How Exit Plans Can Help Create Sustainable Microfinance Institutions
In the early 2000s, there was general skepticism that microfinance could be successfully extended from the rural areas to an urban environment. But the foundation believed that the model could be adapted to meet a clear market need for families living in urban slums. We began funding a handful of urban microfinance start-ups with a goal of kick-starting a new market sector to give low-income, urban families ready access to the financial tools they needed to mitigate the day-to-day uncertainty of poverty.
The goal was never to be a permanent investor. From the beginning, there was an exit plan. The foundation sought to help prove the viability of an unproven model – to demonstrate that it could work in dense urban environments with unique social and economic realities; to help establish consistent, client-centric business practices; and to help build small but strong financial entities that could attract commercial capital. The resulting growth in clients and social outcomes, along with the entrance of commercial capital, would signal success and would be our opportunity to withdraw and reinvest in other projects.
In the end, our initiative was remarkably successful, and we did, in fact, follow our exit plan. But the journey between beginning and end led through unexpected terrain, and reinforced the lesson that exit plans need to be clear but flexible.
Enter Partnerships Knowing (and Communicating to Your Partners) That You’ll Eventually Exit
When starting a partnership, clear expectations are always an important part of aligning objectives and action. Begin partnerships and investments knowing that you’ll eventually exit, and openly discuss your intent with your partners and co-investors. When the goal is to build institutions or sectors that outlast you, success means that you’re no longer needed. But that doesn’t mean that everyone will want you to go. You and your partners should be very clear, both about the definition of success and about each partner’s exit expectations.
For example, in 2006, the foundation initiated a series of equity investments in a group of early-stage urban microfinance institutions, including Ujjivan Financial Services, Swadhaar FinServ, Arohan Financial Services, Janalakshmi Financial Services and others focused on serving the urban poor. Foundation staff sat on the board of each institution, and worked closely to establish governance and operational models that balanced client needs with reasonable profit. We wanted to make sure that each of our partners understood two things: That the foundation was fully committed to their success, and that their success would ultimately lead to the foundation’s exit.
Don’t Tie Yourself to the Calendar
In sector or institution building, the end game isn’t exit no matter what. It’s exit based on success. It’s a positive exit. It’s based on impact, sustainability and scale. And since neither you nor your partners can predict what the road from here to there will look like, you need to tie your departure to something other than a calendar date.
Again looking to the foundation’s experience in India, by the end of 2009, circumstances appeared optimal for some of our microfinance investments to begin to wind down. Our partners were largely on track to becoming financially sustainable, and they’d established innovative business practices that advanced the interests of their clients. Meanwhile, a rising influx of commercial capital signaled that the urban microfinance sector as a whole was also gaining traction. It seemed that the goal of sparking a new market sector focused on responsibly serving India’s urban poor was in reach.
Then in October 2010, despite outstanding progress in the urban sector, our partner institutions were hit with a crushing blow. Growth in the entire microfinance sector—globally—ground to a halt with revelations about client abuses at rural microfinance institutions (MFIs) in the southern state of Andhra Pradesh. There was an explosion of concerns about the potential for MFIs to exploit their clients, most of whom were new to the formal financial system. The crisis led to a freeze on commercial capital, innumerable debates, substantial industry turmoil and ultimately a number of reforms—all of which endangered the viability of small growing players. It also led the foundation to reconsider the timing of pending exits.
Stay Flexible, and Stay the Course
The Andhra Pradesh crisis was a sector-wide diversion that required the foundation and its partners to adjust their focus. The first milestone to achieve was stabilizing partners, who in turn, focused on minimizing costs and improving customer outreach to build clientele. Eventually, with reforms in place, urban MFIs again began attracting support from more mainstream investors, and the foundation’s partners turned the corner. By the end of 2012, with close to $1 billion in commercial loan capital available to India’s MFI sector, the foundation was back on the road to executing the final stages of our exit plans and putting the funds to work elsewhere. It was a few years later than we had all expected, but the sector had indeed entered the new phase of stability anticipated in our original exit planning.
Think back to any long, arduous journey you’ve traveled, and you’ll likely recall a few bumps in the road. During monumental journeys, it’s common to encounter treacherous terrain, diversions, unexpected structure or system malfunctions, delays and other distractions. However, even though the trip is taxing, you don’t abandon the plan midway. You keep going until you reach your destination. India’s urban MFI sector is proof that successful exits signal the start of scalable, sustainable solutions that can help millions of people living in poverty. Design your exit plans to offer destined, purposeful goals—yet allow flexibility on the route to achieve them.