IPO Represents A Critical Transition for Microfinance, CGAP

Sep 2010
Washington, USA, September, 28 2010 - The initial public offering (IPO) of Indian microfinance lender SKS marks a critical transition for microfinance, say the authors of a new CGAP paper, "Indian Microfinance Goes Public: The SKS Initial Public Offering," because it proves that accessing capital markets is a viable proposition for microfinance institutions.

Microfinance, which is often funded by international donors and socially minded investors, has been a great development success story. And yet despite this success, microfinance still only reaches an estimated 100-150 million people. Some 2.7 billion people around the world still lack access to formal financial services that are a cheaper and safer alternative than informal services.

"Scaling up financial services is critical," said Stephen Rasmussen, an author of the paper. "Many microfinance institutions still say that one of the biggest barriers to growth they face is not having access to enough capital. What the SKS IPO shows is that microfinance institutions can harness the vast resources of capital markets. And that's a potentially game-changing development."

With nearly 6 million clients, SKS has been among the fastest growing microfinance institutions in the world, with a compound annual growth rate of 165 percent since 2004. In late July SKS became the first microfinance institution in India to go public by offering its shares through an IPO, and only the second pure microfinance institution globally after Mexican MFI Banco Compartamos in 2007.

The IPO was 13 times oversubscribed, and SKS raised $155 million in fresh capital. The company valuation reached the top of the offer band price valuing the company at $1.5 billion, and the share price rose 42% after five weeks of trading.

While advocates of the commercial development of microfinance point to the IPO as a milestone event that will open up new avenues and opportunities for microfinance, others including Nobel Peace Prize winner Mohammad Yunus have expressed skepticism that the goals of profit seeking capital market investors can be compatible with the interests of poor rural women.

"In many ways the IPO story is about the microfinance community getting what it asked for," said Greg Chen, one of the authors of the paper. "But it also challenges us to examine what commercialization really means for microfinance, and what impact it has on how we serve poor people."

"The IPO was a huge success financially, and it will allow SKS to grow," said Rasmussen. "But the purpose of the IPO wasn't just to access capital markets: it was to access capital markets to serve the interests of poor people. For most of us, evidence of real success will only come when we know that many more poor people have actually benefited as a result of this action."

The CGAP paper, which raises the question of what the IPO means for the future development of microfinance and for poor people, discusses key issues around the commercialization of microfinance, including:

- Executive compensation

- Valuation of microfinance institutions

- What the IPO will mean for price and service quality

- How policy makers might react

- How the boards and managers will balance the interests of the poor with commercial imperatives

- And what it means for SKS itself and the actions it is likely to take in the future.

"SKS has made a name for itself defying expectations and pushing beyond established microfinance boundaries," says the CGAP paper, "Whatever its choices the long-term success of SKS will ultimately depend on the satisfaction and loyalty of its clients, and whether SKS finds new ways to improve its products and offer poor people ever better services."

Source : PRNewswire

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