According to Martin Holtmann, who heads microfinance initiatives at the International Finance Corporation arm of the World Bank, there are now about 140 million households in the world with access to microcredit, and a far bigger number with access to micro savings.

 We can argue about who really pioneered the idea of microcredit – the Pakistani social scientist Akhtar Hameed Khan is often cited as the first to build the theory and put it in practice – but there’s no question who gave the idea momentum and had the greatest influence on building the powerful industry it is today. Muhammad Yunus, the Bangladeshi banker and economist, is the figurehead of microfinance; indeed, these days he seems to be regarded with something of the reverence of a Mandela and the recognition of a Bono, particularly since the 2006 Nobel Peace prize for him and for his bank, Grameen.

 The Grameen approach, developed with government and central bank backing from a research project by Yunus’s team at Chittagong University, was distinctive because it made lending to the poor a solid business model. Others had lent to the poor on the back of state subsidies but without really worrying about its sustainability as a business practice. Naturally microfinance, with Yunus very much a part of it, has emphasized its ability to alleviate poverty and to act for the general social good. But you wouldn’t see groups as big as Citigroup building microfinance teams of their own if Grameen hadn’t demonstrated that lending to people without collateral was not only good for the soul but the balance sheet.

 The global financial crisis has had some surprising impacts on the microfinance industry. Sure, some have got into trouble: Holtmann developed an IFC-led facility that aims to raise $500 million to support microfinance institutions facing liquidity problems, and at the time Emerging Markets spoke to him in September it had already approved almost $140 million in disbursements. But that was chiefly for credit institutions suffering a knock-on effect of the liquidity crunch in commercial banks, not because of any lack of confidence in the microfinance institutions themselves. “You wouldn’t call it a full crunch, because MFIs [microfinance institutions] like any prudent institutions had secured medium term financing. But eventually you hit the rollover risk,” Holtmann explains. And in the main, particularly in the deposit-taking institutions, they have if anything outperformed. “Deposit takers have by and large escaped the liquidity crunch because deposits have been stable – in some cases, they have benefited from the fact that commercial banks have had runs on deposits.” So in these exacting circumstances, not only have individual borrowers remained uncommonly reliable, but the management of the banks has held up rather better than global heavyweights too.

 Grameen illustrates these trends. As of August 2009 Grameen itself had an almost 98% recovery rate; its return on equity in 2008 was 21.21% and its capital adequacy ratio 12.02%. It’s also notable that when Yunus speaks these days, more often than not he’s calling for better regulation. He wants the industry to be properly governed and supervised, with the right environment for stable growth. Along the way other long-standing micro-credit lenders have shifted their own models from state subsidy to free-standing sustainability, notably Indonesia’s powerful rural lender, Bank Rakyat Indonesia.

 Microfinance is not universally admired. Some feel it creates a culture of debt; some feel interest rates, which typically are higher than those in mainstream commercial banks, are unreasonably high; some claim that banks like Grameen can’t operate sustainability without subsidies; and still others find them prescriptive (such as Grameen’s 16 principles that, for example, discourage the payment of wedding dowries).

 But there’s no question it has provided opportunity to a vast part of world society that would not otherwise have received it and it will remain one of the fastest growing areas of financial services for years to come.

To see how this article ran, click here: GFPsupplement 4

It’s widely accepted that corruption is a problem in the developing world, and that the worst of the consequent economic hit is to the poor. Development projects such as those supported by the Asian Development Bank are especially vulnerable: they take place in some of the poorest parts of the world, with the lowest ability to supervise, and the greatest incentive to steal. But what to do about it?

Kathleen Moktan is the director for public management in the governance and participation division at the ADB, and is practice leader on public management and governance. She has been a part of the bank’s farthest-reaching initiatives in this area, including the Second Governance and Anticorruption Action Plan (known as GACAP II), approved in 2006, which aims to improve the implementation of governance and anticorruption policies in sectors where the ADB is active; and a joint initiative with OECD which aims to harmonise approaches and share good governance practices.

In Moktan’s reading, corruption is not necessarily any worse in Asia than elsewhere, it just has a greater effect. “Corruption will occur, fraud will occur, crooks are everywhere in the world,” she says.

“The difference is the way institutions deal with it. Institutions in the developing world are weaker so vulnerability is higher. In the developing world the returns from corruption are high and the risk of prosecution is low, so the risk/return tradeoff is different.” The other difference is the impact: the poor and disenfranchised are the worst hit by corruption, and in countries where a greater proportion of the population is below the poverty line, the effect is naturally greater.

Changing the risk/reward tradeoff is at the heart of the ADB’s attempts to tackle the problem in Asia. By strengthening institutions – the independence of the judiciary, the experience of auditors, the accountability and monitoring of public financial management systems – the ability to catch perpetrators is improved.

It’s a slight shift in approach, enshrined in the GACAP II documents launched in 2006. “Past institutional and governance efforts have tended to be too short term and spread across too many sectors,” that document says. “To few resources have been allocated toward preventing corruption and building systems and capacity in public financial management and procurement.”

But it’s not all at the top level, or at least not anymore. “In one country we looked at we noticed that corruption was not occurring at the bidding or tender process, but instead there was collusion at the build phase,” she explains. “The ADB would pay for 100% of a bridge but find they actually only got 80%. Instead of three inches of asphalt, there was one inch, or 10% less reinforced cement.” In this instance the monitoring needed to be taking place at implementation, not the bid.

At the top level, Moktan believes implementing agencies around the region are getting a lot better at spotting what she calls “red flags, where something may be amiss. We’ve trained them to look for things that don’t seem right.” That might mean noticing that the phone number in the letterhead is the same on three separate shortlisted bids. “Executing agencies now are picking these things up more often than not.”

So is it working? It’s a difficult thing to assess: do high numbers mean improving supervision or rising corruption? The Office of the Auditor General, Integrity Division (OAGI) reports that in 2008 the ADB imposed sanctions on 41 firms and 38 individuals in 2008; that brings the tally to 552 firms and individuals banned from working for the ADB since it began investigating corruption allegations in 1998. OAGI, whose headcount dropped from 15 to 12 in 2008, opened fewer new investigations in 2008 than any year since 2002, but at the same time the complexity of investigations is increasing and the number of open investigations in 2008, an average of 105, is higher than previous years.

“I think the biggest measure of success is the extent to which corruption is openly discussed in most countries in Asia and the Pacific,” says Moktan. “10 years ago, nada. It was all viewed as too highly sensitive. Now I can have a meeting with 50 people in the region discussing the nature of political corruption and how it impacts their ability to deliver as government officials.” There has been a certain amount of diplomacy in this process: Moktan says it is best to depersonalise the conversation. “It’s rare you meet public officials now who will not discuss vulnerability to corruption – but if we start with ‘sir, we think you’re a crook’, they won’t,” she says. “If we start with ‘what do you want to achieve and let’s look at where your own goals are at risk’, most are willing. If you don’t put on a western value label, you can have a meaningful discussion.”

Army chiefs rarely find themselves touting potato recipes, but these are remarkable times. So it was that Bangladesh’s general Moeen U Ahmed – who under the military-backed interim government commands much of the real power in this country of 158 million people – found himself addressing a press conference at the Dhaka Radisson in May urging people to eat more spuds.

Moeen’s entreaties were designed to ease pressure on rice, and represented one of the more oblique side effects of a food crisis which at its peak, more than doubled the price of imported rice to Bangladesh.

The vagaries of the international staple food markets may seem a curiosity from a distance, but Bangladesh is very much at the sharp end of the world soft commodities boom that has made others rich. The increase in minimum rice export prices from India from US$425 per ton in October 2007, to US$1,000 per ton in March 2008, feeds directly through to people in importing countries who are absolutely on the survival line already. (Bangladesh gets most of its rice imports from India.) The Centre for Policy Dialogue, a key local think-tank, estimated that during the first quarter of 2008, the section of the population below the poverty line – which already spends 46% of its income on rice – experienced an income erosion of 36.7%. As JP Morgan’s economist David Hernandez has noted: “If you are looking for a symbol of how higher food prices are now really hurting poorer countries, then Bangladesh is it.”

And high prices are bad enough; but in the worst circumstances this year, countries like Bangladesh couldn’t get rice at any cost. Twice, in April and May, Bangladesh put out tenders for rice and didn’t receive a single response, a function of panicked export bans in many of the world’s biggest exporters, among them India, Vietnam, Cambodia and Thailand.

On top of everything else, Bangladesh also faced poor returns from two of its key rice harvests after the impact of one of the cyclones (this one called Sidr) that so frequently blight the country.

Things looked rather apocalyptic back then, but three months on, Bangladesh has managed to step back from the brink, chiefly because of a bumper boro harvest, the single most important of the year, which yielded 17.3 million tonnes on its own. Just as important, Bangladesh struck a deal to import 500,000 tonnes from India; and, to the relief of all, international price prices have started to fall. So the country and its poor live to fight another day. But the experience has been alarming.

Euromoney met with Dr Mirza Azizul Islam, the financial advisor (the equivalent title of finance minister) in Dhaka in August to get his perspective on the impact of food prices and what it means for Bangladesh. “Bangladesh being a net food importing country, it did have a significant impact on domestic prices,” he says with some understatement. “In a globalised world, you cannot insulate domestic prices from the international price levels.”

Getting past it was a combination of luck and judgement. The government ensured there was adequate electricity for irrigation, tried to stamp out instances where dealers refused to sell fertilisers at official prices, and increased the procurement costs of rice to give a sufficiently good margin to make life bearable for the farmers (and to stop them succumbing to the attraction of producing other, non-staple crops). But he acknowledges some fortune too. “We were lucky that the last crop of rice was a bumper crop,” he says. “All this worked to ensure that, at least in terms of available quantity, there is no shortage. But that does not fully address the pricing problem.”

In a country with so many in poverty – studies tend to estimate 40-45%, or at least 60 million people – there’s no choice for a government other than to try to help them out. Bangladesh extended its social protection net, both in terms of the number of people it covered and the quantum of financial entitlement within it, and launched a new programme called the 100 Days Employment Guarantee Scheme, ensuring at least one person in each poor household should get at least some employment, typically in some form of rural infrastructure.

While that keeps the wolf from the door at an individual level, it’s an inevitable drag on an economy that wants to grow. The fiscal budget in June doubled subsidies in fertiliser, petroleum and rice, although some pass-through prices have been adjusted since; these subsidies accounted for 14% of the total budget, or 2.3% of GDP. “A substantial amount,” Mirza says. Citi economist Anushka Shah in Mumbai puts subsidies at 38% of total government revenue expenditure, and 12.5% higher in the 2009 financial year budget than 2008.

Multilateral assistance has helped – the ADB is already in for $170 million of budgetary support, and the World Bank was at the time of writing likely to commit $130 million, Mirza says – and Bangladesh has made strides in improving domestic revenue collection, but the feeling is nevertheless of a bandage applied to an inoperable wound. At 6% in recent years, there’s certainly nothing wrong with Bangladesh’s recent GDP growth but obligations like this can’t help it grow. Citi expects a decline to 5.7% in financial 2009 and probably a further slide from there.

In such an environment, what does the minister think of the export bans that have done so much to raise food prices? Mirza is pragmatic about the behaviour of other countries in the region. “This was driven by their own domestic considerations,” he says. “As prices rose they came under pressure to reduce domestic prices to satisfy their own electorates. But it does affect importing countries. And of course it is very difficult to generate any global or even regional consensus on the right approach.”

If that sounds stoic from a country that found itself in such a perilous situation, it’s perhaps because Bangladesh launched an export ban of its own in May, on non-aromatic rice. But, as Mirza says, that was something of a gesture, a shout in the dark. “For Bangladesh, I would say it was more of a symbolic kind of exercise, because in any case Bangladesh does not export non-aromatic rice.” Of course not – its population needs to eat it. But Mirza is less placid when it comes to some of the solutions that have been proposed in recent months, particularly the idea that came out of Thailand to form a rice cartel, somewhat in the style of OPEC.

“Obviously the Thai proposal of some sort of international cartel didn’t go very far, because if you look at Asean countries other than Thailand and Vietnam, they’re all rice importers. Obviously, they didn’t support this particular proposal.” There is, besides, a considerable technical flaw. “One cannot hold the rice for a very long time,” he says. “In the case of oil, you simply don’t extract it: you don’t have to store it. But once farmers plant rice, they have to harvest it. Because of that it becomes very difficult to operate a cartel.”

More broadly, though, the thinking behind the idea bothers Mirza. “The important point is what would be the objective of such a cartel. If the object is to manipulate prices to the disadvantage of importing countries, that is not something that is morally defensible.”

He has more sympathy with an idea being supported from the Philippines, of creating an international rice buffer against emergency need. “There has been some talk at the regional level: at the last summit of the SAARC countries [South Asian Association for Regional Cooperation, held in Colombo] some governments agreed to rationalise the SAARC food bank. That is something one could attempt; to the best of my understanding there doesn’t have to be any physical movement of food, you simply earmark a certain portion of any particular country’s reserve to make it available to any other country belonging to the food bank, as and when they might need it. But we’ll have to see.”

Mirza, like anyone else, has difficulty working out where commodity prices go from here (Bangladesh is also an importer of oil and has suffered accordingly with that too). Rice prices have come down, as has wheat, but “longer term factors indicate that even though the price has come down it will probably not come to the level prevalent a year or two ago.” Part of it is about demand: Mirza notes that as people move above their poverty line, their demand for food increases more than proportionately, which means that as wealth grows in places like India, China, Vietnam and Bangladesh itself, the demand for rice and other crops grows dramatically too. The arguments on the supply-side are well known, from diversion of agricultural land to biofuels and urban development, to natural disasters from the Australian drought to Bangladesh’s own floods and cyclones.

Visiting Bangladesh one is struck by how much and yet how little it has in common with its high-population peers. The world’s truly populous emerging markets – India, China, Brazil, and to an extent Pakistan, Indonesia and even Vietnam – are engines of global growth, turning their vast numbers of people into an advantage through manufacturing and the emergence of a wealthy middle class. Bangladesh is right up there in population, ranking sixth or seventh in the world, yet its growth rates lag the other names on the list, and in particular it doesn’t turn up in emerging market equity portfolios or the hit lists of foreign investors or private equity. FDI was just $625 million in 2006, the last available number, a considerable fall from the previous year; it was over $16 billion in India the same year.

Does Bangladesh have a chance to join that club? “I think it has,” says Mirza. “For one thing labour costs in Bangladesh have remained cheap. On the human resources side, even if the percentage of people coming out of [top] schools is not all that high, the absolute number is quite large. Third, our private sector has become a lot more dynamic now. And young entrepreneurs are emerging, mostly sons and daughters of established businessmen who have been educated abroad, come back home and tried to make their enterprises more professionally managed. Farmers are learning to switch crops, adopt new seeds, and use greater irrigation.”

But there are, as Mirza says, “substantial problems.” Perhaps the biggest is infrastructure, particularly power. Bangladesh has gas reserves, “but the findings by local researchers suggest that if we can’t discover new gas fields the country may run into a serious shortage by 2050.” That’s bad news for a country already heavily dependent on petroleum imports.

From the foreign investment perspective, there is another problem:  politics. The government in which Mirza serves seized power last year on the justification that both the major political parties who have run Pakistan since 1991  – two women, Begum Khaleda Zia of the Bangladesh Nationalist Party and Sheikh Hasina of the Awami League, have alternated in power since then – were fundamentally corrupt. Both leaders were imprisoned on corruption charges, and the interim government – which initially said it was taking power for three months – said it would clean things up before allowing democratic elections. Progress has not been smooth: the government has taken more and more time as it said it was purging phantom voters from the electoral roll, but has become increasingly heavy-handed, arresting between 10,000 and 12,000 local leaders and politicians in a two week period starting May 28. Elections are now slated for December, but even then it is not clear who, if anyone, is going to participate in them.

Mirza acknowledges that “there is still a bit of uncertainty in some countries where people are not too sure what will be the result of the next election: will there be a stable government? Will the same sorts of people who were responsible for endemic corruption come back to power? But I think these uncertainties will disappear within the next few years. And if we can improve the electricity supply situation through the exploitation of oil, I think we stand a good chance of creating something like 7% growth.”

Things are happening – the forthcoming IPO of Grameenphone will be the country’s largest ever float, and a major investment by NTT DoCoMo in a local telco is an important step. (See the separate article for more on these transactions and the outlook for privatisation.) But there is no question that wholesale foreign participation needs stability to give it enough comfort to come in.

“Of course the most important issue is going back to democracy: democracy by the people, for the people,” says Mamun Rashid, managing director and country officer for Bangaldesh at Citi. But he does not feel the transition has been a barrier. “The entrepreneurs of this country, and the electorate, do not mind accepting a bit of reduction in GDP growth and accepting an interim government to clean up and pave the way for future sustainable success.”

Rashid, who leads a Citi office enjoying growing momentum not just in corporate transactions but particularly microfinance, is extremely bullish on his country, from its low cost labour to the excellent spoken English. “Bangladesh has shown in the past that despite its natural calamities it is very much on a growth path,” he says. “Bangladesh is not floods. Bangladesh is not natural calamity. Bangladesh is not corruption. Bangladesh has a story to tell.”

But while it tells it, it’s a tough job for policymakers. Balancing the twin pressures of inflation and the need for growth is a tough job in any market, but it is nowhere tougher than in a nation where people are constantly on the threshold of not having enough to eat. All being well Mirza and his team will hand over power to a new team after the December elections; that team, like others before it, will take custody of a country with so much potential and yet so much to lose.

IPOs are scarce enough as it is in this gruesome global market. But the largest ever IPO from one of the world’s poorest countries, whose previous record deal was in 1994? That’s rarer still.

When Grameenphone lists in Bangladesh later this year, it will be something of a landmark. According to a statement released after its July 21 board meeting, the telco will raise $300 million, half of it in a pre-public offer private placement, and half in the float itself, on the Dhaka and Chittagong Stock Exchanges. Since Dealogic lists the previous record as a $28.9 million listing for Monno Fabrics in December 1994, that’s quite an increase.

Citigroup Global Markets Bangladesh is the global coordinator, issue manager and lead underwriter on the deal. Mamun Rashid, managing director and country officer for Bangladesh, reckons there’s real opportunity in Bangladesh’s markets. “Our capital market is coming up,” he says. “In 2006 the market cap was $5 billion, in 2007 it was $10 billion, and as of June 30 it has become $13 billion.” By that stage, it had come to represent 18.7% of GDP. So there’s appetite, but not a lot to buy. “There is tremendous demand for blue chip shares,” he says. “There are only about 200 companies listed but the daily turnover has already exceeded Vietnam and is near to the Philippines.”

A growing interest in the idea of frontier markets has started to direct some attention towards Bangladesh. When Merrill Lynch launched its Frontier Index in February, it included Bangladesh alongside more established markets such as Kuwait, Pakistan, Vietnam, Nigeria and the UAE. Merrill says that long-only emerging market funds have very low exposure to frontier markets – about 1.2% of total assets under management – but that the figure is rising, and has more than doubled as a proportion since mid-2006.

Grameenphone is also interesting in illustrating a rare example of foreign ownership in Bangladeshi companies. It is controlled by Telenor of Norway, and in fact telecommunications is the only area in Bangladesh where foreign control is commonplace. NTT DoCoMo in the process of buying a 30% stake in TM International Bangladesh, known locally as Aktel; the TM of TM International stands for Telekom Malaysia, which owns 70%. Still another is the Egyptian group Orascom, which bought Sheba Telecom in 2004, rebranding it as Banglalink. Citi is advising on the NTT deal too. “Bringing in an investor like DoCoMo means something to Bangladesh,” Rashid says.

But this is all acquisition or sale in private companies; where’s privatisation here? This is the key difference between markets like Pakistan and those in Bangladesh – a lack of foreign participation in the sale of state-owned assets. Bangladesh’s financial advisor (the term used for finance minister in Bangladesh’s interim government), Mirza Azizul Islam, says: “At the moment there is no bar to foreign participation in the privatisation process, but somehow we have not seen a lot of interest.” (See separate feature for a full interview with Mr Mirza.)

It has been tried before. In 2006, under a previous administration (the one ousted by the military government’s coup last year), the country’s Privatisation Commission took to the road to sell Rupali Bank, the only state-owned bank listed in Dhaka and Chittagong. They attracted reported interest from groups including Malaysia’s Alliance Bank and India’s ICICI, and eventually awarded the sale to Prince Bandar of Saudi Arabia, who offered $330 million for 67.26% of the shares and was later awarded the remaining 26% government stake for $128 million in February 2007. But the deal was never completed, and was formally abandoned in March.

Mirza’s previous job was chairman of Bangladesh’s Securities and Exchange Commission, and in his various roles he has been instrumental in trying to get more companies on to the market. He has succeeded in getting some stock of a handful of government companies onto the exchanges, notably the oil groups Jamuna and Meghna Oil, and the shares of Titas Gas Transmission and Distribution are in the process of divestment, but none involves foreign participation. Mirza says “there is a lot of interest from foreign investors in the greenfield industries,” but not so much in state floats. He would certainly like to see more active capital markets, and thinks Grameenphone is “path breaking.” Today, he says, the markets are dominated by financials and some manufacturing companies – “some have been done well, but there are quite a few that are really bad eggs.”

Mirza’s most recent budget speech announced plans to divest shares of nine state owned enterprises in the power sector, 10 industrials and two telcos. Since the same budget also announced a reduction in corporate tax for listed companies, and a new book building system is being introduced, perhaps this is the start of a more active period on Bangladesh’s markets. But to get foreign interest, there will need to be greater political stability, and for that, December’s elections – which should return power to a democratically elected party – are vital.

Rashid believes a privatisation process is inevitable in time. “It is coming” he says. “It is one way traffic. You have to follow Vietnam if you want to exceed Vietnam. You have to follow Indonesia if you want to pose any competition to Indonesia. The government has corporatized some of its companies, so it has started. The next step would be going public.”