Microfinance and Capital Markets - Council of Microfinance Equity ...

Ownership incentivesIn two of the institutions that listed—Equity Bank and Compartamos—management anddirector ownership has become an important issue. It stands to reason that long-servingmanagement and directors should have incentives tied closely to the long-range successof their institution. The fact that these individuals have been rewarded for their success isa good signal to the industry in general and should also enable the industry to attract firstclasstalent as the very critical issue of management succession is addressed in a numberof MFIs. In both of these cases, management acquired their shares through investment.However, as public entities they will be able to use incentives such as options or stockgrants as incentives for existing management and employees and, as appropriate, toattract new management into the company.Many MFIs have operated with the same senior management team over the last 15–20years or more, from the early emergence of microfinance in the developing world.Incentive compensation could play an important role in an orderly succession both out ofand into these institutions. That is the normal case in for-profit institutions, both financialand industrial. BRI, with majority ownership by the Indonesian government, couldpresumably not offer such incentives. In the case of BRAC Bank, the very smallownership stake of the senior management of the NGO speaks highly of their individualcommitments to the Bangladeshi poor.Despite these two examples, incentives have an important role to play as MFIs structurethemselves on commercial terms and become shareholder-owned institutions. We wouldexpect to see stock options as an important form of incentive compensation formanagement recruitment and employee stock plans as more MFIs go public in the future.ScaleEach of these institutions has achieved massive scale within its respective market,translating into a strong capital base and profits. As banks by any international measure,the four are quite small, but within their markets BRI and Equity Bank are important.BRAC has also reached substantial scale, especially if we look at the combinedmicrofinance and SME operations (the latter within BRAC Bank). Compartamos is aniche bank in Mexico, but it is among the largest MFIs in the country and Latin America.The profitability, return on assets, return on equity and low loan-loss ratios of theseinstitutions rank them among the best performing banks and financial institutions in theirrespective markets. Clearly these four institutions are among the best of the MFIs. Assuch they were able to list and issue their shares to both domestic and internationalinvestors. The performance to date of their post-IPO stocks is a reflection of their longtermgrowth potential. Even if we assume that their growth rate will slow by 50% by theend of 2011, collectively their scale or outreach to the working poor is very significant—projected at some 11 million borrowers and 41 million savers. 5454 Projections prepared by Bruce Campbell take the historical growth rate of each of the institutionscompared to the number of borrowers and then reduce their rate of growth stepwise between 2007–2011 sothat by the end of 2011 the growth rate has been reduced by 50%. For savings, the projections focus onlyon Equity Bank and BRI. At present BRI dominates these numbers. However, Compartamos is beginningto experiment with savings, and BRAC is mobilizing a large amount of savings in its SME bank. Were both22