Catching up from our first encounter at NASSCOM's "IT Product Conclave" in August, I felt very proud and privileged to receive an invitation from Anal K. Jain today to Bangalore's pristine Golf Course at the Karnataka Golf Association. Anal has an amazing career behind him with setting up IBM India as employee #1 and after that likewise starting-up the Indian operations for Sun Microsystems. He is strongly involved in mentoring young IT-companies together with NASSCOM, India'a industry association for companies in the space of software development and business process outsourcing (BPO).
His major focus, however, is his current involvement into Microventures, a for-profit fund in the space of microfinance. The sector has recently gained strong public awareness after Mohammed Yunus' got awarded the Nobel Peace Prize for his Grameen Bank, a micro-finance institution from Bangladesh. Indeed, the beautiful thing about micro-finance is three-fold: One, it is ideally suited to raise people out of (absolute) poverty in a sustainable way. Second, giving these people a sense of dignity as the improvement of their lives is the immediate result of the empowerment towards entrepreneurship. And third, yet another confirmation that profit is good – both for the new entrepreneurs, the bank as the mediator in between and ultimately the investor on the financial supply side. Microfinance proves to be a perfect example for the "Bottom of the Pyramid"-principle, where "the poor" are not just considered from a philanthropic perspective, but as equal participants in a vivid economy: As entrepreneurs and customers.
Anal's role for Microventures is an advisor for directing the incoming funds from the European headquarter of Microventures into prospective channels in India. The exiting thing is to understand how the company tackles this challenge in probably the most unsystematic, fragmented, long-tail market that lacks any supportive eco-system so far. Clearly, the opportunity in the aggregate is huge with 70 % of India's 1.1 bn population living in the rural areas being potential customer for micro-finance. My key insights:
- As it is entirely impossible to reach out to each and every of the few hundred million potential customer directly, one has to rely on existing structures of microfinance-institutions which – again – are structurally fragmented and widespread all over the country. Microventures acts as a "fund in fund", i.e. like a meta-layer on top of these existing institutions by taking an equity share in exchange for a cash-injection.
- This cash will be supplemented by bank-loans and then dispersed down to the village level by local employees of the same institution. There the employee will invest into a group of women. Why women? It has proved – reality bites – that men against all promises tend to spend any incoming money at the bar around the corner while women prove to use it for the purpose of their small enterprise. Why groups? Addressing a little community seems to provide a joint sense of ownership, better performance and a lower default rate.
- On average, one loan will amount to Rs. 5,000/- (app. EUR 80.-) which is repayable within one year in 50 instalments where the credit-employee will show up for weekly collection. In the absence of formalized agreements, not to mention their legal enforcement, the personal rapport between the bank's local representative and the recipients is essential. Ultimately, you don't want to either fool or disappoint someone whom you consider a friend by defaulting on your debt.
- Interest rate is usually a reflection of two factors: risk and cost of capital deployment. By nature the risk of such a loan without any collateral is high. Astonishingly, the default rate is relatively low due to the measures explained above. On the other hand, as one can easily fathom, the cost of deployment along these various cascades of intermediaries as well a logistic issues of transporting money back and forth is painstakingly high. Therefore, the annual interest comes at a price around 20 percent.
- Mircoventures' role, besides the allocation the funds in the investments phase, consists in the governance of the investee companies. The model to earn its money back could be either a trade sale of the stake to some strategic investor or possibly an IPO which would create a liquid event for the limited investors. The fund itself makes its money in the typical two-fold model of a fee as the share of funds under management plus some carry in case of disproportionate returns.
Anal being a seasoned businessman was very candid that "if you are looking for pure economic profit, then there are easier industries to go into than microfinance in India". That's why the limited partners of Mircoventures are predominantly wealthy individuals who want to invest and do some good at the same time. Who are seeking for both a return on capital gains and a return on social benefit. In the microfinance industry the term coined for that aspiration is called "double bottom line".
I really like that expression. Maybe we should all look for whatever we do, a bit more for that "double bottom line".
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