Obituaries and Microfinance

The first page that I open every morning in a newspaper is that of “obituaries”. My mother and many of my friends frown upon this morning chore that I follow diligently every single day. I do not deny that in some ways it reflects my cynicism towards life, but it is also a reflection of the fact that I am never shying away from reality. Obituary is an extremely interesting column. While most people turn over these morose pages, they speak a lot about the deceased. However, the most interesting thing to notice is the people mourning about the loss. But this article is not about obituaries or my fascination towards them. While a lot of people are writing the obituaries of microfinance, I thought I might as well provide a different perspective towards it.Working for a financial intermediary in the social sector can provide you with varied exposures. It truly opens up your eyes towards people, their attitude and what is the end purpose of their business. Having spent close to 6 years in the financial services industry, I have a fair idea that while raising capital for an entity, the entity has to bare all. Probably not the noblest of professions like a doctor or a lawyer but it does give you the same insights.

My stint unfortunately coincided with the “humpty-dumpty” fall of the microfinance sector. However I do not believe that unlike “humpty-dumpty” the microfinance sector cannot be put back together. It’s an extremely simple sector to understand that has simple dynamics but overtime got ridden with self-imposed jargons. At the end of the day it was plain lending and collection. As a financial intermediary you have got to believe that your clients business has potential. And even after the recent debacle we still believe that there is an enormous potential in the sector clearly misunderstood by so many. Darwin’s theory of survival of the fittest will be put to test in this sector as well.

The other day one banker mentioned, “Ohh, the microfinance sector is doomed”. And then he quickly retraced his stance back in a typical banker fashion, “…but I am sure it will return back to normalcy…” Nobody knows about industry turnarounds better than the bankers. Since liberalization the economy has seen both the manufacturing industry (in the mid 90s) and the software industry (in the late 90s and early 2000) face similar downturns. While the manufacturing industry was strangulated with interest rate hikes, software industry simply misunderstood their potential as panacea. Both the sectors came out stronger from the calamity and are undoubtedly the pride of the economy today. The reason our banker friend retraced his stance is clear that often we have seen many industry pundits having to eat their own words post pronouncing dooms day scenarios. While bankers understand the pulse of the industry much better than most of us, at times political duress and bureaucracy can make them commit genocide, and microfinance is a case in point. Their growth fuelled by bank borrowings today lay in tatters as their own trusted bankers pulled the plug on liquidity.

Talking about growth, many VC and private equity players pumped in millions of dollars believing in the sector. Whether their belief stemmed from growth, social impact or promoter is not sure. But what we do know is that most of them have now turned their attention away from the sector. When asked about investment in the sector, most would have this typical answer, “Ahemmm…, well the sector is volatile and we are closely monitoring the developments.” We cannot do much about it, but we both know that they are surely not “CLOSELY” monitoring the developments. An equity investment has less to do with valuations or multiples and more to do with faith. There is positive correlation to it. Higher the faith, higher the valuations, lower the faith, lower the valuations. I never like the word “risk”. Faith sounds pious and there is a certain level of affability about it, while risk always sounds negative and there is an air of mistrust surrounding it. But that’s clearly my personal perspective. But when I am doing my job, I would still nomenclature it as “risk”. I get paid for using the word.

I feel faith is an extremely important facet. More so with the microfinance industry which is considered to be one of the most nobel social businesses. The obvious reason for our viz. financial intermediaries’ continued presence may look selfish as we thrive on their success. But the truth is that we and a lot of other optimists still have “faith” in the industry. Thankfully, we have been spared of the difficult situation of judging the sector which does have its share of bad apples.

This article may not have provided the best perspective to either microfinance or the world of finance or obituaries. The intention was none. The intention was merely to make people realize that “it’s never over until the fat lady sings”, and we hope that the fat lady never sings.