiary of DB Valoren S.à r.l which in turn is said to be a Luxembourg based company. And completing the circle, we find that DB Valoren S.à r.l. is said to operate as a subsidiary of Deutsche Bank AG. Please exhibit # 1 at the end of this article which shows this relationship to Deutsche Bank AG in a clear manner

Therefore, it is clear that the purchase of shares - of SKS Microfinance Limited - was done by one the key subsidiaries of Deutsche Bank AG. Therefore, this investment can certainty be called as an investment made by Deutsche Bank AG or the Deutsche Bank group.

Okay folks, what are the key issues concerning this investment made by Deutsche Bank?

Read the following news items and it will become clearer.

First, according to a recent news item in The Hindu Business Line article[vi] (May 22^nd, 2012) –

“’We have found massive problems in insurance operations of SKS Microfinance’, Mr J. Hari Narayan, Chairman, Insurance Regulatory and Development Authority, told Business Line. IRDA teams conducted field enquires and inspections for a long time, he said. The irregularities included receiving the cheques of death claims from its insurers on its name, which is illegal. The only listed MFI in the country, based out of Hyderabad, had also ‘collected’ higher commissions than permitted by the insurance regulator while selling the insurance policies”.

Second, according to a recent news item in Moneylife article[vii] (July 27^th, 2012) -

“SKS Microfinance has said that some of its employees have cheated the company to the tune of Rs15.8 crore in the last financial year, reports PTI. The services of employees involved have been terminated and the company has written off over Rs14 crore. The auditors of the company have reported that there was cash embezzlement by the employees to the tune of Rs2.5 crore and loans given to non-existent borrowers was Rs13.3 crore, the micro lender said in its annual report”

I am not sure that anyone would invest in a company that has been directly accused (of having massive problems in their insurance operations) by no less a person than the Chairman of a major regulatory authority covering insurance operations in India. And for the record, Mr. J. Hari Narayan, Chairman, Insurance Regulatory and Development Authority (IRDA), is a very well respected (professional) regulator. That apart, investing in a company that self-admits increasing ghost clients and frauds[viii] in its operations is again a very serious matter.

And coming on the back drop of the (now) famous LAPO (Nigeria) case – where Deutsch Bank’s Comminty Development Finance Group (CDFG) lent money to the MFI despite publicly available information with regard to illegal savings collection and intermediation by the same MFI and presence of several other serious weaknesses in the same MFI’s operations - Deutsche Bank’s micro-finance investments certainly need good explaining by their management.  This is because of the claims that Deutsche Bank makes with regard to micro-finance and micro-finance investments:

“Deutsche Bank was the first global bank to establish a socially motivated microfinance fund more than a decade ago. Our activities in the microfinance sector are led by the Community Development Finance Group as part of the Bank's overall Corporate Social Responsibility commitment. We provide loans, investments and limited philanthropic grants to the microfinance sector towards the goal of enabling the poor throughout the developing world to access credit for self-employment as a poverty alleviation strategy. We have served over 120 microfinance institutions (MFIs) in 50 countries over the last decade, with $215.5 million in capital benefitting as many as 2.8 million poor entrepreneurs. While India is one of the largest potential markets for microfinance, Deutsche Bank currently does not have any loans to microfinance institutions there due to the rapid commercialization of the sector and concerns with pricing of the loans to poor clients.

Deutsche Bank is not active in the microfinance sector as a commercial activity to realize financial gains for the bank. However, Deutsche Bank recognizes that the success of microfinance depends upon its ability to utilize business discipline and financial techniques to achieve the goal of scale and sustainability in serving the financial needs of the un-banked poor. Deutsche Bank has developed social scorecards through which it judges the social intentions and the extent of social framework of MFIs in its underwriting. Deutsche Bank's MFI clients must meet standards of good governance, transparency, and interest rates that are reasonable within the country and regional context.

Over the last decade, Deutsche Bank has been a consistent advocate and voice in emphasizing the essential social objectives of microfinance and has used its leadership position to call attention to the sector's growing risk of aggressive commercialization. Some examples of our advocacy efforts are:

a)   In early 2008, Deutsche Bank gathered industry leaders including CEOs of MFIs, academics, rating agencies, development banks, and thought leaders to discuss the challenges facing the microfinance industry with increased purely commercial investors entering the market. This roundtable discussion led to the Pocantico Declaration, which was an important historic moment in the history of microfinance, providing clarity of intentions and values for the sector in being committed to the interests of the poor.

b)  Following the Pocantico Declaration, Deutsche Bank was the early funder and one of the architects of the SMART Campaign, which focused on protecting the interests of microfinance clients by making sure that poor borrowers were not over-indebted, that there was transparency of pricing, that collection methods were not excessive, and that clients were treated fairly.

 c) In November, 2010 Deutsche Bank organized a roundtable and brainstorming session on the potential risk of multiple borrowing and over-indebtedness with in-country microfinance networks, development banks / agencies, and philanthropists.

d)  In partnership with Moody’s and leading universities such as NYU and Yale, Deutsche Bank initiated the idea and organized a large conference at its headquarters in America where a discussion of the social impact and innovation of microfinance took place. 

e)  In 2011, DB convened a meeting in New York with eight CEOs of the leading microfinance networks to discuss challenges with a view to forming an association that can collectively address issues faced by the Industry. The unprecedented meeting resulted in the formation of the Microfinance CEO Working Group comprised of industry leaders from ACCION, FINCA, and Pro Mujer, among others. Subsequently, the Group released a report “Road Map for the Microfinance Industry: Focusing on Responsible and Client-Centered Microfinance” which addresses responsibility and development of client services and products.

With more than half of the world’s population living on less than two dollars a day, there is an urgent need to alleviate poverty. Microfinance is a business approach to helping the poor build their way out of poverty, by providing the poor access to financial services, namely credit and a safe place for their savings. Microcredit, the extension of very small loans (microloans) to poor and low-income entrepreneurs who cannot access local traditional funding due to a lack of collateral, or a credit history, has proven to be a revolutionary model for enabling the poor to rise from poverty.

With capital to grow their businesses and increase earnings, the poor can invest in their families’ health and educational needs and make a significant impact on the development of their communities. By most industry estimates, less than 20% of the demand for microcredit from the world’s poor entrepreneurs is being met, a large opportunity for social investors like Deutsche Bank to make a real impact by developing funding structures to channel capital to these communities.”[ix]

To summarize, whether it is the present untimely (huge) investment in SKS (an MFI under fire from the regulator and having increasing ghost clients/frauds as per its own admittance) to supporting the illegal operations of LAPO[x] (Nigeria) some years ago and attempting to cover up the same (Mr Asad Mahmood tried to do so as per Hugh Sinclair’s book and related communication)[xi], Deutsche Bank has an immense amount of explaining to do. And going by the same transparency principle (that Deutsche Bank claims to have helped create for MFIs), it is time that Deutsche Bank comes clean on its global micro-finance investment story! Let us be clear on that!

And for the record, I must clarify that despite several e mails to Mr Asad Mahmood, the public face of the Community Development Finance Group (CDFG) at Deutsche Bank, there has been no reply what-so-ever till date from him[xii]

Some of the key questions that Deutsche Bank (and its senior management) would need to provide answers to include (but are not limited to) the following:

a.   Why did Deutsche Bank invest in SKS at a time when even the regulator (Chairperson, IRDA) saw massive problems with its (insurance) operations? 

b.   How could Deutsche Bank invest in SKS despite admittance by the company to presence of ghost clients and frauds in its micro-finance operations? It must be remembered that these have increased in absolute terms as compared to the past as an earlier Moneylife article shows (Increasing frauds, internal lapses at MFIs: Need to strengthen supervisory arrangements to protect the poor)

c.   How did Deutsche Bank invest in an Indian MFI when it (publicly claimed and) thought it unfit to even lend money to Indian MFIs? Please see statement reproduced from Deutsche Bank’s website – “While India is one of the largest potential markets for microfinance, Deutsche Bank currently does not have any loans to microfinance institutions there due to the rapid commercialization of the sector and concerns with pricing of the loans to poor clients.”[xiii]

d.   The Deutsche Bank website notes that, “Deutsche Bank's MFI clients must meet standards of good governance, transparency, and interest rates that are reasonable within the country and regional context.” If that was the norm, then, how did Deutsche Bank invest in LAPO (Nigeria), which, according to public domain information,  suffered from several weaknesses including: a) illegal collection and intermediation of savings; b) inordinately high (effective) interest rates touching 144% under specific situations; c) an illegal loan product (perhaps) because illegal savings collection was a part of it; d) conflict of interest in terms of the auditor being related to the CEO and other such issues; e) high levels of client desertion; f) lack of transparency with regard to data (which led to MicroRate’s subsequent withdrawal of its rating); and g) poor governance among other things.  

e.   Who coordinates the various Deutsche Bank investments in micro-finance? According to their focus magazine, it is the community development finance group (CDFG) that coordinates this! If so, how did the CDFG recommend SKS Microfinance despite the various on-going problems? At least, should not have Deutsche Bank waited until the enquiry by the regulator was over?

f.    And last but not the least, why did the same Deutsche Securities Mauritius Limited sell of its stake in SKS Microfinance just a few months ago (according to the Economic Times[xiv] as well as filings with the BSE) and then again buy back SKS Microfinance shares? Something peculiar is happening here!

As one of the world’s foremost global banks, the least I expect is an IMMEDIATE internal enquiry into the micro-finance operations of all its subsidiaries (and not just the CDFG) and redressal of any weaknesses/short comings so that investments made by Deutsche Bank are: a) in accordance with the law and seen to be seen as such; b) safe and sound from an investor/systemic perspective; and c) most importantly, ethical from a transparency stand point. Only time will tell whether this happens at Deutsche Bank AG …and I hope that the recently appointed (Co) CEOs of Deutsche Bank AG … Juergen Fitschen and Anshu Jain…set in motion the various processes to address these controversial micro-finance investments and issues related to these immediately…Otherwise, the image of Deutsch Bank with regard to its role in global micro-finance will continue to take a pounding…  

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[i] Does Sinclair’s Open Challenge (to the Global Micro-Finance Industry) Make His Claims True? and Hugh Sinclair's Response to My Earlier Post - "Does Sinclair’s Open Challenge (to the Global Micro-Finance Industry) Make His Claims True?"

[ii] The exchange rate on 25^th July 2012 was Rs.56.0465 = 1 US $. This would mean that the total investment was of the order of over US $ 13.90 Million (Source: http://www.oanda.com/currency/converter/) 

[iii] http://timesofindia.indiatimes.com/business/india-business/Deutsche-Securities-mops-up-9-15-in-SKS-via-QIP/articleshow/15169644.cms

[iv] http://www.sebi.gov.in/FIIIndex.jsp?fiiIndxName=D

[v] http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=36660922

[vi] Source: Quoted from http://www.thehindubusinessline.com/industry-and-economy/banking/article3446545.ece

[vii] Source: Quoted from http://www.moneylife.in/article/sks-microfinance-employees-swindle-rs158-crore/27247.html. The Moneylife article was based on the SKS annual report and so, the annual report must have been released earlier than the date of the news item.

[viii] Increasing frauds, internal lapses at MFIs: Need to strengthen supervisory arrangements to protect the poor

[ix] https://www.db.com/usa/content/en/1077.html

[x] Please see the following articles in this regard: Why blame the MFIs alone?; Should not microfinance investment vehicles be judged by the same standards set for retail MFIs?; and Does Sinclair’s Open Challenge (to the Global Micro-Finance Industry) Make His Claims True?)

[xi] Please see the following articles in this regard: Does Sinclair’s Open Challenge (to the Global Micro-Finance Industry) Make His Claims True?

[xii] Please see the following articles in this regard: Does Sinclair’s Open Challenge (to the Global Micro-Finance Industry) Make His Claims True?

[xiii] https://www.db.com/usa/content/en/1077.html

[xiv] http://articles.economictimes.indiatimes.com/2012-07-26/news/32869385_1_sks-microfinance-deutsche-securities-stake