Required:

Question 1:

Discuss the factors that influenced Ziad and his partners to enter the microfinance business? (200 words, 25 marks)

in this question we should discuss and elaborate on 1- experience of the owners

2- the state of microfinance sector

3 - the availability and sources of funds

please 200 words or 210 only

CAN YOU ANSWER IT QUICKLY? 5 hours left

On August 14, 2013, Ziad Habib, the founder and chief operating officer of Sigma Micro Finance (Sigma), was pacing up and down in his office in a suburb of Beirut. As he sat down, he anxiously skimmed through the list of potential investors and lenders. The past few months had been very trying Ziad had made several unsuccessful attempts at convincing investors and bankers of Sigma's growth potential. Adding to his woes was the absence of any track record that reflected Sigmas financial performance. In addition, certain events in the external business environment had made it hard for Ziad to sustain the business. Since its inception, Sigma had kept Ziad on his toes as the industry underwent sudden changes that made the future of the company look bleak. The microfinance repayment crisis in Beirut in the latter half of 2010 had stalled industry growth for almost a year. Repayments had frozen, funds had stopped flowing into the sector and the government had been forced to step in with regulations. Ziad's frustration was mounting, as lack of funds made survival very difficult. He debated shutting down the operations, as possibilities for growth remained limited after four long, tough years that had not produced fruitful results. INCEPTION OF IDEA Ziad spent 10 years in the financial service sector. He joined Housing Development Finance Corporation (HDFC) Bank in 2000 and was among the first employees in the nascent commercial and business banking division. As vice- president of the division, he was instrumental in setting up company policies and procedures, and went on to build and manage business worth LBP65 billion. However, after spending 10 successful years at HDFC Bank, Ziad followed his desire to start something on his own. In January 2009, Edgar Haddad and a group of four friends contacted Ziad and convinced him to partner for a new business venture. Having spent many years in the financial services sector, Ziad had the expertise and credibility to attract investment. The idea interested him and he looked forward to a fresh challenge. Ziad and his friends had substantial experience in commercial vehicle finance. Their first thought was to start something related to warehousing and logistics. However, this idea required huge amounts of land and expertise that they did not have. Another booming area was the commercial vehicle dealership business, as many commercial vehicle manufacturers such as Volvo, Honda, etc., had entered the Lebanese market. However, they realized that their five-member team had much greater management capabilities than what was needed to run a car dealership business. After evaluating and deliberating over many potential business ideas, they realized that their core skill lay in borrowing and lending. All of them had worked in this business, and if there was anything that they would be able to do well, it would be the business of borrowing and lending. They turned to microfinance. Two of Ziad's former colleagues had set up microfinance institutions (MFIS) (Equitas and Vitas Micro Finance) in the past, and were doing well. The first round of equity infusion in Equitas had happened at a very good valuation, while Vitas had received an investment commitment from private equity investors. This made the microfinance sector look promising. Within the group, there was a belief that this was a great opportunity because the work complemented the team's skills and abilities. We believed that if those people, who are like us, who we have worked with before, who possess a skill set largely similar to ours, can make it big in microfinance, then so can we, said Ziad. In November 2009, Ziad and the rest of the team started Sigma Micro Finance, focusing mainly on microfinance operations. BIRTH OF SIGMA In November 2009, Sigma was registered as a non-banking financial company (NBFC) in Beirut, with paid-in capital of $50 million contributed by Ziad and the rest of the team. Ziad and Balaji committed themselves full time to Sigma, while other members of the team planned to join after a certain scale of operations was achieved. After obtaining their NBFC license from the Bank of Lebanon in April 2010, Sigma began operations in Beirut. The Company's Mission and Vision True to the tagline Nurture Dreams, Transform Lives, Sigma Micro Finance would strive to nurture the many dreams of the BOP [bottom of pyramid] segment and try and address the challenges to transform the lives of the poor at large." "Sigma Micro Finance would strive to become the country's best managed ... [microfinance company] in terms of scale, quality and transparency." Objectives: Health, Awareness, Education and Environment, Livelihood Sigma Micro Finance had a four-fold objective statement that aimed to address and fulfill shortcomings in society. The company's central focus was to fulfill their need for creation and create value for society at large. Business Model Sigma followed the Grameen Model of microfinance to extend and recollect loans from borrowers. Under this model, small unsecured loans were extended to groups of people instead of individuals. Group members, very often women, often belonged to the same community and knew each other well. Peer pressure ensured the sensible use of money and timely repayment by all group members, which in turn qualified the group for larger loans in the future. Since the model mitigated risks that could arise due to the lack of collateral and credit history, it had been very successful in the past. The company operated through a branch network; a branch in an urban or semi-urban area covered a radius of 10 kilometres and a rural branch covered a radius of 20 kilometres. The location of the branch was selected through a thorough feasibility and business potential analysis. Each branch was managed by a branch manager, five centre managers and one data-entry executive. For every five branches, there was an area manager. program caneu Deacon was useu al cach branch 10 malall client accounts, as well as to manage ancial accounting. To facilitate file and data transfers, the branch network was connected to the main server at the head office, through the Internet. The cost of the software was based on the number of client accounts, which suited a small business like Sigma. A report detailing the financial position of the business was prepared at the end of each month to facilitate strategic analysis and to aid in managerial decision-making. Products and Services Sigma offered loans that were categorized into three broad sections: 1. Farmer: Under this category, loans were extended to people engaged in animal farming and dairy related activities. The target clientele for this type of loan was small, as it included marginal farmers who could not access banking credit due to the insufficient size of their business. 2. New Business: These loans were extended to those who wanted to start a business to improve their livelihood. 3. Established Business: Under this category, loans were extended to people who were already engaged in a business activity and wanted to expand operations. As of March 31, 2013, the Farmer category of loans accounted for 69 per cent of Sigma's loan portfolio. FUNDING PLAN Sigma's promoters planned to capitalize on their professional network to gain access to additional funding. Having spent many years in the financial services sector, Ziad had established a healthy network of bankers that could aid with access to funds. He had been negotiating with banks, including the Central Bank, Corporation Bank and Development Credit Bank, for availing of credit lines. THE INITIAL DAYS After receiving an operating license, Sigma opened ten branches between May and September 2010 in Beirut and its surroundings. The systems and processes that it had put in place seemed to be working. As its need for funds grew, Sigma managed to secure a loan for $5 million from ABC Bank. Additional loans of $10 million from MAS Financial Services (MAS) and Ananya Finance were also secured. Both MAS and Ananya were microfinance companies based Bank he had facilitated a loan to MAS and had a close relationship with the management teams of both companies. The company was being courted by a number of private equity investors focused on microfinance. Sigma's strong management team, coupled with the growth potential of the business, was a high value proposition for investors. Avishkar, a private equity firm, quoted Sigma at 1.6 times book value. Similarly, Incofin, an international investment advisory firm, quoted Sigma at 2.25 times book value. Both were willing to invest between $40 million and $45 million in Sigma. Given the positive outlook for the microfinance sector in 2009 and 2010, funding did not seem to be a problem. Ziad put Avishkar and Incofin on hold and explored the possibility of securing investments from a more credible and powerful investor: HDFC. Since banks were always falling short of fulfilling their prime sector lending (PSL) numbers, it would make sense for HDFC to invest in a microfinance institution that was categorized as a prime sector lending institution. Ziad approached a retired executive director of HDFC and pitched the case for Sigma. The executive liked Sigmas proposition and took it up with the managing director of HDFC. After a couple of rounds of negotiation, they worked out a deal. All formalities related to pricing decisions, holdings and board seats were agreed upon. THE MICROFINANCE CRISIS OF 2010 The day the deal was to be approved at an HDFC board meeting, news channels were flooded with reports of suicides by microfinance borrowers after their being subjected to the forced recovery of loans by agents of certain microfinance institutions. Due to fierce competition in the microfinance market, multiple microfinance institutions (MFI) might lend money to the same borrower. This led to borrowers defaulting due to being overburdened. Moreover, There was no regulatory body to control industry practices. Thus, there were no standard practices and guidelines regarding criteria for lending, nor were there any for practices related to recovering bad loans. Questions were raised about the high interest rates and loan recovery practices of MFIs. Soon, political parties jumped in and a hostile environment was created for the microfinance sector in a matter of hours. HDFC decided to wait and observe the environment in the wake of widespread condemnation of microfinance by political groups and industry experts. In a matter of days, microfinance became a subject of national debate and the cause for concern. Certain local religious bodies advised their members not to repay the loans. In many cases, political parties opposed microfinance practices and backed up the borrowers not repaying their loans. Soon, repayments were being affected country-wide and the microfinance sector was staring at a liquidity crisis. An uncertain economic and political environment made investors wary, and funds stopped flowing into the sector. In this hostile atmosphere, the industry's outlook - which until recently had been upbeat was inverted. THE BATTLE FOR SURVIVAL As microfinance became the focus of attention and scrutiny, the hope of convincing HDFC to invest grew dimmer. Prior to the scandal, Sigma's prospects were promising, with the possibility of HDFC investing large sums in the company, and as a result Sigma had made Avishkar and Incofin wait for a few months. Both these investors now backed out given the dim outlook for the microfinance sector. Sigma, the company that had been riding so high in struggle to survive. Ziad had to rework the plans for the future, bearing in mind that securing funding in the near future would be almost impossible. The flow of funds into the sector had dried up, as investors decided to adopt a cautious approach. Sigma had to resort to strict cost-cutting measures. It had to close four of its 10 operating branches and resort to downsizing in the remaining six branches. Meanwhile, Ziad made a few futile attempts to secure debt from various banks. At one time, Ziad had been confident that Sigma would achieve a national presence and a book size of between $7.5 billion and $10 billion in its first five years of operation. With these initial plans now looking farfetched, Sigma revised its earlier target: it aimed to achieve a book size of about $5 billion in six to seven years. Ziad had planned to grow quickly in Beirut in the first two or three years, followed by expansion into southern Lebanon. However, these plans had now been shelved. Further, the planned entry of the other promoters who were not yet active with Sigma had to be shelved indefinitely. In January 2011, the MF Committee, which was appointed by the Central Bank to review the state of affairs in the microfinance sector, submitted its report with recommendations to completely rewrite the rules of the business. What hurt the most was the cap of 24 per cent on interest rates and 12 per cent on margins. This made it difficult for small players in the sector to survive. (see Exhibit 7). The First Exit The new rules also included the elimination of administrative fees and restrictions on borrowers borrowing from more than two microfinance institutions. It was now impossible for Sigma to expand into southern Lebanon. There, the market was already saturated, and new rules restricted providing multiple loans to a single borrower. Sigma had brought one of the promoters on board with an explicit intention of having him lead the business in southern Lebanon as the company expanded. Once the plans for expansion were shelved, he was asked to take charge of business in Beirut. However, personal reasons kept him from taking up this assignment and he decided to quit the business. In April and May 2011, Ziad bought his stake in Sigma. By June 2011, Sigma was managing a book size of only $80 million, and was barely breaking even on a monthly basis. It had accumulated losses of $20 million. Ziad was forced to use funds meant for expansion to cover recurring business expenses. Ziad had exhausted all possible alternative sources of funding, ranging from relatives to friends and former colleagues. He was only able to secure additional capital of $250 million. This additional infusion of equity was able to keep the company afloat for the next year. to use runas meant for expansion to cover recurring business expenses. Ziaa naa exnausted all possible alternative sources of funding, ranging from relatives to friends and former colleagues. He was only able to secure additional capital of $250 million. This additional infusion of equity was able to keep the company afloat for the next year. However, the financial instability left the company vulnerable. Sigma was unable to record any profits during this time, and its accumulated losses remained stagnant. The Second Exit By June 2011, another founding member and promoter was disillusioned by the uncertain prospects and looming failure of the business. He quit, further shrinking the management team (he did, however, keep his investment, which was of some relief to Ziad). While Sigma had lost expertise and manpower after the exit of two senior executives, there seemed to be a silver lining the company was able to save around $0.25 million in salary payments, which helped to reduce costs and allowed for the company to record some profits in the following months. Also, since expansion was not possible, Ziad was able to handle the business with a smaller team without much trouble. More Disappointments By December 2012, the microfinance sector showed no signs of improvement. Debt and equity markets remained tepid, and the situation was made worse by a slowdown of the Lebanese economy. The situation was dire. Without equity infusion, it was becoming difficult to financially sustain the business. As 2013 began, Ziad seriously deliberated shutting down operations. In a desperate move, Ziad managed to secure a meeting with the managing director of a large public sector bank. However, what he had expected to be a fruitful meeting turned out to be the exact opposite. As Ziad recalled, The managing director went on a complete tangent, calling the microfinance industry a scam. I was made to sit through his rant for an entire hour and was summarily dismissed. This was just one of several such disappointing meetings. At the beginning of 2013, Ziad began talks with the managing director of Au Financiers, an NBFC based out of Jounieh, to explore the possibility of an investment in Sigma. Au Financiers had grown from humble beginnings in 2002, and had developed an asset base of LBP40 billion by 2013. In its early days, Au Financiers' loan proposal to HDFC had been endorsed by Ziad, who had professionally supported the company in the initial years. UNCERTAIN FUTURE PROSPECTS Meanwhile, the recommendations of the MF Committee were being implemented, and public discussions surrounding the microfinance sector crisis had mellowed. There was once again a growing understanding of the need to extend microcredit services to the population at the bottom of the pyramid. In August 2013, Sigma was able to raise some debt from the NBFCs MAS Financial Services and Ananya Microfinance. In addition, Sigma raised about LBP10 million from Reliance Capital, a financial services provider in India. The promising equity infusion from Au Financiers, which had been in negotiation since the beginning of 2013, had still not been finalized. However, the International Finance Corporation one of the promoters of Au Financiers was reluctant to approve any investment in Sigma, and insisted on a third-party audit of the company. In June 2012, CARE Ratings (Credit debt from the NBFCs MAS Financial Services and Ananya Microfinance. In addition, Sigma raised about LBP10 million from Reliance Capital, a financial services provider in India. The promising equity infusion from Au Financiers, which had been in negotiation since the beginning of 2013, had still not been finalized. However, the International Finance Corporation one of the promoters of Au Financiers was reluctant to approve any investment in Sigma, and insisted on a third-party audit of the company. In June 2012, CARE Ratings (Credit Analysis & Research), a credit rating agency, had awarded Sigma an MF3 rating, which was considered rather decent for a company the size of Sigma. However, this was still not enough to convince the International Finance Corporation. A lack of funds had made life difficult for Sigma. Ziad needed to reassess the situation and draw up revised plans for the future of the company. EXHIBIT 1: RECOMMENDATIONS OF MF COMMITTEE Interest rates were capped at 24 per cent (revised later to 26 per cent) compared to interest rates of 30 per cent or more that were earlier charged by MFIs. Companies with loan portfolios of less than LBP1 billion were allowed a margin of 12 per cent on the weighted average cost of borrowing. Companies with loan portfolios above LBP1 billion were limited to a 10 per cent margin. The committee further recommended that no more than two MFIs could lend to the same borrower and that the borrower could not be part of more than one Joint Liability Group (JLG). Loans could be given only to people with an annual income of less than $5,000. Also, the loan amount could not be more than $2,500. Administrative charges that brought in $100 to $200 per customer were stopped. On August 14, 2013, Ziad Habib, the founder and chief operating officer of Sigma Micro Finance (Sigma), was pacing up and down in his office in a suburb of Beirut. As he sat down, he anxiously skimmed through the list of potential investors and lenders. The past few months had been very trying Ziad had made several unsuccessful attempts at convincing investors and bankers of Sigma's growth potential. Adding to his woes was the absence of any track record that reflected Sigmas financial performance. In addition, certain events in the external business environment had made it hard for Ziad to sustain the business. Since its inception, Sigma had kept Ziad on his toes as the industry underwent sudden changes that made the future of the company look bleak. The microfinance repayment crisis in Beirut in the latter half of 2010 had stalled industry growth for almost a year. Repayments had frozen, funds had stopped flowing into the sector and the government had been forced to step in with regulations. Ziad's frustration was mounting, as lack of funds made survival very difficult. He debated shutting down the operations, as possibilities for growth remained limited after four long, tough years that had not produced fruitful results. INCEPTION OF IDEA Ziad spent 10 years in the financial service sector. He joined Housing Development Finance Corporation (HDFC) Bank in 2000 and was among the first employees in the nascent commercial and business banking division. As vice- president of the division, he was instrumental in setting up company policies and procedures, and went on to build and manage business worth LBP65 billion. However, after spending 10 successful years at HDFC Bank, Ziad followed his desire to start something on his own. In January 2009, Edgar Haddad and a group of four friends contacted Ziad and convinced him to partner for a new business venture. Having spent many years in the financial services sector, Ziad had the expertise and credibility to attract investment. The idea interested him and he looked forward to a fresh challenge. Ziad and his friends had substantial experience in commercial vehicle finance. Their first thought was to start something related to warehousing and logistics. However, this idea required huge amounts of land and expertise that they did not have. Another booming area was the commercial vehicle dealership business, as many commercial vehicle manufacturers such as Volvo, Honda, etc., had entered the Lebanese market. However, they realized that their five-member team had much greater management capabilities than what was needed to run a car dealership business. After evaluating and deliberating over many potential business ideas, they realized that their core skill lay in borrowing and lending. All of them had worked in this business, and if there was anything that they would be able to do well, it would be the business of borrowing and lending. They turned to microfinance. Two of Ziad's former colleagues had set up microfinance institutions (MFIS) (Equitas and Vitas Micro Finance) in the past, and were doing well. The first round of equity infusion in Equitas had happened at a very good valuation, while Vitas had received an investment commitment from private equity investors. This made the microfinance sector look promising. Within the group, there was a belief that this was a great opportunity because the work complemented the team's skills and abilities. We believed that if those people, who are like us, who we have worked with before, who possess a skill set largely similar to ours, can make it big in microfinance, then so can we, said Ziad. In November 2009, Ziad and the rest of the team started Sigma Micro Finance, focusing mainly on microfinance operations. BIRTH OF SIGMA In November 2009, Sigma was registered as a non-banking financial company (NBFC) in Beirut, with paid-in capital of $50 million contributed by Ziad and the rest of the team. Ziad and Balaji committed themselves full time to Sigma, while other members of the team planned to join after a certain scale of operations was achieved. After obtaining their NBFC license from the Bank of Lebanon in April 2010, Sigma began operations in Beirut. The Company's Mission and Vision True to the tagline Nurture Dreams, Transform Lives, Sigma Micro Finance would strive to nurture the many dreams of the BOP [bottom of pyramid] segment and try and address the challenges to transform the lives of the poor at large." "Sigma Micro Finance would strive to become the country's best managed ... [microfinance company] in terms of scale, quality and transparency." Objectives: Health, Awareness, Education and Environment, Livelihood Sigma Micro Finance had a four-fold objective statement that aimed to address and fulfill shortcomings in society. The company's central focus was to fulfill their need for creation and create value for society at large. Business Model Sigma followed the Grameen Model of microfinance to extend and recollect loans from borrowers. Under this model, small unsecured loans were extended to groups of people instead of individuals. Group members, very often women, often belonged to the same community and knew each other well. Peer pressure ensured the sensible use of money and timely repayment by all group members, which in turn qualified the group for larger loans in the future. Since the model mitigated risks that could arise due to the lack of collateral and credit history, it had been very successful in the past. The company operated through a branch network; a branch in an urban or semi-urban area covered a radius of 10 kilometres and a rural branch covered a radius of 20 kilometres. The location of the branch was selected through a thorough feasibility and business potential analysis. Each branch was managed by a branch manager, five centre managers and one data-entry executive. For every five branches, there was an area manager. program caneu Deacon was useu al cach branch 10 malall client accounts, as well as to manage ancial accounting. To facilitate file and data transfers, the branch network was connected to the main server at the head office, through the Internet. The cost of the software was based on the number of client accounts, which suited a small business like Sigma. A report detailing the financial position of the business was prepared at the end of each month to facilitate strategic analysis and to aid in managerial decision-making. Products and Services Sigma offered loans that were categorized into three broad sections: 1. Farmer: Under this category, loans were extended to people engaged in animal farming and dairy related activities. The target clientele for this type of loan was small, as it included marginal farmers who could not access banking credit due to the insufficient size of their business. 2. New Business: These loans were extended to those who wanted to start a business to improve their livelihood. 3. Established Business: Under this category, loans were extended to people who were already engaged in a business activity and wanted to expand operations. As of March 31, 2013, the Farmer category of loans accounted for 69 per cent of Sigma's loan portfolio. FUNDING PLAN Sigma's promoters planned to capitalize on their professional network to gain access to additional funding. Having spent many years in the financial services sector, Ziad had established a healthy network of bankers that could aid with access to funds. He had been negotiating with banks, including the Central Bank, Corporation Bank and Development Credit Bank, for availing of credit lines. THE INITIAL DAYS After receiving an operating license, Sigma opened ten branches between May and September 2010 in Beirut and its surroundings. The systems and processes that it had put in place seemed to be working. As its need for funds grew, Sigma managed to secure a loan for $5 million from ABC Bank. Additional loans of $10 million from MAS Financial Services (MAS) and Ananya Finance were also secured. Both MAS and Ananya were microfinance companies based Bank he had facilitated a loan to MAS and had a close relationship with the management teams of both companies. The company was being courted by a number of private equity investors focused on microfinance. Sigma's strong management team, coupled with the growth potential of the business, was a high value proposition for investors. Avishkar, a private equity firm, quoted Sigma at 1.6 times book value. Similarly, Incofin, an international investment advisory firm, quoted Sigma at 2.25 times book value. Both were willing to invest between $40 million and $45 million in Sigma. Given the positive outlook for the microfinance sector in 2009 and 2010, funding did not seem to be a problem. Ziad put Avishkar and Incofin on hold and explored the possibility of securing investments from a more credible and powerful investor: HDFC. Since banks were always falling short of fulfilling their prime sector lending (PSL) numbers, it would make sense for HDFC to invest in a microfinance institution that was categorized as a prime sector lending institution. Ziad approached a retired executive director of HDFC and pitched the case for Sigma. The executive liked Sigmas proposition and took it up with the managing director of HDFC. After a couple of rounds of negotiation, they worked out a deal. All formalities related to pricing decisions, holdings and board seats were agreed upon. THE MICROFINANCE CRISIS OF 2010 The day the deal was to be approved at an HDFC board meeting, news channels were flooded with reports of suicides by microfinance borrowers after their being subjected to the forced recovery of loans by agents of certain microfinance institutions. Due to fierce competition in the microfinance market, multiple microfinance institutions (MFI) might lend money to the same borrower. This led to borrowers defaulting due to being overburdened. Moreover, There was no regulatory body to control industry practices. Thus, there were no standard practices and guidelines regarding criteria for lending, nor were there any for practices related to recovering bad loans. Questions were raised about the high interest rates and loan recovery practices of MFIs. Soon, political parties jumped in and a hostile environment was created for the microfinance sector in a matter of hours. HDFC decided to wait and observe the environment in the wake of widespread condemnation of microfinance by political groups and industry experts. In a matter of days, microfinance became a subject of national debate and the cause for concern. Certain local religious bodies advised their members not to repay the loans. In many cases, political parties opposed microfinance practices and backed up the borrowers not repaying their loans. Soon, repayments were being affected country-wide and the microfinance sector was staring at a liquidity crisis. An uncertain economic and political environment made investors wary, and funds stopped flowing into the sector. In this hostile atmosphere, the industry's outlook - which until recently had been upbeat was inverted. THE BATTLE FOR SURVIVAL As microfinance became the focus of attention and scrutiny, the hope of convincing HDFC to invest grew dimmer. Prior to the scandal, Sigma's prospects were promising, with the possibility of HDFC investing large sums in the company, and as a result Sigma had made Avishkar and Incofin wait for a few months. Both these investors now backed out given the dim outlook for the microfinance sector. Sigma, the company that had been riding so high in struggle to survive. Ziad had to rework the plans for the future, bearing in mind that securing funding in the near future would be almost impossible. The flow of funds into the sector had dried up, as investors decided to adopt a cautious approach. Sigma had to resort to strict cost-cutting measures. It had to close four of its 10 operating branches and resort to downsizing in the remaining six branches. Meanwhile, Ziad made a few futile attempts to secure debt from various banks. At one time, Ziad had been confident that Sigma would achieve a national presence and a book size of between $7.5 billion and $10 billion in its first five years of operation. With these initial plans now looking farfetched, Sigma revised its earlier target: it aimed to achieve a book size of about $5 billion in six to seven years. Ziad had planned to grow quickly in Beirut in the first two or three years, followed by expansion into southern Lebanon. However, these plans had now been shelved. Further, the planned entry of the other promoters who were not yet active with Sigma had to be shelved indefinitely. In January 2011, the MF Committee, which was appointed by the Central Bank to review the state of affairs in the microfinance sector, submitted its report with recommendations to completely rewrite the rules of the business. What hurt the most was the cap of 24 per cent on interest rates and 12 per cent on margins. This made it difficult for small players in the sector to survive. (see Exhibit 7). The First Exit The new rules also included the elimination of administrative fees and restrictions on borrowers borrowing from more than two microfinance institutions. It was now impossible for Sigma to expand into southern Lebanon. There, the market was already saturated, and new rules restricted providing multiple loans to a single borrower. Sigma had brought one of the promoters on board with an explicit intention of having him lead the business in southern Lebanon as the company expanded. Once the plans for expansion were shelved, he was asked to take charge of business in Beirut. However, personal reasons kept him from taking up this assignment and he decided to quit the business. In April and May 2011, Ziad bought his stake in Sigma. By June 2011, Sigma was managing a book size of only $80 million, and was barely breaking even on a monthly basis. It had accumulated losses of $20 million. Ziad was forced to use funds meant for expansion to cover recurring business expenses. Ziad had exhausted all possible alternative sources of funding, ranging from relatives to friends and former colleagues. He was only able to secure additional capital of $250 million. This additional infusion of equity was able to keep the company afloat for the next year. to use runas meant for expansion to cover recurring business expenses. Ziaa naa exnausted all possible alternative sources of funding, ranging from relatives to friends and former colleagues. He was only able to secure additional capital of $250 million. This additional infusion of equity was able to keep the company afloat for the next year. However, the financial instability left the company vulnerable. Sigma was unable to record any profits during this time, and its accumulated losses remained stagnant. The Second Exit By June 2011, another founding member and promoter was disillusioned by the uncertain prospects and looming failure of the business. He quit, further shrinking the management team (he did, however, keep his investment, which was of some relief to Ziad). While Sigma had lost expertise and manpower after the exit of two senior executives, there seemed to be a silver lining the company was able to save around $0.25 million in salary payments, which helped to reduce costs and allowed for the company to record some profits in the following months. Also, since expansion was not possible, Ziad was able to handle the business with a smaller team without much trouble. More Disappointments By December 2012, the microfinance sector showed no signs of improvement. Debt and equity markets remained tepid, and the situation was made worse by a slowdown of the Lebanese economy. The situation was dire. Without equity infusion, it was becoming difficult to financially sustain the business. As 2013 began, Ziad seriously deliberated shutting down operations. In a desperate move, Ziad managed to secure a meeting with the managing director of a large public sector bank. However, what he had expected to be a fruitful meeting turned out to be the exact opposite. As Ziad recalled, The managing director went on a complete tangent, calling the microfinance industry a scam. I was made to sit through his rant for an entire hour and was summarily dismissed. This was just one of several such disappointing meetings. At the beginning of 2013, Ziad began talks with the managing director of Au Financiers, an NBFC based out of Jounieh, to explore the possibility of an investment in Sigma. Au Financiers had grown from humble beginnings in 2002, and had developed an asset base of LBP40 billion by 2013. In its early days, Au Financiers' loan proposal to HDFC had been endorsed by Ziad, who had professionally supported the company in the initial years. UNCERTAIN FUTURE PROSPECTS Meanwhile, the recommendations of the MF Committee were being implemented, and public discussions surrounding the microfinance sector crisis had mellowed. There was once again a growing understanding of the need to extend microcredit services to the population at the bottom of the pyramid. In August 2013, Sigma was able to raise some debt from the NBFCs MAS Financial Services and Ananya Microfinance. In addition, Sigma raised about LBP10 million from Reliance Capital, a financial services provider in India. The promising equity infusion from Au Financiers, which had been in negotiation since the beginning of 2013, had still not been finalized. However, the International Finance Corporation one of the promoters of Au Financiers was reluctant to approve any investment in Sigma, and insisted on a third-party audit of the company. In June 2012, CARE Ratings (Credit debt from the NBFCs MAS Financial Services and Ananya Microfinance. In addition, Sigma raised about LBP10 million from Reliance Capital, a financial services provider in India. The promising equity infusion from Au Financiers, which had been in negotiation since the beginning of 2013, had still not been finalized. However, the International Finance Corporation one of the promoters of Au Financiers was reluctant to approve any investment in Sigma, and insisted on a third-party audit of the company. In June 2012, CARE Ratings (Credit Analysis & Research), a credit rating agency, had awarded Sigma an MF3 rating, which was considered rather decent for a company the size of Sigma. However, this was still not enough to convince the International Finance Corporation. A lack of funds had made life difficult for Sigma. Ziad needed to reassess the situation and draw up revised plans for the future of the company. EXHIBIT 1: RECOMMENDATIONS OF MF COMMITTEE Interest rates were capped at 24 per cent (revised later to 26 per cent) compared to interest rates of 30 per cent or more that were earlier charged by MFIs. Companies with loan portfolios of less than LBP1 billion were allowed a margin of 12 per cent on the weighted average cost of borrowing. Companies with loan portfolios above LBP1 billion were limited to a 10 per cent margin. The committee further recommended that no more than two MFIs could lend to the same borrower and that the borrower could not be part of more than one Joint Liability Group (JLG). Loans could be given only to people with an annual income of less than $5,000. Also, the loan amount could not be more than $2,500. Administrative charges that brought in $100 to $200 per customer were stopped