The Holy Grail of Old-School

The chance to work at the IFC was too good to be true, if even just for a 3 month internship. I was assigned to a team working on a deal memorandum for IFC's first microfinance venture in Jakarta: project financing for a Java-based commercial bank to extend microloans to aspiring micro-entrepreneurs. I was surprised that it was the first; after all Indonesia had arguably the most mature and differentiated microfinance sector in the developing world. Bank Rakyat Indonesia (BRI), the largest local bank, was known the world over as a bank that revolutionized rural microfinance (even in 2001, its microbanking division accounted for 34% of its total assets, 31% of loans outstanding, and 41% of deposits); the microbanking unit was profitable even though the bank as a whole was loss making. With several types of MFIs, including BRI rural banking units, independent rural banks (BPRs), as well as non-bank MFIs such as financial cooperatives, village MFIs, and pawnshops, it was also one of the most diverse.

A few pleasant surprises came my way in the first week of working here:

1. Analytic rigor. This was the real thing, worlds apart from how we used to fund projects at AID (let's see... does it look like it'll help people someday? have we met or worked with the NGO before? might this lead to a people's movement of some sort?). In the first few days I was pouring over financial statements, calculating NPL, NIM, interest spreads, and ROA ratios, and talking to experts to build accurate projections for the model. What better way to learn finance than to get thrown in the deep end with a cause I could be passionate about?

2. Strategic mindset. Even more surprisingly, the whole process seemed more like a consulting case than a valuation exercise. I realized, as PE folks back at Wharton had always told me, that valuation is just a piece of the puzzle. The real question of whether IFC should finance this project or not depended on (here come the 3 buckets!!!) opportunity size / market demand, macro-economic / regulatory / environmental influences, and alignment with IFC goals (which would include the financial ROI analysis). Hmm, maybe there is more to the IFC than finance.

3. Development impact. I know the skeptic in me will be back to argue on this one later, or maybe it's just the IFC kool-aid (which, in southeast Asia, comes in all natural flavors with real fruit), but I really feel like this project will have social impact while achieving ROI. I went for a walk on Friday evening in the Kuningan area where my corporate housing was and saw people lining up outside a "Pegadaian" (state-owned pawnshop). Pegadaian itself had over 12.5M customers in 2005, with banks reluctant to lend to potentially high-risk customers after the economic crisis of the late 90s. However, droughts and adverse situations would force people to use valuable items, such as farm equipment, as collateral, leading to a downward spiral if they couldn't pay back the loan (with interest). Commercial microbanking units, such as the project we were financing, would give these people another option, a more structured and formal way to take microloans. I was moved by what I saw; behind our market sizing and deal structure was this story of real people who would be affected by what we do. Is that what we should call development?