Feb 17th 2011 | NEW YORK | from the print edition
Barack Obama imports a big idea from Britain
BURIED in the detail of Barack Obama’s proposed 2012 budget is a rule change that could have a big impact on how America tackles its thorniest social problems. The new rule would allow various government agencies to issue “pay for success bonds”. These would be bought by private investors and the money used to finance projects run by charities or businesses. But the investors would only be repaid, or make a profit, if the projects achieve certain results agreed in advance, such as reducing youth crime or getting students from poor areas into higher education.
Mr Obama proposes that up to $100m be freed up to run pilot schemes to test the idea. The rule changes are needed so that money can be committed over longer periods than is usual in public contracts, and repayment be made contingent on performance. They would also allow for much less detailed terms on the methods to be used, rather than on the outcomes, than is typical. Public money can be set aside for evaluation of whether the targets have been met.
The Pay for Success Bond is a catchier name for its British inspiration, the Social Impact Bond, the first of which was launched last year by David Cameron’s coalition government. (Social Finance, a sort of investment bank for the social sector, which designed the Social Impact Bond in Britain, this week launched a sister organisation in America, to find suitable candidates for Pay for Success Bonds.) These raised money from private investors to fund the expansion of schemes run by charities to reduce the reoffending rate among certain categories of criminal after their release from jail. If the recidivism rate falls far enough, investors can earn up to a 13.5% annual rate of return. If there is no improvement, investors could lose all their money.
The search is now on to find suitable pilot projects. The mayors of New York City and Baltimore are said to be keen to apply. Another possible candidate is the National Guard Youth Challenge, overseen by the Defence Department, which applies military discipline to provide skills training to at-risk youth. All this is a lot more inspiring than arguing over which bits of public spending to cut.
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FEBRUARY 23, 2011, 9:18 A.M. ET
By Anthony Harrup
Of DOW JONES NEWSWIRES
MEXICO CITY (Dow Jones)–Mexican microfinance lender Banco Compartamos said its net profit was practically flat in the fourth quarter as the company increased hiring to support growth in its customer base and loan portfolio.
Compartamos, which specializes in small loans to individuals and small businesses, reported Tuesday net profit of 515 million pesos ($41.6 million), or MXN1.20 per share, in the October-December period, compared with MXN516 million or MXN1.21 per share a year earlier. Full-year net profit rose 26% to MXN1.88 billion.
The bank’s customers rose 31% to 1.96 million in 2010, and its loan portfolio expanded 28% to MXN9.76 billion. Non-performing loans fell to 1.98% of the portfolio from 2.43%, and its capitalization ratio was 44.2% compared with 42.6%.
Net operating revenue in the quarter rose 25% to MXN1.51 billion, while net operating profit rose 2.3% to MXN676 million, limited by higher operating expenses.
Compartamos reported a 33% year-on-year increase in the number of employees to 9,773. “Operating expenses were mainly allocated towards employee-related expenses, such as salaries, productivity bonuses and training,” the company said.
Compartamos wrote off past-due loans for MXN65 million in the fourth quarter, compared with MXN59 million in the like period of 2009. Loan loss coverage was 146%, up from 141% a year earlier.
Chief Executive Fernando Alvarez said in a telephone interview that the company expects to surpass the 2 million customer mark in 2011, with growth between 19% and 23% in its client base. As market penetration increases, and client growth tends to slow, the bank sees more of its growth coming from new products and from expansion abroad.
New products include micro-insurance policies, home improvement loans, and the bank’s latest innovation, a pilot debit card program in the state of Veracruz where clients have their loans deposited in the card, and can also make deposits.
The eventual expansion of the card program, which is still being tested on a small scale, could lead to a change in the traditional way of interacting with customers, who receive their loans in cash and make their payments in cash, Alvarez said.
The other source of growth Compartamos is looking at is expansion abroad, either organically by opening up operations, or through acquisitions, Alvarez said.
In December, Banco Compartamos swapped its shares for shares in holding company Compartamos SAB (COMPARC.MX) with the aim of giving the company greater flexibility for expansion. The company is in the process of delisting the Banco Compartamos shares.
Compartamos SAB shares closed down 3% Tuesday on the Mexican stock exchange at MXN23.21.
-By Anthony Harrup, Dow Jones Newswires; (5255) 5980-5176, email@example.com
Matthew Bishop of the Economist schools Felix Salmon on the benefits of for-profit microfinance. You should also read Matthew’s post defending for-profit microfinance. While Matthew may not succeeded in changing everyone’s mind, he does give the best argument against my position that we’ve heard.
Published Tuesday February 15th, 2011
By DEREK SANKEY
CALGARY – When Torontonian Gray Taylor decided to invest in a “microfinance bond” several years ago, it was a move that satisfied both his need to do good in the world and to make money in the process.
“The return on investment was adequate and the side benefits were immense,” said Taylor, a corporate law partner and chairman of Bennett Jones LLP’s climate change and emissions trading group.
“I try not to give away my money, but I think if you do good in the world and if you do good in the process, that’s great.”
He’s not prepared to give up his returns on his investment – he still has to retire some day – but the microfinance bond allowed the fund managers to target loans to entrepreneurs in developing countries to start small businesses.
Today, he said, he believes his strategy is all about managing risk.
Taylor doesn’t consider himself an “ethical investor,” per se, because to him the concept is all about sustainable investing – looking for companies that evaluate all of their risks, including from an environmental, social and governance (ESG) perspective.
“This world is changing very rapidly and you can see the things that take people down and make people profitable,” said Taylor.
“In some ways, this is a different way of thinking about the world.”
Whether you call it ethical investing, green investing, social investing, sustainable investing or any other label, the bottom line is that the broad ESG investing trend is going mainstream.
“It’s an area that has garnered a lot more traction and is going mainstream,” said Michael Jantzi of Sustainalytics, a Toronto-based, global investment organization that analyzes corporations using ESG screens.
The institutional investors – large pension plans, asset owners, sovereign wealth funds – are becoming much more vocal in shareholder meetings in pressing executives for answers about how they address ESG factors as another layer of risk to the long-term sustainability of the company, said Jantzi.
“Unless you’re looking harder, looking differently, that risk-return equation gets out of whack,” he said . “What ESG is doing is providing another perspective, another lens.”
Retail investors are jumping on board, but ethical investing still comprises a relatively small portion of the investment market – about three per cent, according to Ron Robbins, an investment industry veteran and author of Investing for the Soul.
“There’s been a tremendous interest in sustainability,” Robbins said.
“The ethical investor is really there for very strong ethical reasons – social reasons – whereas the sustainability-green investor takes a rather different tack.”
Everybody seems to have a slightly different definition of it, but you can’t argue with the numbers.
The Social Investment Organization did a study in 2008 and found that assets under management in socially responsible investments (SRIs) in Canada surged to a total of $609 billion, up from $503 billion two years earlier.
In Europe last year, $1.8 billion (Cdn) in new investments flowed into SRIs even in a global downturn, according to Sustainalytics.
Laurie Glans, an investment counsellor with RBC Global Asset Management Inc. in Calgary, said recent studies have shown that ESG funds are comparable to non-ESG funds in terms of return on investment.
“It’s almost indistinguishable,” Glans said. “It has neither hurt nor helped their performance.”
What it does is address a broader range of risk and, in the process, eventually create a greener, more socially responsible and more sustainable organization, he said.
The problem right now is size, and size matters.
Despite numbers that sound big, SRIs are still a relatively small portion of the investment market, although there are a growing number of ethical funds available to retail investors.
Glans and his team manage between $40-50 billion in assets, yet its community values bond has just $120 million in it. Part of that reason has been a reluctance to incorporate ethical investing into average investors’ portfolios.
“The biggest obstacle to this whole area is still this really stubbornly persistent myth that you can’t be a social investor and make money at the same time,” said Jantzi.
Some investors simply decide to directly invest in entrepreneurs that are supporting a social or environmental cause.
Others opt to go the philanthropic route to achieve their ethical goals.
Investors such as Taylor are convinced that ethical investing is what the future of investing will be all about.
“If you focus on the communities you’re in – every body – that’s real business in my view, not rip-and-grab business,” he said.
The View from Harvard Business
By Sean Silverthorne | February 7, 2011
Undeveloped nations need products, too.
People living on a few dollars a day still require shelter, food and services. There are three ways to attack this problem: 1. Give them money and other aid, 2. Teach them to develop their own products and services, 3. Let capitalism and entrepreneurs create markets around solutions.
The third type would seem to be the hardest to fulfill — how do you sell products to people who can barely afford to survive? Turns out that disruptive innovation and innovative entrepreneurs are helping advance the lives of millions of people living in poverty.
Think back to Harvard Business School professor Clay Christensen’s pioneering work on disruptive technology. One of the underlying foundations of the theory is the idea of a product that is “just good enough” — it services a basic need through simplicity at a fraction of the cost of the feature-bloated incumbent. Think disposable camera. Compared to an ordinary camera, the disposable produced crummy pictures, but they were good enough to satisfy millions of users who needed photos to send to relatives and stuff in the shoebox. Likewise, the transistor radio made music sound like it was coming from a tin can, but you could take it to the beach, unlike its table-bound predecessors.
OK, you are a social entrepreneur, and you have a problem to solve. In Liberia, only 2,000 homes out of 4 million are hooked up to the electric grid, but a cell phone revolution has taken place. Nigerians who have moved from rural to urban centers invest in cell phones as a way to keep in touch with far away families. The average Nigerian spends 25 percent of his income, roughly $48, to keep it charged through expensive “electricity centers.”
So there’s the market need and a ceiling price people are willing to pay. What’s your just good enough solution?
Ask Richard Fahey, a 2010 fellow of Harvard’s Advanced Leadership Initiative. Although he’s not trying to make a profit, you can see the workings of “just good enough” at play in his idea.
Fahey is working with companies to produce solar powered lanterns that are also chargers, which sell for $45. These lanterns would not only save Nigerians considerable money, but they could replace health-damaging kerosene lamps now in use. Read Turning on the Lights in the Harvard Gazette for more details.
This is how a market-driven solution begins to grow, says Michael Chu, an HBS professor who studies social entrepreneurship. It’s not that one firm finds success in a market, but rather that its success draws other competitors who then build an industry. Case in point: At least three companies are competing to sell cheap eyeglasses to the developing world, self-customizable specs that sell for a few bucks.
So the lesson is that disruptive innovation and “just good enough” products can allow you to reach markets that previously never crossed your mind. And if you sell to the developing world, you’ll be helping market capitalism change the world for the better.