Harare - IPOs by
Microfinance Institutions (MFIs) are a relatively a new phenomenon, with the
first ‘true’ public listing of an MFI happening in April 2007. Mexico`s Banco Compartamos (let`s share it)
became the first Latin American MFI to go public, raising $467mln. Due to the
dearth of IPOs on the Zimbabwe Stock Exchange in recent times, following the
announcement of the impending GetBucks IPO, a somewhat justifiable sense of
euphoria is palpable domestically. But, like prior IPOs of MFIs, a certain
tinge of restraint is warranted. Heated debates have happened regarding the
ethicality of an MFI profiting from the poor in its pursuit of profits for its shareholders,
a direct result of going public.
Renowned Economist and
founder of Graemeen Bank – the world`s first ever micro-lender – Muhammad Yunus, has vehemently opposed IPOs by
MFIs, arguing that they lead to mission-drift where the institutions will not
be able to serve the financially marginalized as focus will squarely be upon
profit maximization. A different school of thought insists that without public
raises of capital, MFIs will not be able to eradicate poverty quickly and
include more people into the financial system in a sustainable manner. The jury
is still out however on the tradeoff between poverty alleviation and
profit-making in the micro-lending business.
Value
in GetBucks…
Stable,
low risk business model
That aside, I see some
value in GetBucks, premised on its business model of salary-based loans whose
repayment is deducted-at-source. This
model is relatively stable and low risk as evidenced by the company`s 98%
collection rates, which reduces the volatility of earnings through lowering
impairments. This could potentially come in handy when serving civil servants
who have displayed a greater affinity to borrow in recent years, albeit
concerns are that they are now over-indebted. Loan codes from employers’
payrolls will enable GetBucks to receive deductions before salaries reach
borrowers` bank accounts. Risks will be
minimized and information on borrowers will be easily collated enabling greater
credit risk management. The strength of this model will be put under scrutiny
however, as the company launches alternate products such as agricultural
financing as well as other non-deduction payroll lending. Further, regulation
in this area is rather topsy-turvy in most African states and in the long term,
this may present problems. Last year,
Uganda`s government unilaterally withdrew codes on its payroll and stopped making
loan deductions, leaving lenders in the lurch.
Lower
funding costs and higher margins
GetBucks` historical average
Cost of Funds (CoF) has been c13.2% and they forecast this figure to be between
15-25% in the next 3 years. However, the deposit taking license that Getbucks
was awarded in July leaves it in good stead to enjoy lower CoF in the future as
well as access to more funds for on-lending, as it utilizes deposits for such
purposes. More crucially however, an increasing share of deposits to total liabilities
will lead to wholesale reductions of average CoF and higher margins.
Headroom
for more debt raises
MFIs have been known to have
debt-equity ratios of up to 2.0x, and judging from Getbucks` historical 3-year
average of 1.43x, the company is well placed to raise more debt that can be
used for the purposes of funding growth of its loan book. Management has
indicated a strong desire to aggressively grow its current loan book standing
at $11.6 million. In a market where only 30% of the population is banked, there
is scope for increased earnings growth and higher shareholder returns as the
company serves more people as it expands. Despite the prevailing economic
hardships, strongly capitalized MFI`s will be able to realise growth in the
short to medium term and this capacity for GetBucks to raise more capital will
play to its advantage.
High
net interest margins
By nature, MFIs serve the
base of the economic pyramid and the risk attached to it is considerably
higher. GetBucks` pricing model will have to be proportionate to the risk it
faces, implying higher asset yields. As has previously been mentioned, CoF will
likely go down, on the back of the deposit taking license that GetBucks has,
and this will potentially see higher margins for the business. The average net
interest margin for GetBucks stands at 38% over the period it has been in
existence. In the medium term however, one would foresee the company`s margins
taper off as risks of lending decline due to improved risk profiling, coupled
with strong competition in the market.
Efficient
systems
GetBucks appears to be a
tightly run ship and we have seen the Cost to Income Ratio (CIR) fall over the
years from. Employee costs and management fees presently constitute the bulk of
operating expenses. CIR will likely
increase a bit more as the business seeks to expand, especially coming from the
IPO. From the current CIR of 28%, (the average for sub-Saharan Africa banks is
61%) management forecasts CIR to hold off at 16%, but this is rather too
optimistic. The cost structures need to be monitored regularly and be reined
in. Cost per loan Asset, a measure of the average cost per loan advanced to a
customer in monetary terms is low compared to other MFIs, at 22% in the last
financial year. This kind of efficiency bodes well for profitability in the
future, particularly as the company focuses on cost containment.
But
downside risks remain….
Over
borrowed customer base
Borrowers in Zimbabwe are
becoming over-indebted, particularly civil servants who are an easy target from
furniture retailers, to clothing shops offering them easy credit terms. This
can create a huge debt trap where employees borrow from one lender to offset
their debts elsewhere. If there is any lesson the last sub-prime mortgage
crisis has taught us, it is that household debt should not be allowed to keep
ballooning as this will present downside risks in the future. Borrower stress is likely to be magnified as
most corporates and the government (the country`s largest employer) struggle to
pay salaries on time, if at all. . If borrowers are struggling, this poses a risk to lenders such as GetBucks, who may find impairments rising, perhaps to a destabilizing point. Memories of what happened with South Africa`s unsecured lender African Bank Limited (ABIL) are still fresh in the mind.
Excess equity
GetBucks` historic 3-year average borrowings-to-loans ratio of 44% shows that loan portfolio expansion is largely funded by equity. An unanticipated drop in asset quality may place shareholders at more risk, considering the company`s excess equity. Though GetBucks does transfer some of this risk from shareholders through the deduction-at-source model, higher borrowings to net-loans ratio would be more desirable, implying that a sizeable chunk of funding risk is allocated to debt sources.
Several studies have shown that, MFI equity is now less risky than before, but it is also much more closely correlated with the conventional financial sector, providing relatively smaller diversification benefits. There is reason to be bullish on GetBucks however, as it has room for growth as it expands its product offerings and possibly venture into micro-housing finance and SMEs lending.
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