IPO Represents A Critical Transition for Microfinance, CGAP

By Cgap, PRNE
Monday, September 27, 2010

WASHINGTON, September 29, 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,"
(www.cgap.org/gm/document-1.9.47613/FN65.pdf) because it proves that
accessing capital markets is a viable proposition for microfinance

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

"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

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 US$155 million in
fresh capital. The company valuation reached the top of the offer band price
valuing the company at US$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

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."

Join microfinance leaders in a special blog series on the SKS IPO from
September 28 at the CGAP Microfinance Blog [microfinance.cgap.org/]

Read the paper: www.cgap.org/gm/document-1.9.47613/FN65.pdf

CGAP (www.cgap.org) is an independent policy and
research center dedicated to advancing financial access for the world's poor.
More information at www.cgap.org

Jeanette Thomas of CGAP, +1-202-473-8869, jthomas1 at worldbank.org

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