Microfinance: Doing Well By Doing Good
There are very few investments in the world that not only make a decent return but offer some greater societal benefit that can contribute to the improvement of the quality of life of individuals, as well as contribute to the development of emerging nations. But that’s all changing.
This type of investing, known in the past by various names, today is referred to as “impact investing.” Coined in 2007, impact investments are made into companies, organizations, and funds with the intention of generating measurable social and environmental impact alongside a financial return. Below, we look at the best ways to play this trend.
Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to above market rates, depending upon the circumstances. These investors seek to place capital in businesses, nonprofits and funds that can harness the positive power of enterprise. This type of investment cuts across asset classes, such as private equity, venture capital, debt and fixed income instruments.
The sector has gained momentum, according to Washington, DC-based, non-profit Consultative Group to Assist the Poor (CGAP), both in developed and developing countries in recent years. According to a June 2013 report, CGAP found, “there are more than 300 impact investment funds. This universe of funds includes those known as socially responsible investing vehicles (SRIs), microfinance investment vehicles (MIVs), and bottom of the pyramid venture funds.”
Chart A: Emerging Markets Impact Investing – Sectors
These investments are run by specialized asset managers (e.g., responsAbility, Triodos, and Bamboo Finance) and mainstream financial institutions—e.g., JPMorgan & Chase (NYSE: JPM), UBS (NYSE: UBS), and Deutsche Bank (NYSE: DB).
A number of actors also engage in “sector building” activities, including foundations such as Rockefeller, Omidyar Network, and the Bill & Melinda Gates Foundation; networks such as the Global Impact Investing Network (GIIN), Aspen Network of Development Entrepreneurs (ANDE), and European Venture Philanthropy Association (EVPA); and universities such as Duke, Harvard, and Oxford, according to the CGAP report.
Over the past three years, JPMorgan and GIIN have conducted an annual survey on global impact investing, capturing data from a sample of those funds with at least US$10 million in assets under management (AuM). The latest survey released in January 2013 showed that US$8 billion had been committed by impact investors in 2012, increasing from US$2.5 billion reported in 2010.
“While the different reporting universes from year to year make it difficult to report precise growth trends, the significant increase in the number of respondents (from 24 respondents in 2010, to 52 in 2011, and 99 in 2012) itself signals sector growth,” CGAP observed in its report.
A Look at Microfinance
While impact investing can cover many different sectors (see Chart A), a considerable amount of investment has been made in microfinance. Microfinance is a form of financial services for entrepreneurs, small businesses and the poor lacking access to banking and related services.
For entrepreneurs, the two main mechanisms for the delivery of financial services to such clients are: (1) relationship-based banking for individual entrepreneurs and small businesses; and (2) group-based models, where several entrepreneurs come together to apply for loans and other services as a group. Microfinance to the poor is generally known as micro credit.
Though the level of financial inclusion varies widely around the world, according to the World Bank’s Global Financial Development Report 2014, “Globally, about 50 percent of adults have a bank account, while the rest remain unbanked, meaning they do not have an account with a formal financial institution.” Not all the 2.5 billion unbanked need financial services, but barriers such as cost, travel distance, and documentation requirements are critical, the bank found (see Chart B).
According to the World Bank report, “The poor, women, youth, and rural residents tend to face greater barriers to access. Among firms, the younger and smaller ones are confronted by more binding constraints. For instance, in developing economies, 35 percent of small firms report that access to finance is a major obstacle to their operations, compared with 25 percent of large firms in developing economies and 8 percent of large firms in developed economies.”
As economist have long argued, financial inclusion is important for development and poverty reduction. “Considerable evidence indicates that the poor benefit enormously from basic payments, savings, and insurance services. For firms, particularly the small and young ones that are subject to greater constraints, access to finance is associated with innovation, job creation, and growth,” the bank found.
Chart B: Adults Using a Bank Account in a Typical Month
Microcredit as an investment does have the ability to produce good returns and help the poor. But the World Bank does note that microfinance institutions must have a rigid discipline as to the pace of credit creation for this initiative to be sustainable.
“A spectacular recent example is the subprime mortgage crisis in the United States in the 2000s: the key contributing factors included the overextension of credit to non-creditworthy borrowers and relaxation in mortgage-underwriting standards” the bank found.
Another example of overextension of credit in the name of access was the crisis in India’s microfinance sector in 2010. Because of a rapid growth in loans, India’s microfinance institutions were able to report high profitability for years, but this resided on large indebtedness among clients, the World Bank found.
While these two examples had very complex dynamics that impacted performance, they illustrate the broader point that deep social issues cannot always be resolved purely with an infusion of credit. If not implemented properly, efforts to promote financial inclusion can lead to defaults and other negative effects.
But we believe that with the increasing participation of global banks and institutional investors, the promotion and development of more transparent investment vehicles, the industry is slowly growing to a point where retail investors will one day be able to participate more meaningfully in impact investment alongside institutional investors and private equity investors (see Chart C).
Chart C: Impact Investing Portfolio Performance
While there are investment vehicles, such as certificates of deposit and some publicly traded companies, in talking to microfinance industry specialists, they acknowledge that the retail investment sector is one of the areas that still need development (building products such as Mutual or Exchange Traded Funds, for example, which can be transparently scrutinized and evaluated). But these experts say such products are in the works, which could offer new opportunities for individual investors seeking new income and diversification opportunities.
Furthermore, as part of the Global Investment Strategist’s overall mission to highlight exciting and attractive new markets for investors, we intend to provide continuing coverage of the impact investment sector and its markets (microfinance, health care, food and agriculture, etc.), highlighting suitable investments as they become available.
The Places to Impact Invest
As noted, there’s a limited number of ways that the individual investor can participate in the impact investment arena. Here’s a list of the current investment opportunities in the sector.
• Microfinance Fund
Calvert Foundation is the charitable arm of Calvert Group, a socially responsible investment company. Its bonds are used to fund economic development activities around the world, especially in microfinance. Rates of return are similar to those on bank certificates of deposit (CDs), although these notes aren’t insured and have more risk. The minimum investment in Calvert Foundation is $1,000, either through a brokerage or directly.
• Publicly Traded Institutions
Three microfinance institutions are publicly traded, with their stocks listed in the countries where they operate. Most of these firms started as nonprofit lenders and grew enough to become independent and profitable.
Banco Compartamos (OTC: BMOSF) operates in 325 communities in Mexico, making loans that average less than $1,000 each. It has worked with more than 1.5 million customers since its founding as a nonprofit organization in 1990. It makes both business and home-improvement loans. Its specialty is forming groups of women who take out loans together and support one another in business through education and sharing ideas.
Equity Bank (USE: EBL), based in Kenya and with operations in Uganda and Sudan, offers a full range of savings and lending services designed for people without a lot of money. Among its many products is mobile banking, where people can transfer funds through their phones.
SKS Microfinance (NSE: SKSMICRO) is the largest microfinance company in India and, by extension, the world. It has 1,627 branches and 5.3 million customers, which it refers to as members.
This type of investing, known in the past by various names, today is referred to as “impact investing.” Coined in 2007, impact investments are made into companies, organizations, and funds with the intention of generating measurable social and environmental impact alongside a financial return. Below, we look at the best ways to play this trend.
Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to above market rates, depending upon the circumstances. These investors seek to place capital in businesses, nonprofits and funds that can harness the positive power of enterprise. This type of investment cuts across asset classes, such as private equity, venture capital, debt and fixed income instruments.
The sector has gained momentum, according to Washington, DC-based, non-profit Consultative Group to Assist the Poor (CGAP), both in developed and developing countries in recent years. According to a June 2013 report, CGAP found, “there are more than 300 impact investment funds. This universe of funds includes those known as socially responsible investing vehicles (SRIs), microfinance investment vehicles (MIVs), and bottom of the pyramid venture funds.”
Chart A: Emerging Markets Impact Investing – Sectors
These investments are run by specialized asset managers (e.g., responsAbility, Triodos, and Bamboo Finance) and mainstream financial institutions—e.g., JPMorgan & Chase (NYSE: JPM), UBS (NYSE: UBS), and Deutsche Bank (NYSE: DB).
A number of actors also engage in “sector building” activities, including foundations such as Rockefeller, Omidyar Network, and the Bill & Melinda Gates Foundation; networks such as the Global Impact Investing Network (GIIN), Aspen Network of Development Entrepreneurs (ANDE), and European Venture Philanthropy Association (EVPA); and universities such as Duke, Harvard, and Oxford, according to the CGAP report.
Over the past three years, JPMorgan and GIIN have conducted an annual survey on global impact investing, capturing data from a sample of those funds with at least US$10 million in assets under management (AuM). The latest survey released in January 2013 showed that US$8 billion had been committed by impact investors in 2012, increasing from US$2.5 billion reported in 2010.
“While the different reporting universes from year to year make it difficult to report precise growth trends, the significant increase in the number of respondents (from 24 respondents in 2010, to 52 in 2011, and 99 in 2012) itself signals sector growth,” CGAP observed in its report.
A Look at Microfinance
While impact investing can cover many different sectors (see Chart A), a considerable amount of investment has been made in microfinance. Microfinance is a form of financial services for entrepreneurs, small businesses and the poor lacking access to banking and related services.
For entrepreneurs, the two main mechanisms for the delivery of financial services to such clients are: (1) relationship-based banking for individual entrepreneurs and small businesses; and (2) group-based models, where several entrepreneurs come together to apply for loans and other services as a group. Microfinance to the poor is generally known as micro credit.
Though the level of financial inclusion varies widely around the world, according to the World Bank’s Global Financial Development Report 2014, “Globally, about 50 percent of adults have a bank account, while the rest remain unbanked, meaning they do not have an account with a formal financial institution.” Not all the 2.5 billion unbanked need financial services, but barriers such as cost, travel distance, and documentation requirements are critical, the bank found (see Chart B).
According to the World Bank report, “The poor, women, youth, and rural residents tend to face greater barriers to access. Among firms, the younger and smaller ones are confronted by more binding constraints. For instance, in developing economies, 35 percent of small firms report that access to finance is a major obstacle to their operations, compared with 25 percent of large firms in developing economies and 8 percent of large firms in developed economies.”
As economist have long argued, financial inclusion is important for development and poverty reduction. “Considerable evidence indicates that the poor benefit enormously from basic payments, savings, and insurance services. For firms, particularly the small and young ones that are subject to greater constraints, access to finance is associated with innovation, job creation, and growth,” the bank found.
Chart B: Adults Using a Bank Account in a Typical Month
Microcredit as an investment does have the ability to produce good returns and help the poor. But the World Bank does note that microfinance institutions must have a rigid discipline as to the pace of credit creation for this initiative to be sustainable.
“A spectacular recent example is the subprime mortgage crisis in the United States in the 2000s: the key contributing factors included the overextension of credit to non-creditworthy borrowers and relaxation in mortgage-underwriting standards” the bank found.
Another example of overextension of credit in the name of access was the crisis in India’s microfinance sector in 2010. Because of a rapid growth in loans, India’s microfinance institutions were able to report high profitability for years, but this resided on large indebtedness among clients, the World Bank found.
While these two examples had very complex dynamics that impacted performance, they illustrate the broader point that deep social issues cannot always be resolved purely with an infusion of credit. If not implemented properly, efforts to promote financial inclusion can lead to defaults and other negative effects.
But we believe that with the increasing participation of global banks and institutional investors, the promotion and development of more transparent investment vehicles, the industry is slowly growing to a point where retail investors will one day be able to participate more meaningfully in impact investment alongside institutional investors and private equity investors (see Chart C).
Chart C: Impact Investing Portfolio Performance
While there are investment vehicles, such as certificates of deposit and some publicly traded companies, in talking to microfinance industry specialists, they acknowledge that the retail investment sector is one of the areas that still need development (building products such as Mutual or Exchange Traded Funds, for example, which can be transparently scrutinized and evaluated). But these experts say such products are in the works, which could offer new opportunities for individual investors seeking new income and diversification opportunities.
Furthermore, as part of the Global Investment Strategist’s overall mission to highlight exciting and attractive new markets for investors, we intend to provide continuing coverage of the impact investment sector and its markets (microfinance, health care, food and agriculture, etc.), highlighting suitable investments as they become available.
The Places to Impact Invest
As noted, there’s a limited number of ways that the individual investor can participate in the impact investment arena. Here’s a list of the current investment opportunities in the sector.
• Microfinance Fund
Calvert Foundation is the charitable arm of Calvert Group, a socially responsible investment company. Its bonds are used to fund economic development activities around the world, especially in microfinance. Rates of return are similar to those on bank certificates of deposit (CDs), although these notes aren’t insured and have more risk. The minimum investment in Calvert Foundation is $1,000, either through a brokerage or directly.
• Publicly Traded Institutions
Three microfinance institutions are publicly traded, with their stocks listed in the countries where they operate. Most of these firms started as nonprofit lenders and grew enough to become independent and profitable.
Banco Compartamos (OTC: BMOSF) operates in 325 communities in Mexico, making loans that average less than $1,000 each. It has worked with more than 1.5 million customers since its founding as a nonprofit organization in 1990. It makes both business and home-improvement loans. Its specialty is forming groups of women who take out loans together and support one another in business through education and sharing ideas.
Equity Bank (USE: EBL), based in Kenya and with operations in Uganda and Sudan, offers a full range of savings and lending services designed for people without a lot of money. Among its many products is mobile banking, where people can transfer funds through their phones.
SKS Microfinance (NSE: SKSMICRO) is the largest microfinance company in India and, by extension, the world. It has 1,627 branches and 5.3 million customers, which it refers to as members.
Stock Talk
Add New Comments
You must be logged in to post to Stock Talk OR create an account