Investors jump on Indian micro lending IPO

The first microfinance company to sell shares to the public in India had strong support from investors on Monday, when it's shares closed up 10.5 percent in the first day of trading.

The strong presence of the company, SKS Microfinance, is expected to encourage other micro lending programs to offer Initial Public Offerings, analysts said. Supply is likely to stoke an already fierce debate about whether micro lending programs, many of which are like SKS in that they began as nonprofit organizations, should make substantial profits by making high interest rate loans to the poor.

SKS, which makes loans to women in rural India, has raised more than $350 million in its initial public offering, one of the most successful in the country this year. It sold 16.8 million shares at 985 rupees ($21) earlier this month, the stock closed Monday at 1,088.65 rupees on the National Stock Exchange of India.

"There was a lot of demand for the stock because of its novelty value," said Pankaj Agarwal, an analyst at securities firm Execution Noble. "There is no doubt about it: the success of this I.P.O. will bring more I.P.O.’s."

Analysts say that a handful of fast-growing Indian micro lending companies like Spandana Sphoorty Financial and Share Microfin may quickly follow SKS in sale of shares to the public.

Overall, SKS is one of five micro finance companies and banks to have shares publicly traded. The other four are Bank Rykat of Indonesia, BRAC Bank of Bangladesh, Compartamos Banco of Mexico and Equity Bank of Kenya.

India has been a particularly fertile ground for micro lending, because its formal banking system does not reach much of its population. A study several years ago found that only 40 percent of the countries households have a bank or postal savings account.

Moreover, the Indian banking regulations require that 40 percent of the portfolio of each bank's loans be in "priority" sectors - a requirement that banks can meet, in part, by lending money for loans and buying loads from micro lending institutions like SKS. This has made it relatively easy for Indian microfinance companies to raise the money they need to lend.

SKS, which became a for-profit company in 2003, has grown at an incredible pace since 2006. Starting in March, it had $634 million in loans outstanding, from $306 million only 12 months earlier. In addition, the company said that less than 1 percent of its loans were delinquent.

Several prominent investors like Vinod Khosla, George Soros, and Sequoia Ventures have invested in SKS over the years, attracted by its mission to eradicate poverty in India, strong growth, and enviable profit margins - 18 percent in its last fiscal year.

But the lender also has been dogged by controversy, including questions about how the two nonprofit groups that provided money to help establish the for-profit SKS would allocate the wealth that they earned from their shares sold in the initial public offering and shares they still own.

Mr. Agarwal and other analysts are also worried about how well SKS and other microfinance companies will maintain their low default rates and high growth rates. Some analysts and researchers fear that the intense competition among lenders might lead to substantially higher defaults.

Micro lending programs gain traction with small businesses

Micro lending programs are emerging as a response to the credit crisis for small businesses. Micro lending is most commonly associated with developing countries. But micro lending is on the rise in the U.S. as more small businesses are turning to micro lending when the bank says no. Micro lending programs could increase even more as a bill of borrowing for small businesses that would cut taxes and credit facility for small businesses stopped amid partisan feuding in the Senate.

Micro lending: welcome to the Third World, America
Micro lending - making small loans, usually for the poor - has been one of the most effective means of financing growth in third world countries. But then the U.S. economy has fallen and can not seem to arise. The New York Times reports that tight credit and recession have increased the demand for loans under the United States. Micro lending and microfinance are receiving attention are increasing in popularity. Kiva, which lent more than $150 million in 53 countries, began lending pilot program to business owners in the U.S. Grameen Bank -a micro lending program in Bangladesh which was started by Muhammad Yunus, who won the Nobel Peace Prize for his innovative work in micro lending - has also increased its lending to Americans.

Small business lending bill fails
Micro lending as measures to help small businesses, the U.S. Senate is sitting on their hands. Mr. Bloomberg reports that a bill addressing the lack of credit for small businesses died July 29 when the Senate Democrats do not get enough votes to consider the legislation. The bill would have provided $30 billion for banks with less than $10 billion in assets encourage lenders to small businesses. The cost of paying back the billions would be reduced to small business lenders such as their level of borrowing rose. It is estimated that the lender package could prime $300 billion in small business loans. But Republicans want to extend the grip of Bush's tax cuts for the project and said it would encourage more risky loans.

Micro Lending Success Stories
While the Senate hesitates, micro lending is scoring success stories. The New York Times tells the story of a restaurant owner in Silicon Valley who saved her business with a loan of $6,500 that she has three years to pay off and carries an interest rate of 6 percent. The Miami Herald reports that OUR MicroLending, a lender based in Miami, made 764 micro loans totaling $4.5 million. Their clients generally have fewer than five employees, with sales of $100,000 or less. OUR microloans range from $1,500 to $12,000 and average about $5,000. The average loan term is one year.

Aid small US entrepreneurs with Kiva

The financial crisis has had a lasting impact on small businesses around the world and here at home in the United States. With the credit crisis created a virtual paralysis of credit, small businesses in the U.S. are facing a tough battle to find the funds, especially if your financial history is not stellar. Kiva.org, one of the most interesting innovative web space micro lending programs, is hoping to come to the aid of U.S. entrepreneurs and small businesses by launching an expansion pilot that would allow individuals anywhere to make small loans to low U.S. income entrepreneurs through Kiva platform.

Kiva is a peer-to-peer micro lending program that facilitates loans among the creditors of the citizen and extremely low-income entrepreneurs in developing countries. Through the Kiva platform, anyone can lend $25 or more to support an entrepreneur and the specific progress of the loan may be followed by an initial grant of refund. By receiving reimbursement, the creditors may withdraw their funds from Kiva or lend again to another entrepreneur, thereby continuing the cycle of credit.

In April, Kiva members loaned $4.5 million to entrepreneurs, up 56 percent year-over-year and a record month for Kiva. From inception in 2005, the micro lending program has lent $75 million was lent to support more than 180,000 people in 44 developing countries. President of Kiva, Premal Shah, says this new initiative to include U.S. companies increasingly makes sense since financial markets have deteriorated and traditional lending began to dry, even in the U.S.

According to Kiva, small businesses represent more than 87 percent of all U.S. companies and, on average, these small enterprises are responsible for 900,000 new jobs created per year, according to the Association for Enterprise Opportunity. This number seems small to me, but the impact of small businesses in job creation is evident. To make matters worse, says Kiva owners over 10 million companies face difficulties in raising capital, even before the credit crisis and economic slowdown.

Kiva is launching today with one's ability to make loans to 45 small businesses and entrepreneurs seeking funding for areas of New York, San Francisco, Boston, Atlanta and Miami. The companies vary in purpose and services, salons, landscaping nurseries. For example, a Queens, NY based entrepreneur provides bakery products to bodegas in New York. He is looking to raise $ 6,000 to fund the technology of insulation of their trucks.

Shah says that the idea was introduced by California first lady Maria Shriver and journalist when she visited the Kiva office last year. She asked if Kiva model could be replicated nationally to assist low-income entrepreneurs in the United States. Shah said he initially was not sure whether the Kiva micro lending international development model would fit the U.S., but after the recession, the organization saw the opportunity and necessity to provide community driven, low cost capital for small business owners in the U.S.

Traditionally, the Kiva uses micro lending partners, called "Field Partners", to evaluate whether the companies and entrepreneurs are eligible for the Kiva micro lending program. Field Partners looks at a variety of factors in the companies, including history of past borrowing, the reputation of the village or group, and the feasibility of the business idea and then facilitates the loan transactions between Kiva and the micro lending program. In the U.S., Kiva will be partnering with ACCION USA, a micro lending program that lends in 48 states throughout the U.S. and Opportunity Fund, a community development financial institution company based in San Jose, CA.

But P2P lending to U.S. companies has proven controversial in the past. Prosper, a U.S. peer-to-peer lender stopped all new lending on its site because of SEC scrutiny. Prosper, which is now back online, decided to register under the Securities Act, a process that took months. Since Prosper is a seller of investment, the organization had to be registered with the SEC in accordance with the laws of securities in the U.S. Lending Club and Loanio also faced similar problems in P2P lending programs .

Shah said Kiva is different from P2P sites, in that you can not earn a rate of return. The best you can do is get your money back at 0% interest - such as if you were to loan to a friend. Shah argues that a key factor for the SEC is to determine whether the organization is offering a 'security' - where there is an opportunity to earn a rate of return. Since Kiva loans to the working poor with 0% interest, they are clearly charitable in nature, and thus registration with the SEC is not required.

One of the attractive parts of the new micro lending program is the ability of creditors in other countries to lend to entrepreneurs in the U.S., making Kiva facilitator of economic development across both the developed and underdeveloped countries. Kiva also has signed up celebrities to join the initiative. Apparently, the actor Tom Hanks will be lending to a small U.S. company and investor Warren Buffet has been invited to contribute to the new micro lending program as well.

What is Micro Lending?

Micro lending is the provision of very small loans to those in poverty designed to encourage entrepreneurship. These individuals lack collateral, steady employment and a verifiable credit history and therefore can not meet even the minimum qualifications for access to traditional credit. Micro lending is a part of microfinance, which is the provision of a wide range of financial services to the poorest.

Micro lending is a financial innovation that is generally considered to have arisen with the Grameen Bank in Bangladesh. In that country, he has successfully enabled extremely poor people to participate in self-employment projects that allow them to generate income and, in many cases, begin to build wealth and exit poverty. Due to the success of micro lending, many in the traditional banking sector began to realize that these micro lending borrowers should more correctly be classified as pre-financing, thus, micro lending is increasingly mainstream credibility in the financial sector, and many traditional organizations for funding large are contemplating micro lending projects as a source of future growth, although almost all large development organizations discounted the likelihood of success of micro lending when it was started.