“We would like to see differentiation in the rules for Microfinance Investors”-DWM

Microfinance Focus, July 29, 2010: Developing World Markets (DWM) is an asset manager and an investment bank specializing in asset management for microfinance and other socially positive businesses in developing countries. It is managing approximately $600 million of assets and has invested in over 100 microfinance institutions (MFIs) worldwide as of the most recent quarter.

James Kaddaras, Partner, Developing World Markets

DWM’s asset management activities operate through DWM Asset Management LLC, a limited liability company. In 2006, DWM structured and closed a securitization of cross-border loans to 26 MFIs in 17 countries. The transaction is channelling approximately $60 million of international capital to over 1 million low-income micro-entrepreneurs in Latin America, Eastern Europe, Southeast Asia and the Middle East.

DWM also structured and placed notes to fund a $25 million loan to Access Bank (formerly Microfinance Bank of Azerbaijan) in 2007 and 2008, and has syndicated a €10 million loan in 2007 to an MFI in the Balkan region, one of the largest loans made to any MFI in the region.

In an exclusive interview with Microfinance Focus, James Kaddaras, Partner, Developing World Markets and Jennifer Lee, Head of Lending Team, Asia, spoke about the future prospect of DWM’s investment in India and the challenges they are facing in the bringing in capital to microfinance market.

Microfinance Focus:  Can you brief us about the Developing World Markets’ involvement in Indian microfinance sector?

 James Kaddaras:  Our first equity investment in microfinance was with SMILE and we are exploring other equity and debt opportunities as well. Although as you probably know that on the debt side there are significant restrictions from RBI about foreign debt coming to Indian NBFCs, like ECBs rules, (external commercial borrowing). So it is very difficult to do debt transactions. We are still trying to find ways within the regulatory and legal framework to do that but we are also exploring the equity space on an ongoing basis.

Microfinance Focus:  What is the prospect you are seeing in Indian microfinance sector?

James Kaddaras: We think India has a lot of first rate MFIs. I myself came to India 5 years ago to meets MFIs and I have watched them grow tremendously and retain portfolio quality and good management, good corporate governance and still keep their focus on their social mission. I think it is a terrific country for microfinance with lots of opportunity

Microfinance Focus: What are some of the challenges and risks that you are facing in India and how do you plan to address them?

James Kaddaras: The most obvious risk I think is the rate of the growth of some of the MFIs. It is one thing for a company to be growing 20-40 percent a year, that is really a significant growth and it is quite another for a company to be growing 50-100 percent a year. That is perhaps an unsustainable rate of growth. With the financial crisis, some companies have been unable to sustain their growth and because of this, problems which were not apparent earlier have become apparent now.

In general we think it is terrific that more and more low income people are being served in India but there is a limit to how quickly and for how long, MFIs can grow at such a high rate.

Microfinance Focus:  What are the strategies DWM is adopting to mitigate the risk of very high growth?

Jennifer Lee:  We look for institutions that have set up the right infrastructure to be able to support the high growth. Institutions have the right MIS systems, the right internal controls, and the right internal auditing functions. There are people who have developed their staff to achieve that growth in a controllable manner. We also look at management’s future growth objectives, are they responsibly identifying areas of new need, have they prepared themselves to maintain their high growth and are they looking at growth in a reasonable fashion.

Microfinance Focus:  What are the future investment plans of DWM in India?

James Kaddaras: We want India to be the larger portion of our overall investment map. Normally our funds have a country limit of 15% of the total assets and in general our investors don’t like us going to the top of the country limit. We want to see India to be one of the largest countries in our portfolio and are in talk with a lot of companies here.

DWM is unique in its ability to meet all of the needs of the balance sheet of an MFI because we have an investment banking capability as well as fund management capability. We can structure debt and equity issuances or put together securitizations or we can simply invest in existing instruments in the MFIs. We see a number of deals that are of interest to us now. The number of equity transactions we’ll be doing will be less than the number of debt transactions because of the difference in the nature of the two investments

We think India is blessed with a lot of socially motivated promoters who are also very sharp business people. They put together good management teams, good board of directors and good corporate governance policies.  Our job is to provide resources to these institutions so that they can provide the low income people we all want to serve.

Sometimes the regulatory framework makes it a little difficult to us. My personal hope would be that the regulators might be able to make some distinction between patient long term social capital which companies like DWM represent and more purely commercial hot capital that might just come in and move out. We know the rules are designed to protect against the excess of the later but they affect our ability to provide capital to MFIs. So I would like to see some differentiation in the rules for microfinance particularly for foreign investors like us

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