Catalyst Microfinance Investors
Shafiq Haque Choudhury, President of the Association for Social Advancement, uses his background as a campaigner to help the Bangladeshi poor.
But for fate and fortune, Shafiq Haque Choudhury might have been a human rights activist or a politician. Instead, the Bangladeshi civil servant turned entrepreneur is making waves with Catalyst Microfinance Investors (CMI), the Amsterdam-based private equity fund that has built a booming business lending to small, uncollateralized borrowers in developing economies.
Despite the global economic downturn, CMI and its investment vehicle, ASA, have enjoyed close to 90% year-on-year growth on average for the last four years. At the end of 2011, ASA International had a microfinance loan portfolio totaling US$105m, compared with just US$14m after its first year in 2008.
ASA, which also means “hope” in Bengali, currently serves more than six million borrowers worldwide, most of whom are too poor to interest mainstream banks.
Choudhury, who founded ASA in Bangladesh in 1978 and co-founded CMI in 2006, has proved that small loans can be big business. “We gave socially conscious investors the opportunity to invest in the world’s poor,” he says. “They’re now reaping the dual benefits of seeing their investments grow while giving disadvantaged people the opportunity to improve their livelihoods.”
Microlenders have a social obligation to be cost-efficient.
ASA has been hailed as one of the true pioneers of microfinance. Many experts credit Choudhury with fashioning a novel microlending strategy and steering microfinance toward profitability by targeting individuals with little collateral beyond the willingness of friends and neighbors to vouch for them.
The Asian Development Bank, in its publication Finance for the Poor, has compared Choudhury to Henry Ford for his “cost-effective sustainable microfinance model.” In spite of the acclaim, Choudhury remains remarkably modest about his achievements.
“My philosophy is simple: if done correctly, microfinance can help the poor and be a profitable, low-risk venture,” he says.
Standing on the roof of the ASA building in downtown Dhaka, the capital of Bangladesh, Choudhury insists his aims remain what they were when he demonstrated in favor of landless farmers as a student in the 1960s.
“I was driven by the desire for social and economic justice,” he says, looking out at the urban sprawl. “Even when I entered the civil service, I noticed that the system was failing the poor. So I left government service and eventually set up ASA.”
For Choudhury, the learning curve was steep. “After seven or eight years of activism, I realized that I needed to shift strategy,” he recalls. “There could be no freedom without economic empowerment.
So we started to provide small loans to aspiring entrepreneurs, most of whom were women.”
According to Choudhury, rural Bangladeshi women not only turned out to be more reliable customers, but by giving them the opportunity of self-employment and access to money, ASA has boosted women’s empowerment.
A pragmatist rather than an ideologue, Choudhury has always remained tethered to reality. “Instead of giving people fish, we decided it would be better to teach them how to fish,” he says. “We tried to unlock the inner entrepreneur within those people.”
Private capital actually makes microfinance more sustainable by increasing availability of funds.
Until the middle of the last decade, the microfinance scene was dominated by non-profits. ASA was one of the first microfinance institutions to break that model. Choudhury considered tapping into private equity as a source of funding in the face of opposition from those who believed that microlending should be “above” market forces and instead embrace more noble priorities.
“There was a time when I, too, thought microcredit should be non-profit only,” says Choudhury with a selfdeprecating smile. “But I saw private capital as the route to scaling up financial services to the poor. This might seem counterintuitive, but that actually makes microfinance more sustainable by increasing the availability of funds.”
To be effective as an anti-poverty tool, microfinance must not only be efficient, it must also be scalable, explains Choudhury.
“This city has millions of people living below the poverty line,” he says, pointing at the slums in the distance. “Reaching a few thousand would be like treating cancer with aspirin. But in order to scale up services, you need to attract private-sector capital.”
Bangladeshi laws do not allow ASA to become a for-profit enterprise. But Choudhury was keen to roll out the ASA model globally.
In 2006, along with CMI co-founder Dirk Brouwer, a Dutch investment banker, Choudhury met some institutional investors who were interested in microfinance.
The investors included the Dutch pension fund ABP; the US investor financial services organization TIAA-CREF; CDC Group; established microfinance funds such as Gray Ghost Microfinance Fund, as well as a number of other private investors mainly from Europe and the US.
“The investors asked if we could do microfinance on a commercial basis - investors would provide equity and they wanted to get their money back with profit since they were taking a risk,” Choudhury explains.
“We said yes, and CMI was born.”
The ASA system proved an attractive proposition for investors who wanted their investments to be both profitable and socially beneficial.
The investors committed US$125m over a period of 10 years. CMI, incorporated in Mauritius and supported by ASA and Sequoia, the investment fund led by Brouwer, brought to bear a unique combination of established microfinance know-how with corporate finance and private equity expertise.
With the equity provided by CMI, ASA International starts up microfinance institutions - a process known as “greenfielding” - in carefully chosen countries, providing much-needed capital to low income people and microenterprises.
ASA currently works in seven countries:
- Sri Lanka
Projects are due to start in Kenya, Uganda and Tanzania in 2013.
The project areas are chosen on the basis of extensive surveys carried out concentration of and landless people and housing patterns.
Focused on people
Despite lending to clients most bankers wouldn’t touch, ASA rarely loses money. “We put people at the front and center of our policy,” says Choudhury. “Banks rely on documents and collateral, but we rely on people.”
For ASA, social relationships that bind communities - church and mosque associations, tribal and family ties, company and school attachments - became hard assets. Choudhury’s people use a business model that leverages community obligations and shame - often the strongest collateral to be found in remote areas where formal credit records are non-existent.
“When neighbors and friends vouch for each other, they don’t want to default,” explains Choudhury.
“Our employees live within the community and our clients know that we will stand by them as long as they maintain a good credit line.”
Choudhury readily admits that there is a fundamental conflict between a private investor’s desire to make money and a philanthropist’s interest in helping the poor.
“You have to manage that conflict,” he stresses. “We make a profit, but not too much. The maximum is 10%. But our investors are socially conscious - they are in it for the long haul.”
Choudhury is at pains to explain that microfinance is resistant to the global financial crisis because it invests in small enterprises. The seamstress in Nigeria or the poultry farmer in Bangladesh is less susceptible to upheaval in the financial markets, ensuring the company’s resilience and operational agility when others may fail.
At a time of global financial turmoil, CMI and ASA have grown beyond traditional boundaries by sticking to sound business sense.
“We remain profitable by innovating and watching costs all the time,” says Choudhury. “Microlenders have a social obligation to be cost-efficient as the poor can’t afford to pay for the inefficiencies of service providers.”
By combining the heart and mission of a non-profit with the discipline and market-based principles of a for-profit, Choudhury hopes to help the world’s impoverished billions.
Yet, despite his often revolutionary message, his remains the moderate, civilized voice of management.
“I am not a radical,” he muses. “If you say radical things, people may applaud you. But if you’re reasonable, perhaps they’ll follow you.”
That’s how to make change happen and he’s doing it one small enterprise at a time.