The rise of social enterprises in Malaysia

By JOHN LOH and WONG WEI-SHEN starbiz@thestar.com.my

Although still at an early stage, they can make a difference in addressing social issues

PROFIT with a conscience - that could well be the mantra for a new kind of business taking root here called the social enterprise.

Although there is no one definition, social enterprises are generally understood to be businesses that exist primarily to fulfil social goals, which could be anything from reducing poverty, creating jobs for the disadvantaged, to educating children in rural areas.

According to Leaderonomics chief executive officer Roshan Thiran, a social enterprise bridges the gap between a traditional non-profit organisation and for-profit corporation (see chart).

In fact, he points out, all businesses start out with some kind of social mission in mind, like how Google was premised on organising information on the Internet, and Ford on making cars that were affordable to the masses.

To accomplish its social objectives, a social enterprise has to find ways to generate income by providing a product or service, and the resulting profits are funnelled back into a specific cause.

Unlike a non-governmental organisation or charity, social enterprises do not rely on donations, but they may seek grants, equity, or loans to support their capital needs.

Kal Joffres, chief operating officer of the Tandem Fund, says that in any case, “there isn't enough free or donor money to go around to fix the problems we have today”. Tandem Fund is a not-for-profit venture fund that invests in social enterprises in Malaysia.

It can be hard to change the mindset of existing leaders, but what we can do is create leaders from the youth. - ROSHAN THIRAN

 

“Social enterprises are still at a very early stage, but they could be very transformative for a lot of the problems we face,” he contends.

Due to their non-traditional structure, social enterprises tend to take innovative approaches around their business model.

In the case of Leaderonomics, which got its seed funding from Star Publications (M) Bhd, The Star's parent shareholder, a part of the proceeds from its training and human resources consultancy work done for corporates is reinvested into its youth leadership-building activities.

For example, the company organises regular leadership camps for young people where half of the spots are reserved for orphans and underprivileged children.

In addition, it opened a youth community centre for “kids-at-risk” called DropZone in Petaling Jaya and is piloting a leadership club for secondary schools.

Leaderonomics' main aim, Roshan says, is to build leaders from the grassroots. “It can be hard to change the mindset of existing leaders, but what we can do is create leaders from the youth. If we are successful in changing their value system into one that is authentic and based on integrity, we have a shot in 20 years to see many leaders in the country emerge from this group,” he says.

To supplement its core mission, it offers a range of consultancy services, such as its talent accelerator programme for those identified as an organisation's “top talent”, and it counts companies like Malakoff, RHB Bank, and Sime Darby among its blue-chip clients.

“Social” returns

In the 1980s, General Electric boss and maverick management guru Jack Welch introduced the idea of “shareholder value” which dictated that a company is duty-bound, above all else, to maximise returns on investment (ROI) for its shareholders, increase its share price, grow its market capitalisation and so on.

Turning this concept on its head, social enterprises measure themselves against a different set of criteria, using terms like social ROI, and the triple bottomline, referring to people, planet, profit.

I think paying taxes makes us more powerful. We are on the same footing as any other business. - DR REZA AZMI 

“Things like marketing and branding, they are not real. But if you can create lasting social value, I think the community will (continue to) give back,” Roshan quips.

Most social enterprises, it would seem, have one thing in common: they were motivated by a problem.

Online crafts retailer Elevyn - whose name was derived from the phrase “the eleventh hour” - started out this way.

One of its founders, Puah Sze Ning, was volunteering with the orang asal in Sabah as part of efforts to document land rights issues and the displacement of local communities when she was asked by one of the women if she could help them sell their handmade crafts in Kuala Lumpur.

“They were really poor - some are single mothers, some are elderly. And they have no other source of income,” explains Mike Tee, co-founder of Elevyn with Devan Singaram.

“Even when they make it, they can't really sell it as Sabah has a very limited market. Sze Ning was quite stumped, she had just finished university at the time. So she came back and felt really helpless.

“During one of our meet-ups, she told us this story. Since we're (Tee and Devan) both software developers, we thought about setting up a website that would connect producers to customers.”

The term “orang asal” refers to all indigenous people throughout Malaysia, while “orang asli” refers to those in the peninsula, Tee says. The website, elevyn.com, sells a variety of fair trade items, and it is worth noting that beside each product display is a box that shows exactly what percentage of its sales price goes to the maker, designer, reseller and for materials.

They were really poor - some are single mothers, some are elderly. And they have no other source of income. - MIKE TEE

 

“We started with a group in Kudat, Sabah, then expanded to the peninsula with a couple of orang asli groups. Recently, we started working with Burmese refugees based in Kuala Lumpur. People have described us an ebay for the poor,” Tee chuckles.

To get on their feet, the team applied for and won a RM150,000 grant from the Multimedia Development Corp (MDEC) in 2008. At the time, MDEC gave out pre-seed funding to start-ups with technology businesses.

On Elevyn's business model, Tee points out that some 70% to 80% of the sales price goes back to the producers of the goods, and the team receives a 5% cut after deducting PayPal transactions.

“We make very little money from this. That's why for this model to work, we need scale,” he says. A percentage of the profit is also apportioned for a particular cause like school books, for instance.

Currently, Elevyn either sells individual products to visitors at its website or bulk orders directly to corporate clients. They have yet to sell to gift retailers, but Tee says this might be a possibility in the future.

However, several operational hurdles stand in its way. First, the products must address market needs. “Sometimes we tell our producers to make a product this way or that to suit the market, but what they are making could have been passed down from their ancestors, and we certainly don't want to disrupt that,” Tee explains.

Second, constant supply is difficult to ensure, since most of the orang asal depend on the rattan and other raw materials that grow near their homes, which, in turn, may be determined by the seasons.

Profitable venture?

A rented home in Sri Hartamas serves as an office for Wild Asia, a social enterprise that advises clients on environmental and social policies and practices.

“We have been profitable since we started,” exclaims Dr Reza Azmi, Wild Asia founder and director.

“We are service-based, and so did not require a lot of capital,” he says of the enterprise that started out as an online platform for information exchange on nature-related issues.

Some of Wild Asia's services include sustainability assessments to help plantation companies comply with standards set by the Roundtable on Sustainable Palm Oil, as well as developing their environmental and social management systems.

Social enterprises are still at a very early stage, but they could be very transformative for a lot of the problems we face. - KAL JOFFRES 

This social enterprise got off the ground some 10 years ago with RM10,000 in seed capital from a few individuals, including Reza. Wild Asia, which he says has close to RM1mil in paid-up capital now, is based on a model whereby 65% of its profit goes to its cash reserves as well as to invest in responsible tourism initiatives, such as the Okologie dive and study centre at the Batu-Batu Resort in Mersing, Johor.

A further 25% of its profit is shared among staff and associates as a bonus, while the balance 10% is split between Wild Asia's shareholders.

Reza, who studied biology in the United Kingdom, says he found his calling in conservation work during a gap year from university. “I wanted to be a professional beach bum,” he jokes.

Having done this for a number of years, he observes that there has been growing concern among businesses to preserve the natural world. “Banks and investment houses are starting to take notice. They might refrain, for example, from putting their money in or lending money to companies that deal with converted forests.

“We are one of the groups they hire to verify these things. But its the foreign banks that have specific policies on this,” Reza explains.

Even so, profitability remains a key concern for social enterprises. According to Tandem Fund's Joffres, start-ups break even in about three to five years, but social enterprises can take up to eight years.

“It takes them (social enterprises) longer to grow the market, and they often take smaller margins and do community-building activities at the same time,” he quips. Compounding this is the issue of funding, which can be hard to come by for social enterprises.

The tax question

Another issue that could curtail the growth of social enterprises is the lack incentives and tax breaks. They can currently only register as private limited companies and are taxed as such, since they derive an income from business activities.

Tee says Elevyn is taxed on a percentage of its profits, though not if the company is loss-making. To make things easier for social enterprises, the Social Enterprise Alliance, where Joffres is a committee member, is pushing for more policy recognition for the sector.

For starters, it is hoping to make amendments to the tax policies to make it legal for charitable trusts or foundations to give money to social enterprises.

Foundations cannot provide monetary support to social enterprises under the present tax regime as it would be viewed as an investment by the Inland Revenue Board (IRB), Joffres stresses.

Deloitte Malaysia country tax leader Yee Wing Peng tells StarBizWeek via email that while the Government does provide for tax exemptions on income received under the Income Tax Act 1967, this is for approved charitable organisations.

“A limited liability company or Sdn Bhd is not included because it is formed with a profit-seeking motive and the profits generated can be returned to shareholders in the form of dividends. There is no restriction to prevent the company from distributing profits to the shareholders instead of using the profits solely for charitable purposes.

“I advise the social enterprises to use a legal form that is acceptable to the IRB as this would encourage more donors to contribute due to the availability of tax deduction and with the income exempt from tax, more funds can be channelled for charitable causes.

“If the initiator has to use a Sdn Bhd set-up due to compelling business needs, attempts may be made to the higher authority i.e. the Finance Minister to consider exemptions. Putting in place covenants to ensure that the profits made by the Sdn Bhd can only be used for the intended charitable purposes may help,” Yee explains.

Nonetheless, Wild Asia's Reza argues that social enterprises “don't need handouts to survive”. “I think paying taxes makes us more powerful. We are on the same footing as any other business. You are a business entity just like any other,” he says.

More than money

A key question moving forward for social enterprises will be how sustainable they can be, and what kind of impact they can deliver. That will depend on, among others, how quickly they can adjust their business models to respond to market forces.

Asked about Wild Asia's impact, Reza says it has been the cultural shift within organisations in their treatment of the environment. He cites the example of a major government-linked corporation they had consulted that now has its own 20-man team to do the job internally.

He also notes that Wild Asia is beginning to attract interest from disillusioned corporate dropouts wanting to join his team and do something with a purpose other than financial gain.

According to Tee of Elevyn, the impact of a social enterprise need not be purely financial either. “You can't fix a problem just by putting money into it,” he says.

“There was recently an order that came in from Japan and Spain. We told them (the producers) to ship it to these addresses and the women were very surprised, because to them these countries are a world apart, and yet they had an interest in their products.

“The impact is not just in terms of money, but also the pride that what they're making has value.”

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The rise of the adolescent CEOs

The rise of the adolescent CEOs

Many of today's young entrepreneurs are not old enough to drink or drive, but nothing is stopping them from making millions with their online ventures.

By Sarah McBride SAN FRANCISCO

 

(Reuters) - Josh Buckley, chief executive of an online gaming start-up, is looking forward to next month's Game Developers Conference in San Francisco, particularly for the parties and the accompanying schmoozing with industry A-listers.

There's one problem: Buckley, who will turn 20 this week on February 22, may be turned away from many of the parties because he is not old enough to drink. His fake ID was recently confiscated, and the two new ones he ordered from a company in China have not yet arrived.

Such are the dilemmas facing the ever-younger entrepreneurs that Silicon Valley investors are backing these days. While little data on the phenomenon exists, venture capitalists say they are funding more chief executives under age 21 than ever before.



"At a certain point, they can't get much younger or we're going to be invested in preschool," quipped Marc Andreessen, whose venture-capital firm Andreessen Horowitz is one of several that backs Buckley's company, MinoMonsters.

Andreessen and other venture capitalists say the entrepreneurs they fund at 18 or 19 typically have been prepping for years -- learning computer code, taking on ambitious freelance projects and educating themselves on the Internet.

Some are self-consciously molding themselves in the image of Facebook founder Mark Zuckerberg, 27, who created computer games as a child and was taking a graduate-level computer course by his early teens.

Internet businesses that target consumers make a sweet spot for the baby-faced, because online companies often require relatively little capital. A semiconductor start-up might require $10 million to $20 million in the early stages, noted Joe Kraus of Google Ventures, and that would be tough even for the most talented youngster.

"If I'm going to write that big a check, I'm going to invest in people who've done it before," he said. "But if you look at it as, 'Hey, I'm going to raise $500,000,' there's a lot of ways to raise that."

Kraus helped back Airy Labs, an educational social-gaming company run by 20-year-old Andrew Hsu that raised $1.5 million. Hsu is now learning the same hard lessons as many of his elders: the company recently laid off staff and is looking to rent out some of its office space in Palo Alto, California. Hsu said the company is taking a different direction and focusing on a line of new products in math, language arts and science.

Kraus said his biggest hiccups with young entrepreneurs are the business references they don't understand because they are too young to be aware of them.

Andreessen says more than one young entrepreneur has asked him: "What did Netscape do again?" Andreessen co-founded Netscape, which developed the first commercial Web browser and helped launch the Internet era, shortly after graduating from college in 1993.

"I was 9 years old" during the first Internet boom, says Brian Wong, 20, who runs reward-network Kiip. He has had his fill of stories about companies that tanked amid the dot-com bust of 2000. The first time he heard the name Webvan, a legendary dot-com failure, "I had to look it up," he recalled.

Wong has raised more than $4 million from Hummer Winblad Venture Partners and others.

He believes his age helps him and other youthful entrepreneurs. "You're expected to be limitless," he said. "Kind of destructive."

While the freewheeling ways of youth may be a positive for venture capitalists, they are less appreciated by landlords. Tim Chae, the 20-year-old chief executive and co-founder of social-media marketing company PostRocket, said his age and lack of credit created problems when he moved to San Francisco last year and needed an apartment. Finally, his father had to drive the 88 miles from Sacramento to co-sign a lease.

Chae, a Babson College dropout, now lives in nearby Mountain View and attends 500 Startups, a crash course for young companies run by a venture firm of the same name. He has raised a small amount of capital and hopes the upcoming Facebook IPO will help investors look more kindly on young entrepreneurs. "Thank God for Zuckerberg," he says.

Zuckerberg, who left Harvard after two years, is helping recast the notion of dropping out of college. Peter Thiel, an early investor in Facebook and a co-founder of PayPal, is encouraging others to try that path through two-year fellowships for students who take a break from school, move to San Francisco and pursue their entrepreneurial aspirations.

That's what 17-year-old Laura Deming did when she won a fellowship based on her goal of finding and funding anti-aging technologies and left the Massachusetts Institute of Technology. Because she is not yet 18, she finds herself faxing documents such as non-disclosure agreements to her dad back in Boston to co-sign.

Other young entrepreneurs have trouble negotiating the highways and byways of Silicon Valley quite literally. Sahil Lavingia, 19, recalls a day last summer when he had several meetings scheduled on Sand Hill Road -- home to many of the nation's leading venture-capital firms -- and no car to get there. The journey of just a few miles took hours by the time Lavingia rode a local train a couple of stops, caught a bus to Stanford University and then hopped a shuttle bus to the Stanford Linear Accelerator Center, which is on Sand Hill Road.

Another time, dreading the combination of a hot day and a sweaty walk around Palo Alto, he pulled on a pair of shorts, even though he was heading to a meeting with blue-chip VC Accel Partners. The outfit -- casual even by laid-back Silicon Valley standards -- didn't stop Accel from investing. Lavingia, an alumnus of hot online bulletin-board company Pinterest, raised $1.1 million for his payments start-up, Gumroad.

Buckley also ran into problems getting himself to Sand Hill Road. One night he stayed up until 3 a.m. and slept too late to get to a scheduled meeting with a venture-capital firm. "It didn't go down too well," he said, adding that his profuse apologies and requests to reschedule were met with a curt "no thank you."

Not to worry. Buckley, who had already sold a company while in high school for a sum he says was in the low six figures, raised more than $1 million from Andreessen Horowitz and others.

At the time of the missed meeting, he was attending Y Combinator, a three-month program for start-ups. In a nod to the boy wizard of book and movie fame, Y Combinator co-founder Paul Graham has called Buckley "the Harry Potter of startups," but said he was not the youngest to win admission to the program.

That honor goes to John Collison, now co-founder of payment company Stripe, who was admitted at age 16, but did not go through the program, Graham says. Instead, he and his then-19-year-old brother merged their company with another, Auctomatic, and sold it to a Canadian company for $5 million in cash and stock.

Most of the young entrepreneurs say their interest lies in building rather than selling their companies. Buckley had to say as much in response to inquiries he said received recently from Facebook about a possible sale. His determination not to sell stems from advice he received from a successful executive he met last year at Y Combinator: Mark Zuckerberg.

(Reporting By Sarah McBride. Editing by Jonathan Weber and Maureen Bavdek)

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The rise of social enterprises in Malaysia

PAS will dominate if Pakatan gains power in Malaysia's sarong politics!

Most MBs will be from PAS if Pakatan gains power, says Chua

By FOONG PEK YEEpekyee@thestar.com.my

KUALA LUMPUR: The majority of Mentris Besar will be from PAS if Pakatan Rakyat takes state power in the coming general election, MCA president Datuk Seri Dr Chua Soi Lek said.



The Prime Minister would also be from PAS if Pakatan were to take federal power, he added.

Dr Chua said the coming general election was a do-or-die battle for Barisan Nasional and Pakatan, not just MCA.

Given due recogniti on: Boon Kim Lian receiving an award from Dr Chua while his deputy Datuk Seri Liow Tiong Lai looks on during the ceremony Saturday. 

“There is no room for complacency because Pakatan will do anything to gain control of the country after making some inroads in the last election.

“Pakatan now is very organised and has the resources to take control,” he said at the MCA long service medal presentation ceremony here last night.

Dr Chua said MCA's number one enemy would still be DAP in the elections.

He also stressed the need to expose the party's tactics, so people would not be conned.

”Unlike previous elections, a vote for DAP is a vote for PAS and PKR,” he added.

Dr Chua said Pakatan was only keen to gain power and had no concrete plan for the people or the country's development.

For example, DAP secretary-general Lim Guan Eng had not been able to reply when asked on Pakatan's socio-economic development model for the country.


“All he (Lim Guan Eng) said was money, money, money, and money makes money,” Dr Chua said on the high-profile debate between him and Lim last Saturday.

Apart from exposing DAP's ploy, Dr Chua said MCA must continue to stay united and work hard to face the next election.

He said the party must also adopt a high profile apart from serving the people well.

“I dare say no party can beat us in terms of service to the people since the party's inception 63 years ago,” he said.

Dr Chua said this was one of the reasons MCA was giving out long service medals starting this year.

Meanwhile, MCA secretary-general Datuk Seri Kong Cho Ha said the party's never-say-die attitude, as reflected in its continued service to the people after its dismal performance in the last general election, was commendable.

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Judges, Throw the book at Hoslan!

ON THE BEAT By WONG CHUN WAI 

By not taking action against him, the judges have sent a wrong message to Malaysians.

IT’S incredible that an imam who threw his slippers at judges was not cited for contempt of court on the spot. If we talk about respecting and upholding the law, the judges should have just thrown the book at him, so to speak. 

The imam, Tuan Haji Hoslan Haji Hussain, got himself in the limelight last week when he lost control after his application for the Federal Court in Putrajaya to hear his appeal was rejected. He said he was frustrated when documents he had tendered were rejected as they were not sent within the stipulated time.

Hoslan’s problem started when he was removed as the imam of Masjid Al-Rahimah in Kampung Pandan in 2008. Then, in June last year, the Federal Territory Religious Council obtained a court order forcing him to vacate the imam’s quarters where he had been staying for a decade with his seven children.

The FT Religious Council obviously had a disciplinary problem with this former al-Arqam follower but Hoslan, in turn, claimed he had tendered documents alleging irregularities in handling mosque funds.

When the panel of judges heard this case on Wednesday, Hoslan threw a slipper, followed by the other one, at the judges. He then threw his ihram (a piece of white cloth) on the floor and performed the sunat prayer. His actions caused more than a stir.

Police later escorted him out of the court and he was told the judges had decided not to take action against him.

There was only one reporter who witnessed the incident and the judges sought his cooperation not to publish it. So, if not for the online news portal The Malaysian Insider, we would all have missed this unprecedented incident.

Calls by the other media to the offices of the registrar and judges were not returned when they tried to follow up on the report the following day. Only Hoslan seemed to enjoy the attention he was getting from the media.

The three-member panel of judges comprised Tan Sri Zulkefli Ahmad Makinuddin, who is Chief Judge of Malaya, Datuk Suriyadi Halim Omar and Datin Paduka Zaleha Zahari.

Obviously, the judges have shown compassion, tolerance and liberalism by not wanting to punish the guy. But in doing so, they have sent a wrong message to Malaysians.

They could at least have reprimanded him instead of pretending the incident did not happen and hoping that the media would not become aware of it.

It’s as good as telling us that it was okay for Hoslan to throw his slippers at the judges and then bad-mouthing them to the media outside the court.

It was only after this unfortunate episode became public knowledge that deputy registrar Jumirah Marzuki lodged a report against Hoslan – on Friday, two days later.

More incredibly, she was quoted as saying that she lodged the report because the second slipper which Hoslan had flung towards the Bench had hit her!

Come on, I am not sure whether she expected Malaysians, including the police, to share her disappointment or to laugh at her decision.

Justice Zulkefli has told the media “to let the police investigate”.

Let’s hope the police will not have to take a decade to investigate this open-and-shut case involving an irate man who really needs to have his head examined.

Zulkefli is spoken about affectionately by most court reporters, who describe him as a “kind person”. So they were not surprised when he said “the panel did not make any decision to cite Hoslan for contempt of court as it does not serve any purpose. We do not want to get into the drama. It will complicate the matter further.”

But there are some fundamental issues here. First, the Federal Court is the highest in the country. Two, the panel was led by the second highest judge.

Hoslan does not deserve to be treated like a hero for throwing his slippers at these top judges. By not taking action on the spot, our honourable judges may send the message that they did not mind the action of this man.

No one should be allowed to go scot-free for throwing things at the Bench because they are unhappy, angry, sad or insane. In law, students rely on past court cases or precedents. Well, this is one precedent of a man who threw his slippers at the judges and got away with it.

There is no other way in this case. Hoslan should be taken back to the court and punished. The fact that he is a religious figure should also be taken into consideration. He should have been more composed and exemplary instead of behaving in an outrageous manner.

Throw the book at him!

Frustrated imam ‘bares his sole’

By SIRA HABIBU and M. MAGESWARI newsdesk@thestar.com.my

PETALING JAYA: The imam who threw his slippers at judges claimed that he did it out of frustration.

Hoslan Hussain, 46, said he was extremely frustrated because documents he had tendered at the Federal Court had been rejected because they were not sent within the stipulated time.

“But there was no objection earlier during the case management. The case was rejected because the respondent MAIWP (Federal Territory Religious Council) objected,” he said.

Hoslan, a former Al-Arqam follower, created a stir when he threw his slippers at the panel of judges at the Federal Court on Wednesday.

“I became angry. I threw a slipper. I do not know who was hit.

“Then I threw another slipper. And after that I threw my ihram (a piece of white cloth) onto the floor and performed sunat prayer,” he said.

Hoslan said the police later escorted him out of the court and told him the judges had decided not to take action against him for contempt of court.

“I walked out barefoot,” he said.

Hoslan had tendered the documents alleging irregularities in handling mosque funds.

MAIWP had removed him as the imam of the Masjid Al-Rahimah in May 2008, and in June last year, obtained a court order forcing him to vacate the imam quarters where he had been staying for a decade with his seven children.

The Appeal Court and the Federal Court had upheld the High Court decision.

The three-member panel of judges comprised Tan Sri Datuk Zulkefli Ahmad Makinuddin, Datuk Suriadi Halim Omar and Datin Zaleha Zahari.

In Kuala Lumpur, a deputy registrar of the Federal Court lodged a police report yesterday over the slipper-throwing incident.

Deputy registrar Jumirah Marzuki lodged the report against Hoslan as the second slipper which he had flung towards the Bench had hit her.

Justice Zulkefli confirmed that the report had been lodged. “Let the police investigate,” he said.

Asked about the incident, Justice Zulkefli said the panel did not make any decision to cite Hoslan for contempt of court as “it does not serve any purpose. We do not want to get into the drama. It will complicate the matter further”.

Head of corporate communications and international relations Mohd Aizuddin Zolkeply said the Chief Registrar’s office of the Federal Court denied any allegations by Hoslan, including that he had been denied his right to be heard fairly.

“It is unfounded. Our office has all recordings for hearings at the Federal Court,” he said.

Mohd Aizuddin said the judiciary took seriously matters which could tarnish its image.

Lloyds, Britain’s biggest mortgage lender plunges to £3.5bn loss for 2011

Rising Funding Costs Imperil Profit in 2011

Part-nationalised Lloyds Banking Group said today that it is "in a significantly stronger position than it was 12 months ago" despite unveiling total losses of £3.5 billion for last year.The losses, which compare with a £281 million profit the previous year and are driven by a £3.5 billion hit to tackle the payment protection insurance scandal, are nearly twice the size of those at fellow state-backed bank Royal Bank of Scotland.

 http://www.independent.ie/video/video-world-news/lloyds-makes-35bn-loss-3030959.html
By  Gavin Finch in London at gfinch@bloomberg.net

Lloyds chief executive António Horta-Osório is cutting 15,000 jobs, on top of the 30,000 already axed. Photograph: Reuters

Former Chief Executive Officer Eric Daniels said, “We achieved a step change in our financial performance despite modest economic growth.” Photographer: Chris Ratcliffe/Bloomberg

Lloyds Banking Group Plc, Britain’s biggest mortgage lender, tumbled in London trading as the bank said rising funding costs will squeeze profit margins in 2011.

The net interest margin, the difference between what the bank pays for funds and what it charges for loans, will be unchanged in 2011, Lloyds said in a statement today. The lender is replacing government support with costlier wholesale funding.

“The numbers and outlook statement from Lloyds are a bit of a horror show,” said Ian Gordon, an analyst at Exane BNP Paribas SA in London with a “neutral” rating on the stock. “Lloyds’s second-half performance has been very weak.”

Analysts including Gordon and John-Paul Crutchley at UBS AG said they may cut estimates for 2011 pretax profit by more than 2 billion pounds ($3.2 billion), about a third. Chief Executive Officer Eric Daniels, who will be succeeded by Antonio Horta- Osorio next week, has been trying to wean Lloyds off state aid after the takeover of HBOS Plc in 2008 led to 13 billion pounds of losses and left the taxpayer owning 41 percent of the lender.

The shares tumbled 4.5 percent to 62.85 pence at the close in London, the biggest decline in more than three months.

“The knee-jerk reaction could be some disappointment,” said Cormac Leech, an analyst at Canaccord Genuity Ltd. in London who has a “buy” rating on the stock. “The biggest negative is that the margin will stay flat in 2011.”

Net Interest Margin

Lloyds posted a full-year net loss of 320 million pounds in 2010, compared with a 2.83 billion-pound profit in 2009, the bank said in the statement. Earnings the previous year were buoyed by an 11.1 billion-pound accounting gain on the HBOS purchase. Pretax profit slumped 62 percent to 609 million pounds in the second half of 2010 from the first half.

The net interest margin rose to 2.1 percent from 1.8 percent in 2009. Lloyds cut its reliance on government aid to 96.6 billion pounds in 2010 from 157.2 billion pounds in 2009.

The shares, the second-best performing of the U.K.’s five biggest lenders last year, may struggle to repeat that in 2011 as funding costs and Irish loan losses climb and a government commission weighs whether to break Lloyds up, analysts said. The Independent Banking Commission, which is reviewing competition in the financial services industry, will report in September. Lloyds said today it also expects a “slow recovery over the next couple of years” for the British economy.

“Another extremely challenging year lies ahead,” Gordon said. “There are still very significant bumps in the road.”

Halifax, Oil Losses

Lloyds posted its first full-year pretax profit since the credit crisis today. Profit was 2.2 billion pounds compared with a loss of 6.3 billion pounds in 2009. That beat the 2 billion- pound median profit estimated by 21 analysts surveyed by Bloomberg. Provisions fell 45 percent to 13.2 billion pounds in 2010 from 24 billion pounds in 2009.

Profit was crimped by a 4.3 billion-pound charge for bad loans in Ireland and a 365 million-pound loss on the sale of two deepwater oil drilling rig businesses to Seadrill Ltd. The bank also made a 500 million-pound provision to cover payments it’s making to Halifax mortgage clients because the terms of their loans were unclear.

Lloyds follows Royal Bank of Scotland Group Plc in posting an increase in losses from the implosion of Ireland’s decade- long real estate boom. Edinburgh-based RBS posted a full-year loss of 1.1 billion pounds yesterday, missing analyst estimates as Irish loan losses almost doubled.

“We expect to see further reductions in impairment losses in 2011 and beyond,” Lloyds said in the statement.

‘Radical’ Intervention

Pretax profit at Lloyds’s consumer banking unit rose to 4.7 billion pounds from 1.4 billion pounds. Profit was bolstered as customers reverted to standard variable rate mortgages, which generate more income than fixed-rate loans, Daniels, 59, said on a call to journalists today.

“The stand-out performance in the retail division will undoubtedly raise eyebrows, adding fuel to the fire of those that view the banking behemoth as an anti-competitive force,” said Paul Mumford, a fund manager at Cavendish Asset Management in London. “Increased profits will be met by increased enthusiasm for radical regulatory intervention.”

Daniels, who has overseen a 76 percent plunge in Lloyds share price since he took over as CEO in 2003, said he was “very pleased’ with his tenure at the bank. Daniels told the BBC Radio 4 Today Programme that he hasn’t decided whether to accept his 1.45 million-pound bonus for 2010 even though the board has made an award.

The bank’s core Tier 1 capital ratio, which measures financial strength, rose to 10.2 percent from 8.1 percent as risk-weighted assets declined by 18 percent to 406.4 billion pounds. Lloyds said it expects to meet its target to cut assets by about 100 billion pounds over the next three years.

“We achieved a step change in our financial performance despite modest economic growth,” Daniels said. “While the significant decrease in impairments was a key driver in our return to profitability, we also saw a good performance in the core business.”

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