Microfinance Institutions enter IPO markets: a viable option?
[Editor’s note: This article is intended to serve as a compilation rather than an analysis of the performance of IPOs issued by Microfinance Institutions (MFIs) over the past decade.]
As microfinance is maturing into a more ‘mainstream’ financial services role, the industry has witnessed an array of new financing and investment opportunities becoming available to microfinance institutions (MFIs). In recent years, one such avenue for MFIs is the potential to access capital markets through Initial Public Offerings (IPOs).
Whereas such opportunities are still quite limited, certain markets are leading the path. India in particular has, to date, witnessed the issuance of three IPOs—with a potential seven others entering the market. Moreover, Compartamos in Mexico and Equity Bank in Kenya are also forerunners in the arena of MFIs gone public.
Generally speaking, MFIs (or any company, for that matter) may find IPOs to be an attractive option due to the presumption that it will provide new capital to grow and expand operations and/or to enter new markets. As CGAP’s Stephen Rasmussen points out, “one of the biggest barriers to growth [that many MFIs] face is not having access to enough capital… [When they can] harness the vast resources of capital markets, that’s a potentially game-changing development.”
An IPO might also please investors who want to cash out from their ownership stake in an MFI. Additionally, under certain circumstances, MFIs are required by law to reduce the stake of their private equity investors, especially if they are foreign investors. This being the particular situation in India where the Reserve Bank of India recently instituted regulations requiring banks receiving banking license to reduce their foreign ownership stake to 49%.
However, other microfinance specialists are less optimistic about such an option. For example, Mohammad Yunus expressed concerns that the interests of profit-minded capital market investors don’t align with many MFIs’ missions to alleviate poverty amongst rural populations, especially women. There are further concerns that capital market investors are looking for short-term profit maximization, whereas, at its core, microfinance is a development activity looking towards a bigger picture and needs to be handled with “greater sensitivity.”
This article will examine five notable microfinance institutions in three markets that decided to go public and address some of the concerns surrounding the impact of IPOs on MFIs and the future of such opportunities for microfinance.
Banco Compartamos was one of the first microfinance institutions to issue a public offering. Established in 1990 with international grants and soft loans of US$4.3 million, Compartamos transformed into a finance company in 2000, received a banking license in 2006, and made its public offering in 2007. The IPO sold 30% of its shareholders’ holdings for which they received some US$474 million, or 13 times book value. It’s been estimated that this represented a 100% compounded annual return over an 8-year period for the original investors. Most of the proceeds from the IPO went to public development institutions and NGOs (IFC, Accion) as well as its directors and managers.
The Compartamos IPO pioneered a way that would theoretically enable microfinance to become less dependent on grants and subsidies, and become part of a commercial finance system. The IPO was considered a milestone for microfinance as mainstream international fund managers and other commercial investors bought most of the shares. However, the debate and controversy over the IPO started almost immediately. The IPO was seen as an opportunity for the original investors to cash out, yet adding no new equity for Compartamos (to expand geographically or offer new products/ services).
Despite early criticisms, Compartamos has served two million additional clients and expanded to 536 branches throughout Mexico, Guatemala and Peru since its IPO in 2007; and 98% of its clients are still women. There are everlasting concerns that it will be harder for Compartamos to make decisions that do not maximize investor profits now that private commercial investors control a majority of the shares. However, subsequent to the IPO, CGAP noted that not-for-profit institutional shareholders control enough shares to have authority on issues, keeping the company committed to their social mission of serving low-income and unbanked population.
Following the stabilization of the Indian microfinance industry and a rebound from India’s most notable and controversial IPO (SKS), the Reserve Bank of India (RBI) granted “in-principal” approval of small finance banking (SFB) licenses to 10 institutions in 2015, including two microfinance institutions: Equitas Holding Limited (Equitas) and Ujjivan Financial Services Limited (Ujjivan). Granting an SFB license to relatively small institutions is a new practice in India. But it reflects an acknowledgment of the growing demand for capital to expand into new products and services and to support a large underserved population.
SKS was the second MFI worldwide to offer an IPO (after Compartamos), and the first in Asia. SKS traces its roots back to SKS Society, an NGO established in late 1997. By April 2005 SKS Society launched an aggressive growth plan and registered as an NBFC (Non-Bank Financial Company) named SKS Microfinance. Four years after the NBFC was created, SKS received four rounds of equity funding and issued its IPO in 2010. The company valuation reached US$1.5 billion and the share price rose 42% after five weeks of trading. The IPO was designed as a blend, allowing existing shareholders to cash out 13% of their holdings and SKS selling an additional 10% of new stock to increase funds. It was oversubscribed 13 times and raised US$155 million in new capital for the company.
Despite being successful in meeting its primary objective(s) – i.e. future capital requirements arising out of growth in business and to achieve the benefits of listing on the Stock Exchanges – there were concerns surrounding the SKS IPO. Notably, that it was not necessary for the company’s growth in product offerings and geographic expansion. The IPO came at a time when the Indian market was experiencing over-indebtedness problems, leading to the company’s initial investors to push for an offering to get a large return. Notwithstanding, following the “great Indian microfinance crisis” in 2010 SKS has recovered much of its revenue and is beginning to grow its client base at a rate similar to before the crisis. The ‘reborn’ SKS changed its name in 2016 to Bharat Financial Inclusion Ltd.
Ujjivan issued an IPO in June 2016 represented by 42,270,760 equity shares (887.69 million Rs. or US$13.2 million), initially offered at Rs. 210.00. Ujjivan pre-placed up-to half of newly-issued shares. The intended purpose for the IPO was to augment its capital base to meet future capital requirements as it expands beyond its existing operation in 24 states and 209 districts. Ujjivan engaged in a pre-placement process, enabling the company to find big shareholder(s) before the IPO occurred, then the pre-placed amount was reduced and the rest was sold at the IPO. This policy intended to decrease the price volatility of the shares which is the predominant complaint in the IPO world. This structure suggests that Ujjivan sought to strengthen the balance sheet rather than reduce the foreign shareholder ratio. It was oversubscribed a record 41 times. Of particular note regarding Ujjivan is that the MFI is dedicated to providing financial services to low income Indian women. Given this target market, Ujjivan attracted the support and capital needed to grow from Women’s World Banking. With their support, Ujjivan focused on individual lending (instead of group lending) which became one of Ujjivan’s key market differentiators. Proving this business model and unlocking the full value of the women client base, eventually lead Ujjivan to the IPO market.
Equitas Bank issued an IPO in April 2016, represented by 139,191,802 shares (2,175.00 million Rs. or US$ 32.3 million) with the initial offering at Rs. 110.00 per equity share; and was oversubscribed 17 times. The issue comprised both a Fresh Issue and an Offer for Sale. The objective of the former is to use the proceeds from the Fresh Issue to invest in Equitas’ subsidiaries to “augment their capital base to meet their future capital requirements arising out of growth in the business.” In regards to the latter, the selling shareholders were “entitled to their respective portion of the proceeds of the Offer for Sale.” Equitas will not receive any proceeds from the Offer for Sale. Equitas (like Ujjivan) also pre-placed the IPO nearly half of the newly-issue shares. Interestingly, Equitas also gave employees a total of 250,000 shares. Reducing the foreign shareholder ratio was an important goal of the IPO for Equitas.
The Kenyan microfinance industry has, in recent years, seen its largest MFI – Equity Bank – go public. Equity Bank was founded in Nairobi in 1984, initially focusing on providing term loans and mobilizing deposits. After acquiring the assets of a building society in Kenya, Equity Bank’s focus was directed to microfinance, and small and medium enterprises that were largely unbanked in Kenya. In 2004, the company was given a full banking license and in 2006, Equity Bank issued an IPO to grow its operations catering to this market. Proceeds from the IPO were used to upgrade its MIS software and credit risk management systems as well as expanding into Uganda, South Sudan, Rwanda and Tanzania. The Bank did not float new shares so as not to dilute existing shareholders that included IFC & Africap with 18%, Britak with 12% and “others” with 75%. By obtaining more capital from the Helios fund (supported by IFC, CDC and OPIC) which bought 25% of the shares for US$185 million shareholder value had grown by 900% in 2012.
Equity Bank has a customer base of 9.2 million in six East African countries, making it the largest commercial bank in Africa by customer numbers. Despite continued growth of its share prices, the Bank shelved the idea of raising additional capital in 2012 through a secondary offering; as it generated sufficient funds internally to support its growth. However, the Bank is at present considering a dual listing on the London Stock Exchange. Success in the capital markets has apparently not diminished the Bank’s target constituency as evidenced by the CEO who has stated that they are continuing their mission in Kenya and the surrounding region by “increasing financial access at the bottom of the pyramid”.
Now that Compartamos, SKS, and Equity Bank have tested the IPO waters time will tell whether accessing the capital markets through IPOs is a salvation or downfall for the microfinance industry. Those that have tested the markets have faced hurdles, opportunities, and challenges. A publicly traded institution, as apposed to a nonprofit MFI, retains the risk of losing its ability to control “who sits at the table” and cannot be as choosy when it comes to picking people who have a commitment to an institution’s core values. Some of the examples cited have more or less stayed true to their mission; although this could potentially change in the future as institutional shareholders seek higher returns. As capital is a necessity for microfinance institutions to grow, expand, and improve their operations going public remains an option; as long as rigorous policies and regulations are established and upheld. Time will tell how the interactions between capital market shareholders and institutional shareholders will shape the respective MFIs and the microfinance industry in the long run.
In a 2007 Council of Microfinance Equity Funds (CMEF) study on “Microfinance and Capital Markets: The Initial Listing/Public Offering of Four Leading Institutions”, the authors highlighted four leading microfinance institutions (MFIs) that entered the capital markets through IPOs. They were: Bank Rakyat Indonesia (BRI), Bangladesh Rural Advancement Committee (BRAC), Compartamos (Mexico), and Equity Bank (Kenya). We did not include the first two in our discussion as they were principally commercial banks with microfinance units (see below).
Unlike Compartamos, SKS and others discussed above, which started as NGOs/MFIs, BRI was primarily a corporate lending bank with microfinance operations known as the desa system unit (Village Units). After its IPO on the Jakarta Stock Exchange in 2003, BRI became a full service commercial bank that also included micro and small business lending. In 2015, BRI’s microfinance portfolio totaled 32% of its total loan portfolio and the bank won the Best Microfinance Business award for 2015.
BRAC is one of the largest microfinance NGOs in the world, serving mostly low-income women through Village Organizations. However, choosing not to commercialize its microfinance operations, BRAC decided to float BRAC Bank — a commercial bank serving small and medium companies in Bangladesh — through an IPO on the Dakha and Chittagong Stock Exchanges in 2006; which raised US$13.0 million to expand banking operations in the country. Accordingly, the microfinance arm of BRAC continues to operate as an NGO.
National Microfinance Bank PLC is a commercial bank that serves individuals, micro and small and large enterprises. Listed on the Dar Es Salaam Stock Exchange since 2008, NMB was owned by the Government of Tanzania which started its privatization process in 2005 and sold 49% of the shares to a consortium from the Netherlands. In a second step of privatization, the Government sold 21% of NMB shares to the public through an IPO. NMB’s largest shareholders and strategic partners are Rabobank with 34.9% of the shares and the Government of Tanzania with 31.9% share ownership. Micro and small/medium enterprise lending continue under the umbrella of the Bank that accounts for 20-25% of the total bank loan portfolio. /John Meyers