ShareCap targets small lending banks in developing countries

The International Finance Corporation (IFC), the World Bank’s private sector affiliate, ABN Amro, Holland’s biggest bank, and other international investors have joined the Chicago-based ShoreBank Corporation to launch an investment vehicle that will make equity investments in financial institutions in developing countries that lend to small businesses.

Named ShoreCap International and based in London, the company, which will be managed by ShoreBank, has $15.5m in capital committed now and expects to increase this to $25m in about nine months, says Mary Houghton, president of ShoreBank and ShoreCap’s chairman.

The US’s leading community bank, ShoreBank’s core business is revitalising communities that are in decline. “This is done largely through lending to small businesses because these create jobs,” said Ms Houghton.

The new company will begin by scaling up previous ShoreBank and IFC partnerships, which include joint investments in financial institutions in Kenya and India that specialise in offering credit and other services to small farmers, women, households, low-income entrepreneurs and small businesses.

Next ShoreCap will make equity investments of between $500,000 and $2m in other financial institutions, starting in Asia (“where we are particularly interested in new opportunities in Indonesia and the Philippines”), followed by Africa (“in just about any country in sub-Saharan Africa”) and central Europe, Ms Houghton said.

All told, ShoreCap will make 15-18 investments over three to four years for an expected rate of return of 7%, said Ms Houghton.

“In exchange, ShoreCap (which is also offering subsidised financial and technical advisory services to its investees) will help to build a network of sound and transparent local banks that is essential to a growing economy,” she said.

IFC officials said ShoreCap’s advice would focus on strengthening the investee banks’ internal systems and governance as well as on increasing loan officers’ efficiency. “Each officer should have a portfolio of 300 loans,” said Renate Kloeppinger-Todd, a principal investment officer at IFC.

Other reasons why local banks are the investment target of ShoreCap’s managers are because they know the market, are capable of judging risk and getting repayment, and have the relationships that do not interest conventional banks.

The latter may be changing, however. Large international banks, notably ABN Amro, are realising that the micro business can be profitable. Banks are able to cover the costs of doing small transactions by charging higher rates. And borrowers are willing to pay the higher interest rates because they have small financial requirements and little access to outside capital.