“Tier 3 Microfinance Institutions perform just as well as Tier 1”- Triple Jump

By Shaun Chan,

Microfinance Focus, June 11, 2010: Triple Jump is an international microfinance investment manager based in Amsterdam, The Netherlands. Tripe Jump finances 140 microfinance institutions in 51 countries, the majority of which are tier 2 or 3 institutions. Triple Jump Advisory Services is a foundation that provides technical assistance to lower segment MFIs on a cost sharing basis. Steven Evers, Director Triple Jump has been active in the microfinance sector for over more than 7 years, working both in the field and as a fund manager.

Steven Evers, Director Triple Jump

At Triple Jump, Steven is responsible for overall strategy, Latin American investments and transaction services. Before entering the field of microfinance, Steven gained extensive experience in various positions in banking and strategy consulting with FMO and ING. Steven has an MBA from the IESE Business School in Barcelona and a degree in Economics from the University of Amsterdam. In an exclusive interview with Microfinance Focus, he discusses the challenges faced by tier 2 and tier 3 MFIs. Here are the excerpts from the interview.

Microfinance Focus: Can you share with us the recent contributions of Triple Jump to the growth of the Microfinance Industry?

Steven Evers: Our company was founded to facilitate financial services to low income entrepreneurs in an efficient and professional way. We provide funding to MFIs, and, through our foundation, also advisory services to tier 3 and tier 4 MFIs on a cost sharing basis.

Triple Jump raises capital specifically for the less developed segments of the microfinance market. We specialise in identifying promising young MFIs that have the potential to grow into mature institutions, and providing funding that allows MFIs to grow sustainably. At present Triple Jump finances 140 microfinance institutions in 51 countries, the majority of which are tier 2 or 3 institutions. We offer a high proportion of local currency loans, particularly in Asia and Africa.

Our advisory services help younger MFIs to become sustainable. At present the advisory services team has ongoing projects with 25 institutions in the areas of MIS, internal audit, governance, product development and social performance.

Microfinance Focus: At the Global Microfinance Investment Congress in New York in May, you spoke about financing second tier MFIs. What exactly are tier 2 and tier 3 MFIs?

Steven Evers: No unique definition exists, but the shared consensus is that Tier 1 institutions are mature, usually regulated institutions. These institutions are the focus of most mainstream funders. Tier 2 institutions are maturing, often demonstrating rapid growth, and have overcome most of the main challenges of their early stages. Tier 3 and tier 4 institutions are weaker, often younger institutions. Grameen Foundation has developed a useful definition which many organisations use as a reference. According to Grameen, MFIs are Tier 3 if they are approaching sustainability but face a shortage of capital. These MFIs often have a weak MIS or other needs, and most are NGOs.

Microfinance Focus: What is your outlook on the difference in the nature of their financing? How much is Triple Jump involved in financing tier 2 and tier 3 MFIs?

Steven Evers: Investing in Tier 1 institutions is relatively simple and feels very safe: they are often regulated and low risk, and the relationship with this type of institution tends to be purely business-like. Investing in Tier 2 and 3 institutions is much more (labour) intensive process. Since these institutions still show considerable weaknesses, investors can not solely rely on past performance, and have to be able to recognise future potential. We look through the problems and look for the potential. On the positive side, Tier 2 and 3 institutions also have some strengths, for example they tend to have low leverage. In the end, our assessment of the institution’s management is what carries the most weight and is the best predictor of future performance. At present, over 70% of our clients can be classified as tier 2 or tier 3.

Microfinance Focus: What are some problems associated with the investors’ reluctance to fund tier 2 and tier 3 MFIs? Have there been any notable failures with investments that have occurred in these tiers?

Steven Evers: Much like commercial banks do not have the tools to offer microfinance to micro-entrepreneurs, we have found that commercial lenders generally do not have the tools to work with tier 2 and tier 3 MFIs. They believe that the risk is too high, the amounts too small, and the relationships too demanding. Triple Jump has specialised in this segment, and our staff are better equipped to recognise the best and most promising tier 3 institutions. Our investment track record demonstrates that a carefully selected portfolio of tier 3 MFIs can perform just as well as a tier 1 portfolio based on a risk adjusted return. Through careful management, we have managed to obtain excellent results with all segments. In the rare cases where failures have occurred, this was mostly due to external factors.

Microfinance Focus: Are there any successful stories of tier 2 and tier 3 MFIs gaining access to capital? What have they done that had made them able to attract investments?

Steven Evers: Given our own experience but also looking at the market as a whole, there are many examples of tier 2 and tier 3 MFIs being successful in attracting funding. The common denominators for success are a good governance structure, decent information systems, a good end-client proposition and most importantly, a good management team.

Microfinance Focus: What are the alternative financing structures that MFIs can look towards if foreign direct investment is not forthcoming?

Steven Evers: The best way for an MFI to attract foreign direct investment is by showing good results, therefore we believe that MFIs who have difficulty accessing funding should first work towards improving their own systems and performance.

In the early phases, donations are essential to help build up promising institutions. Once donations are no longer available, the most obvious source of funding for tier 2 and 3 institutions is from local sources such as banks, local apex funds and second tier financial institutions. The interest of local banks for these segments and for microfinance in general varies widely from country to country, but foreign lenders may sometimes offer a guarantee to encourage local banks to support microfinance, preferably with a good level of leverage. In some countries even tier 3 institutions may be permitted to intermediate savings, however we believe that extreme caution is required, as low income persons’ savings should never be put at risk.

Microfinance Focus: Microfinance is becoming increasingly commercialized. How does Triple Jump balance the need for achieving good returns for investors whilst ensuring that it remains committed to its social cause?

Steven Evers: We do not believe in achieving a balance between the social and financial objectives – this implies that one has to come at the expense of the other. We believe that the best microfinance institutions are the institutions which show both a good social and financial performance. If an institution focuses only on their social performance, eventually they will fail. The same is true of institutions that care only about financial performance without concern for their employees and clients.

The Triple Jump staff are all committed to the mission and vision of our company, and we have developed significant expertise in identifying those institutions which successfully demonstrate both financial and social returns.

Microfinance Focus: Do you think that financing MFIs seems pretty similar to funding subprime mortgages? Is there a possibility that a similar scenario will occur?

Steven Evers: It is important to remember that lending inherently carries an element of risk. Careful lending is essential, and we believe that we are careful lenders. The risk exists in every sector that new lenders will enter expecting quick returns, and that they will not use the necessary care when making new loans. We are always aware of this risk and sometimes coordinate with new lenders to share our experience and advise caution. We also advise our partners to exercise caution when taking new loans in order to avoid that they obtain debt which they cannot afford.

Nonetheless, we do not believe that funding MFIs is similar to funding subprime mortgages. Most MFIs tend to be cautious, well-run institutions. Many of these institutions stopped borrowing when the crisis hit, and have only now started to grow their portfolios again. Additionally, the underlying loans which MFIs make to micro-entrepreneurs are for income-generating activities, compared to mortgages which are not productive. Also, MFIs tend to have a very good idea of who their clients are and what they can afford, an important feature that was clearly lost in the subprime mortgage market. Nonetheless, we are aware of the risk of over-indebtedness, and Triple Jump and all of our constituents have endorsed the Client Protection Principles, which we have also incorporated into our due diligence procedures.

Microfinance Focus: Does Triple Jump have any plans for investment opportunities with MFIs in India?

Steven Evers: Yes. We currently have a few investments in India and are looking at several new propositions.

Microfinance Focus: Are there any up and coming deals that Triple Jump has in the pipeline in the near future?

Steven Evers: Every day new opportunities arise. We have a solid pipeline and are continuously in the process of selecting the most promising opportunities. Although growth has been slow in the last 18 months, we have seen the market picking up again in the second quarter and are more positive for the rest of the year and thereafter.

© 2010, Microfinance News. All rights reserved. 2008-09