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Microfinance: Investment in Microfinace without social responsibility?

- The unfortunate end of probably the most promising Microfinance Institution in Argentina How comes that after one and a half years of hard work one of the most promising Microfinance Institutions according several opinions of the sector in Argentina is about to fail bankruptcy? A story of a rise and the fall of private initiative to develop the financial sector by creating a Microfinance Institution in order to create access to financial products for the poorest. ProTrabajo is the joined project of Rodolfo Monsberger (39), Argentinean nationality, and Manuel Alfonso-Ulrich, 30 German nationality, two young encouraged entrepreneurs that resigned their former positions as consultants of one of the worlds most experienced consulting firms in the Microfinance sector (IPC, Internationale Project Consult) based in Frankfurt am Main in order to speed up the financial sector development in Argentina by creating an own Microfinance Institution. Our intention was to set up a small MFI in Argentina and to convince other Institutional Investors to join the project after demonstrating that Microfinance in the feared Argentinean market is possible says Rodolfo Monsberger, Co-Founder and CEO of ProTabajo. We saw a large finance gap in the Argentinean financial system that made it impossible to the vast majority of Micro Entrepreneurs and very hard to small enterprises to receive accurate financial services adds Mr. Alfonso-Ulrich, Co-Founder and COO of ProTrabajo. They finally selected the city of Rosario, a 1,1 million citizens city in the province of Santa Fe where in December 2005, after half a year of preoperative process ProTrabajo S.A., disbursed its first Micro loan to an Argentinean Microentreprenneur. 500 USD for a mechanic so that he would be able to buy specialized tools he needed to realise specific works. In the same way, about 4000 Microentreprenneurs till date received small loans to invest in working capital, assets needed for the company like fridges, electronic balances or light machinery, or even to improve the installations of the housing conditions. In order to create transparency in the ongoing steps ProTrabajo Management hired in August 2006 the well known Consulting and Rating Company Planet Finance to elaborate an independent opinion of the institution that certified a very positive development and management of the institution (see attachment 1). The hard work of the whole team soon led to the following milestones: SEPTEMBER 2006: FONCAP S.A. (FONDO DE CAPITAL SOCIAL) a governmental institution of Argentina decided to provide refinance sources to the growing financial needs of ProTrabajo despite the short operating time of ProTrabajo. OCTOBER 2006: 4th place of the Premio Emprendedores 2006 a contest for start up companies sponsored by Clarin PYMES and Banco Ciudad DECEMBER 2006: Opening of the second branch in the city of Rosario FEBRUARY 2007: ProTrabajo received a letter of Credit from Deutsche Bank Foundation MARCH 2007: FONCAP approved the leverage of the letter of Credit provided by Deutsche Bank and therefore ensures liquidity needs for portfolio growth for the rest of the year 2007. According Oscar Di Lena CEO of FONCAP S.A. and other voices of the Argentinean Microfinance sector, ProTrabajo looks like the most promising institution of the country (see attachment 2). As a surprising side effect of the independent opinion realised to attract institutional investors the same consulting firm Planet Finance saw the potential of ProTrabajo in order to make a direct investment it put the management in contact with Microcred Holding. Microcred Holding is an investment company created by PlaNet Finance with important shareholders like International Finance Corporation, Socit Gnrale, Axa Belgium, French Development Agency (AFD) and the European Investment Bank (www.microcred.org). Microcreds mission is to create a group of commercial microfinance companies offering financial services to lowincome entrepreneurs who do not have access to the traditional financial sector.

Concerning the investment in existing institutions it will be crucial for MicroCred to ensure that existing MFIs agree to belong to an international group of microfinance sharing common values, an Ethical Charter, procedures and governance rules, and common objectives for growth and development you can read on the official web site (http://www.microcred.org/EN/investissements_philosophie.php). The holding seemed to be the perfect match for ProTrabajo that needed a potential partner to expand all over the country. During January and March 2007 Microcred executives visit the institution in order to evaluate a possible merger of both companies, negotiate the terms of the merger and evaluate the company in collaboration of one of the leading audit companies worldwide. In June 2007, a binding letter of intent was signed in Paris where ProTrabajos management already participated as guests in a Management seminar held in Paris. After the signature of the concrete letter of intent the local Microcred team that was working since middle of April together with the management of ProTrabajo was reforced by 6 consultants in order to prepare the countywide expansion of ProTrabajo. Some of them assumed key positions within the institution (Chief Financial Officer) and Regional Head of Rosario, others were making their first steps in the Microfinance business. During all the time ProTrabajo was already completely dedicated to the merger process. Heavy investments in information technology, infrastructure, hiring of new staff and the planned expansion process, implementation of a new incentive systems for the employees combined to a rise of salaries of the local staff to competitive levels were realised by the joint team of ProTrabajo and Microcred executives on the basis of the signed letter of intent and in good faith from both parts. Because of the magnitude of the investments and expenses made till August, the working capital of the institution was all spent. To cover further liquidity needs Microcred acquired in August the first 10% stake of ProTrabajo and provided a short term debt transformable into capital as the liquid funds of the company. ProTrabajo on its side took another refinancing credit line with FONCAP and entered inclusive a short term debt by the parents of one of the majority shareholders in order to meet liquidity needs of the merger process. By mid of October, the operational merger was formally completed by a re-training seminar held to loan officers and administrative personal, the opening of the branch of Cordoba was prepared, loan officer hired, training facilities installed. At the end of October Microcred changed its opinion not to merge with ProTrabajo mentioning the arrears status as a problem when, according to the financial planning of the CFO, executive of Microcred, ProTrabajo was about to receive additional 300.000 USD to cover medium term liquidity. The CFO himself highlighted the imminent threat of the bankruptcy, if no further capital would be injected but the current majority shareholders had not the financial possibility to invest in the company, and Microcred apparently did no longer have the intention. The whole Microcred team was so shocked by the decision taken that 10 days later, the whole team disappeared, leaving behind ProTrabajo with basically no working capital left and huge accumulated debt. As a consecuence of the strong liquidity problem even FONCAP that supported the company basically from its start with refinancing sources declined the provision of new funds, especially considering that the last funds were destined to cover operational costs and the effects of the cost structure gained over the last months. In desperate letters from the management of ProTrabajo, to the board of Microcred in Paris the management highlighted this imminent risk or even the unevitable bankruptcy and claimed to Microcred to assume the responsibility of its actions. The letters from the shareholders insured that the case ProTrabajo would receive full attention and that they will ensure a solution that insures the future of the company. The fact is that nobody came to the mediation processes proposed by ProTrabajo, nobody came to the shareholders meeting during November where majority owners tried to figure out a solution for the company. Finally the last board meeting celebrated the 19th of December in

Paris ends without touching the topic and an official letters from the holding encourage the management to continue the ongoing amicable conversation whereas the fact is that there definitively is a lack of communication since 2 months. Out of sight, out of mind is the childish behaviour we experienced over the last 2 months. Till the present day the whole experience is absolutely unbelievable for us. If we would receive today an offer of 100 USD for the 90% of shares outstanding I would give my congratulations for the perfect job they did, picking a small MFI in the market, driving it into a liquidity crisis and buying it as at 100 USD but we are not working in the M&A sector at an hostile takeover are we? Further we are impressed by the lack of memory - especially when it comes to assume the responsibilities of a company operating in the Microfinance sector where building institutions to guarantee a permanent access to financial services takes years. However, we are sure that the Microfinance world is very small and that most of the institutions do not suffer from lack of memory, so we will do our best to spread our story as far as possible so that institutions with good intentions do not invest in companies that instead of creating MFIs spend their money it to destroy them concludes Mr Alfonso Ulrich. Rodolfo Monsberger adds, maybe we should help the lack of memory of Microcred executives when they write their annual reports within a month that besides creating 2 new institutions in 2007 in Senegal and China, they also have achieved to drive ProTrabajo into bankruptcy. Today, after 2 years of hard work of the owners and their 25 employees, after having disbursed 4000 micro loans to Micro entrepreneurs that surely helped in a sustainable way to build in parts a better future for the microentreprenneurs and their families, ProTrabajo has been destroyed within basically 5 months of merger process. A questionable happening in a business sector where one should assume social responsibility, morale and business ethics are the basis of all initiatives.