The first 10 years of Alex Silva’s working life offered no clue that he would become an innovator who would bring international, commercial funding to the world of microfinance. An honors graduate in industrial engineering, Silva began his career teaching engineering at the prestigious Universidad Centroamericana in his native El Salvador. After earning an MBA from Cornell University, he soon moved into the corporate world, where he rose from financial analyst to project manager with Owens-Illinois Manufacturing, a leading maker of glass bottles and containers.
In 1989, Silva sought a change from corporate work, and moved into the world of multilateral development banking. That’s where he had his first exposure to the early stages of microfinance. As a senior investment officer at the Inter-American Investment Corporation (IIC), he was charged with analyzing private-sector proposals for efforts that would produce both a financial return and social benefits for communities and individuals.
IIC invested in a range of such double-bottom line projects in Latin America—including a Bolivian non-profit microfinance institution called Prodem, which was looking for equity investors so it could meet the capital requirements for becoming a regulated bank. That project, and IIC’s investment, turned into the success story known as BancoSol, the first regulated microfinance institution (MFI) in Latin America, and the first commercial bank in the world dedicated solely to the poor.
From there, Silva decided to promote an investment fund for renewable energy. But he turned to microfinance when a mentor suggested he manage ProFund, the world’s first equity fund for investing in microfinance.
For 10 years as executive director (1994-2005), Silva managed all aspects of ProFund – raising $22 million for the fund, overseeing investments and governance in MFIs, exiting the investments with a profit for investors, and closing the fund. The lesson was obvious: Microfinance institutions were suitable for equity investments, with the added plus that they allowed investors to promote financial services for the world’s working poor.
Silva later launched other financial innovations to strengthen the capital base of MFIs, including a fund management and financial consulting company called Omtrix, and an emergency liquidity facility to act as a lender of last resort for Latin American MFIs during difficult economic transitions. Today, Silva is president of Omtrix and also executive director of Calmeadow, a Canadian foundation that promotes commercial financial services for the poor. (See the Microfinance Matters Interview with Martin Connell, founder of Calmeadow, here.)
Recently, reporter Lucy Conger, on assignment for the Center for Financial Inclusion at Accion, spoke to Silva. An edited transcript follows.
Conger: You say you weren’t initially motivated to work in microfinance. What finally convinced you?
Silva: Early on, I was worried about interest, and I asked a client what she thought of the rates. She asked the loan officer what the rate was. The loan officer said three percent. The client said three percent per day was high, and then the loan officer clarified that the rate was three percent per month. The client then said it was low! She was thinking a daily rate, while we typically think of annual rates. Ultimately, the client isn’t interested in the interest rate. For them, what’s key is access to the funds. That made an impression on me. And trying to be socially oriented was a constant in my life.
Conger: What were the early risks for ProFund, which began investing in MFIs when they were non-profits?
Silva: NGOs—which at that time were the only ones providing microfinance—were there to help the poor. But they were inefficient. They were run by former Peace Corps volunteers and anthropologists. But despite the inefficiencies of the organizations, some were running profitably. Our belief was that if we could organize them better, introduce some technical assistance, we could improve their performance and make them attractive as a business proposition for commercial investors.
Conger: What did ProFund do to promote efficiencies in MFIs?
Silva: While we had no direct technical assistance (TA) that we could provide, we saw ourselves as a bridge between the MFIs and the providers of TA, as well as of alternative sources of funding – many of them our own shareholders. We also liked to believe that we played a meaningful role by participating in MFI governance. We sat on the board of directors of many of our investees. We helped not only by insisting that ‘good practices’ in governance were pursued, but also by constantly pushing management toward increasing efficiencies and behaving more like commercial players.
Conger: What did ProFund teach you?
Silva: ProFund’s initial goal was to invest 50 percent in microfinance and 50 percent in small and medium enterprises (SMEs). I first thought that working with SMEs was more promising. But at the end of the day, we directed 100 percent of the investments to microfinance, due to pent-up demand and because microfinance was much more profitable than SMEs. ProFund kept its focus on microenterprises because our investors made us stay there. Left alone, I would have gone to consumer lending, seemingly a greener pasture. But after two or three years, it was obvious we had a gold mine on our hands.
Conger: Why did you close the fund?
Silva: The main reason for ProFund was to create a demonstration effect, which required that the fund have a beginning and an end. It was designed as ‘closed-end’ fund from the start. It was operating in bad times for Latin America—and yet it was making money. If we rolled our investments over, we’d have made more money, but the demonstration effect wouldn’t have been accomplished. So, we closed the fund in 2005.
Conger: How is microfinance different from consumer lending and lending to small and medium enterprises?
Silva: Microfinance finances microentrepreneurs, the self-employed poor. Most microentrepreneurs are unemployed; the work they do is their business. Microenterprises lack access to credit. Their marginal productivity is immense, their business rotations are high, and their margins are very high if they know what they’re doing. So they can pay high interest rates, and this allows them to bear the administrative costs of small loans. With SMEs, conditions are different. On a loan of US$10,000 to US$50,000, the marginal productivity is less, so they can’t pay such high rates. The reduction in operating expenses is not large enough, and the rates the lender can charge without it becoming too expensive for the SME are similar to what a large corporation would pay, and the guarantee is not so good. SMEs are more difficult.
Conger: What are the major achievements of MFIs over the years?
Silva: In Bolivia today, anyone who so desires has access to microfinance. Way beyond microloans, there is microinsurance, savings, money transfers, etc. Also, in Bolivia, a microfinance loan carries an interest rate nearly the same as a consumer loan in the United States. The rates came down because of competition among MFIs, which required that the players become more efficient. There are also low interest rates elsewhere – in Ecuador, El Salvador, Nicaragua and Peru, for example. A successful MFI in the past was one with 3,000 clients. Today, Compartamos [a Mexican microfinance bank] has more than 2 million clients. Those numbers can’t be achieved without capital markets, and high profits will attract investment. Larger numbers mean economies of scale that, mixed with competitive pressures and the need to reach minimum-return objectives, become a powerful driver for achieving efficiencies.
Conger: What did you do after closing ProFund?
Silva: We’d created Omtrix as a vehicle to allow us to hire people to run and advise ProFund. After ProFund closed, Omtrix took on a life of its own. We had relationships with MFIs and multilaterals, as well as knowledge of microfinance in the region. That gave us a competitive advantage that we used to move the company forward. What we do now is to constantly push the envelope – we’re always looking for new initiatives. In 2005, we created the Emergency Liquidity Facility (ELF), a lender of last resort that provides bridge loans to MFIs in Latin America in the wake of external shocks such as earthquakes and volcanic eruptions. It’s a break-even fund that operates in the most difficult situations – yet we’ve made 26 loans and collected on all.
Conger: How does ELF work?
Silva: ELF has prequalified more than 50 MFIs throughout the region. MFIs that are in good shape before an external shock are well equipped to survive, though they’ll suffer from the impact of the shock. We’re there for those MFIs, making sure they don’t suffer because of liquidity shortages. In a natural disaster, the poor suffer the shock the worst. So, the MFIs suffer. Some clients lose money and don’t pay; some clients withdraw deposits. You’ve got something of a perfect storm going on: Money’s not coming in, savings are being withdrawn, and some clients need incremental funding. It’s a liquidity trap for the MFI. The MFIs turn to their funders for refinancing, but usually most funders prefer not to jump right in, but rather stall and wait to see what happens. The Emergency Liquidity Facility disburses within two weeks; it’s like an I-V pumping liquidity right into the veins of the MFI when they need it the most.
Conger: How can you lend so quickly to an MFI serving lots of clients surrounded by a wrecked local economy?
Silva: We need to know who to get involved with, and we’re pretty good at that. We charge the same market rate as before and then get out, earning a minimal profit.
Conger: The earthquake in Haiti caused the most death and destruction of any disaster in Latin America in recent memory. How did ELF respond?
Silva: The earthquake was of such magnitude that liquidity wasn’t enough. For Haiti, we created a new program called HELP – Haitian Emergency Liquidity Program. Through it, we buy up to one-third of the bad portfolios of MFIs, and they must buy back half of those bad loans in three years. It amounts to a subsidy of 50 percent on the bad portfolio, while minimizing the moral hazard, because the MFI has to continue collecting on the loans to ensure the repayment of the other 50 percent. The program subsidy is funded by the Deutsche Bank Foundation, the Taiwanese Cooperation Agency, Calvert Foundation, the MIF/IDB and the Clinton Bush Haiti Fund, among others.
Conger: ProFund gave you a good overview of the microfinance industry. What do you see as the industry’s pressing problems and what are you doing about them?
Silva: We saw a huge demand for risk management in MFIs. We secured donations, and with the help of hired risk-management consultants, we oversee the application of risk-management techniques to MFIs. We’re also involved in mitigating FX [foreign exchange] risk. We argued that FX risk was misplaced; the international community was making hard-currency loans to MFIs, which in turn were making hard-currency loans to their clients. This was wrong. The risk should be on the shoulders of those with the most strength, not on the weakest link. So, we created a facility that links capital markets and the fund providers – the MIVs, or Microfinance Investment Vehicles – to the MFIs, so the MFIs can hedge currency risks. With seed money from Omidyar Foundation, a guarantee from the Overseas Private Investment Corporation (OPIC) and investments from many industry players, MFX Solutions came to be.
Conger: How does MFX work to reduce risk for MFIs?
Silva: We can put together MIVs and financial institutions that provide hedges. Those financial institutions typically wouldn’t be interested in the needs of MIVs because they are too small and/or demand exotic currencies. Even if they deal in the needed currency, they’re not willing to deal with MIVs because they don’t consider them ‘creditworthy.’ Backed by the OPIC guarantee, we act as an intermediary that allows the MIVs to interact efficiently with the financial institutions offering the hedges.
Conger: Milestones in the industry included the creation of sustainable MFIs, and profit-making – which attracted investors to MFIs. What other events have moved microfinance forward?
Silva: For one, securitization. BlueOrchard and Developing World Markets issued paper backed only by microfinance institutions. It connected Wall Street to MFIs. Then there was the Compartamos IPO. Now investors have a huge appetite for microfinance assets.
Conger: Are there risks to the commercial approach to microfinance?
Silva: Today there’s probably too much money coming into microfinance. Investors are buying into funds like ProFund, and are buying equity and debt of MFIs. In Europe especially, there are offers to the public, and people buy bonds. There isn’t enough capacity in first-tier, small MFIs to take investments; they’re under pressure to grow too fast and this can lead to poor decisions, including over-leveraging of clients. Certainly a lot of people are here just to make money. A lot of people see it as less risky than social investment. Investors see microfinance as the flavor of the month. However, we’re at the tail end of the phenomenon. Microfinance is not so hot now; SMEs are what’s hot to the multilateral banks.
Conger: What must be done to maximize the benefits of microfinance?
Silva: Microfinance is no silver bullet. It’s very good, like aspirin. But if you’re sick, you need antibiotics to be cured. Microfinance is like aspirin; if you keep providing microloans, it makes people feel better, it improves income, and people feel empowered. MFIs need to move from microlending to microfinance, to talk about financial inclusion, to offer savings and lower the cost of remittances. In terms of social peace, it is very important to have masses of people producing income. The solution is complex; it requires fair trade, education and health. People see that microfinance works and they see an immediate impact. It clearly helps as an aspirin would, but it is not enough by itself.
