Published today, Impact investments: An emerging asset class is a report by J.P. Morgan Global Research and is the result of a recent research collaboration project between Social Finance at J.P. Morgan and The Rockefeller Foundation, in partnership with the Global Impact Investment Network. The report’s authors suggest that impact investing will establish itself as an important investment movement over the coming years.
This research note asserts that impact investment, which is intended to create positive social or environmental impact beyond financial return, constitutes a new asset class. Impact investments are typically made in private markets by providing debt or equity to mission-driven businesses. Impact investing has gained traction among a wide range of investors, including large-scale financial institutions, pension funds, family offices, private wealth managers, foundations, individuals, commercial banks, and development finance institutions.
The report also includes the first large-scale data analysis of return expectations from more than 1,000 impact investments and compares them to established benchmarks for emerging and developed market debt and equity returns. The analysis shows that investors have broad expectations for impact investment financial returns, ranging from concessionary to market-beating.
The report also estimates significant market opportunity for impact investment over the next ten years. After analyzing selected segments of five sectors – urban affordable housing, rural access to clean water, maternal health, primary education, and microfinance – serving the population at the “base of the economic pyramid,” the authors identify a potential profit opportunity between $183 and $667 billion and a potential investment opportunity between $400 billion and $1 trillion in the next decade for just these segments of the impact investing market.
This report helps to advance a broader understanding of impact investing as an appropriate and economically effective way to complement government and philanthropy in solving the world’s greatest problems at scale.
Nov 18th 2010, The Economist
There are better ways to regulate the industry.
MICROFINANCE is an example of something that is sadly all too rare: an anti-poverty tool that usually at least breaks even. If you make small, uncollateralised business loans to groups of poor women, they almost always repay them on time. It has grown rapidly in many countries, not least Bangladesh and India. With nearly 30m clients each, these are now the world’s biggest markets for microfinance. Yet the industry has come under attack for being too commercial.
In Bangladesh the government has capped the annual interest rate that microfinance institutions (MFIs) can charge at 27%. In India a new breed of for-profit microlenders has shaken up an otherwise NGO-dominated sector—and annoyed the authorities. In Andhra Pradesh (AP), the Indian state with the most microfinance borrowers and the base for the biggest for-profit MFIs, local politicians have bullied the business to a virtual halt. An interest-rate cap is mooted. These steps are ostensibly motivated by a desire to defend the poor from getting stuck in a debt. But they are wrong-headed.
Despite charging what may seem high interest rates, MFIs typically have wafer-thin margins because of the high costs of making and collecting payments on millions of tiny loans. Pressing them to reduce rates further would jeopardise their ability to attract private capital, inhibiting their growth. Slower growth would in turn hamper their ability to harness economies of scale in order to lower transaction costs and cut rates of their own accord, as many—including the biggest for-profit MFIs—have done in the past. Forcing down rates would also deter new entrants and reduce competition.
The rush to impose restrictions on MFIs also betrays a fundamental misunderstanding about how the poor use credit. Many politicians cite the existence of clients with loans from several MFIs at once to argue that the poor are over-indebted. This ignores the fact that most microcredit loans are tiny, so that several are needed to meet the needs of even a small business. Indeed, the poor often use microloans to pay off far more expensive loans from village moneylenders. This suggests that restricting people’s access to microcredit by capping rates could have the perverse effect of driving more poor people into the arms of village loan-sharks, who still provide the bulk of rural credit in poor countries. (In rural AP, 82% of households have such informal loans, whereas only 11% have loans from MFIs.) That would be good news for these moneylenders, but is surely not the outcome that policymakers want.
Sensible regulation need not be at odds with a thriving microfinance industry. Peru, for example, is ranked by the Economist Intelligence Unit (our sister company) as having the best business environment for microfinance, in part because the regulator has successfully set and enforced rules on capital buffers, leading to a more stable environment for the industry. India, in contrast, is yet to decide whether rules governing microfinance are to be set at the national level or by individual states.
An association of Indian MFIs is trying to set up a credit bureau which would allow them to track clients’ overall indebtedness and credit histories, thus guarding them against lending a person more than she is able to handle. This would be helped enormously if the government speeded up its efforts to give all Indians a universal identification number. The Indian government should also allow MFIs to take deposits, which they are currently prevented from doing: this would make them less dependent on capital markets for funding. All rather complicated things, unlikely to stir up populism. And all a lot more useful for the poor than an interest-rate cap.