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The Relationship Between Microfinance, Entrepreneurship And Sustainability In Reducing Poverty In Developing Nations

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The African Youths Organization

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The extent to which microfinance, entrepreneurship and sustainability are inter-related is dependent on the extent to which it addresses the economic development process for example. If we are looking for an action which will enable the poor to overcome their poverty, I would go for credit invested in an income generating enterprise as working capital or for productive assets leading to establishment of new enterprises or growth of an existing one, profit from the enterprise provides income and a general strengthening/A variety of financial institutions worldwide have found way to make lending to the poor sustainable and to build on the fact that even the poor are self employed repay their loans and seek savings opportunities. The challenge is to build capacity in the financial sector drawing on lessons from international best practices in micro enterprises and rural finance. However, ensuring environmental sustainability is equally important as sustaining micro enterprises financially. The Sustainable Financial Markets Facility (SFMF) recognizes the importance of promoting “environmentally and socially responsible lending and investment in emerging markets, thus stimulating sustainable markets and private sectors activity. The need to enhance other sustainable initiatives is also paramount thus the interrelated nature of microfinance entrepreneurship and sustainable development is evident, the extent to which microfinance, entrepreneurship and sustainability are interdependent in becoming increasingly recognized by experts in their respective fields of work assoc

How will it improve our quality of life?

The fundamental framework: The policy legal and regulatory framework that allows innovative financial institutions to develop and operate effectively. In institution building: Exposure to and training in best practices that banks and microfinance organization need to expand their outreach and develop sustainable operations, long with performance – based support for capacity building. Innovative Approaches: Leasing, lending and other products to increase access of small and medium size enterprises to financial services. Despite the apparent benefit of microfinance in reducing poverty, an inevitable controversy exists.

Triple Bottom Line Benefits

Entrepreneurship is the active process of recognizing an economic demand in an economy and supplying the factors of production (land, labour and capital) to satisfy the demand usually to generate a profit. High levels of poverty combined with slow economic growth in the formal sector have forced a large part of the developing world’s population into self-employment and informal activities. But this is not necessarily negative, micro enterprises contribute significantly to economic growth. Social stability and equity. The sector is one of the most important vehicles through which low-income people can escape poverty with limited skills and education to compete for formal sector jobs, these men and women find economic opportunities in micro-enterprises as business owners and employees. In most developing countries, micro-enterprises and small scale enterprises account for the majority of firms and large share of employment. In Ecuador, for example, forms with fewer than 50 employees accounted for 99 percent of firms and 55 percent of firms in 1980: in Bangladesh, enterprises with fewer than 100 workers accounted for 99 percent of enterprises and 58 percent of employment in 1986. Finally, it has been noted that small-medium enterprises constitute the most dynamic segment of many transition and developing economics. They are more innovative, faster growing and possibly more profitable as compared to larger sized enterprises. Hence, the role of entrepreneurship in reducing poverty in developing nation is promising. 

Issues, Barriers and Opportunities?

THE ROLE OF SUSTAINABILITY IN REDUCING POVERTY IN DEVELOPING COUNTRIES The concept of sustainability is difficult to define and its precise definition varies within different contexts. However regarding the development process, two primary aspects of sustainability emerge. Economic and environmental sustainability both tie in with the notion of sustainable micro-entrepreneurship, economic sustainability refers to a continual supply of finance to meet a person on community’s needs, usually in the for of secure and accessible loans from a microfinance institutions and environmental is the aim to preserve environmental resources for use by future generations providing financial services entails that they must be sustainable and that means charging interest rates that cover your costs. Microfinance institutions have convincingly demonstrated that they can become profitable and sustainable institutions while making major contributions to poverty reduction by increasing economic opportunities and employment. This affects them because the growing public awareness of corporate governance and of environmental and social issues is driving changes in consumers behaviour. Investment and policy or regulatory adjustments, all signs point to continued pressure on the private sector to demonstrate the economic growth and sustainability.

Council of Microfinance Equity Funds Issues New Guidelines for Corporate Governance

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Publication Updated and Expanded to Discuss Social-Performance Management, Risk and Crisis Management, Responsible Exits, Aligning Incentives and More

BOSTON, Aug. 14, 2012 /PRNewswire via COMTEX/ — The Council of Microfinance Equity Funds (CMEF), a membership organization of leading microfinance equity investors, today announced the release of a new, enhanced version of its corporate governance manual, “The Practice of Corporate Governance in Microfinance Institutions.”

Given the importance of good governance to the microfinance industry, the CMEF’s “Governance Guidelines,” first released in 2005, have recently been updated and expanded to include more in-depth discussions of social-performance management, risk and crisis management, responsible exits, aligning incentives, and formal documentation.

“Good governance is the ability of board members to monitor the status of the organization, make good strategic decisions, and hold executives accountable for their execution,” said Elisabeth Rhyne, managing director of the Center for Financial Inclusion at Accion. “Ultimately, that comes down to the quality of the board members, the culture and practice of the board, and the power relationships among board members and executives.”

Experts acknowledge that the need for good governance has grown increasingly important for microfinance institutions (MFIs), especially in the wake of widespread financial crises. Daniel Rozas affirms, in “Weathering the Storm,” a paper released by the Center for Financial Inclusion in 2011, that “Good governance is the ultimate backstop for crisis prevention and management.”

The CMEF Governance Guidelines are meant to provide candid, precise and practical guidance in the field of corporate governance specifically tailored to MFIs, and to offer concrete instruction to MFI boards. While many of the recommendations in the guidelines, such as how to structure an effective board, are applicable to all types of financial institutions, MFIs have a number of distinguishing characteristics that affect the implementation and operation of governance.

The Governance Guidelines address how MFIs can best maintain a focus on social outcomes, and how MFIs in transition to private or deposit-taking institutions can develop ideal governance structures. Good governance is not automatic, and MFIs must continually work to develop good governance over time. The CMEF hopes that these Governance Guidelines will serve as a useful tool for MFIs to use in the development of good governance practices.

About the Council of Microfinance Equity Finds

Since 2005, the Council of Microfinance Equity Funds (CMEF) has served as a valued forum for leading microfinance equity investors who are pursuing double-bottom line goals. By helping Council members deepen their relationships with their investee MFIs, enhance the performance of their investments, and develop best practices and standards, the CMEF aims to ultimately strengthen the microfinance industry and advance the expansion of commercial microfinance. CMEF members include: Accion, Accion Investments in Microfinance, AfriCap, Bamboo Investments, Caspian Capital Partners, Catalyst Microfinance Investors, Citi Microfinance, Compartamos, Creation Investments Capital Management, Danish Microfinance Partners, Developing World Markets, Developpement International Desjardins, Equator Capital Partners, FINCA International, Grassroots Capital Partners, Grupo ACP, Incofin Investment Management, Lok Advisory Services, MicroVentures Investment, MicroVest, Norwegian Microfinance Initiative, Oikocredit, Omidyar Network, Omtrix International, Opportunity International, responsAbility Social Investment Services, Triodos Investment Management and Triple Jump. To learn more, visit: www.cmef.com .

Making a profit from making a difference – FT.com

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August 5, 2012 5:40 am

Making a profit from making a difference

By Sophia Grene

Sustainable logging carried out in Cameroon in the Congo Basin natural woodland©GettySustainable logging carried out in Cameroon in the Congo Basin natural woodland: preserving forests is just one project impact investing can help

To many, investment is purely about generating a return on their money, but a growing band of wealthy individuals and institutions are seeking to achieve a little more.

“There’s a growing hunger from the wealthy to go beyond how to spend it, understanding if they don’t engage with these [social and environmental] issues, social problems will arrive on their doorstep,” says Paul Szkiler, chief executive of Truestone Impact Investment.

Impact investing, most commonly defined as investments made with the intention of helping to solve a social or environmental problem as well as generating a financial return, has seen growing interest from investors, particularly since the financial crisis.

It covers a wide range of areas, from microfinance to private equity in developing markets and even “social bonds”, an innovative way for governments to fund services provided by non-state bodies on a payment-for-results basis.

The term impact investing was coined by the Rockefeller Foundation in 2007 and a year later the Global Impact Investors Network was launched. Since then, investment managers and intermediaries report a steady increase in interest in the sector, but it is hard to pin down a reliable figure, given the sector’s fragmented nature and the difficulty of defining it.

For one of the most developed and codified sectors of the impact investing world – microfinance – estimates as of 2010 vary from $7bn invested (from Swiss microfinance manager and adviser Symbiotics) to $24bn committed (from the Consultative Group to Assist the Poor), demonstrating the difficulty of getting a sense of the size of the sector.

The GIIN definition is frequently adopted: “Impact investments are investments made into companies, organisations, and funds with the intention to generate measurable social and environmental impact alongside a financial return”, but even that leaves a number of queries, such as whether that financial return is expected to match market returns or if it comes second in any conflict between it and the social impact.

In general, practitioners and investors are keen to make a distinction between “social impact first” investments, where the investor is prepared to sacrifice some financial return in exchange for the belief their money is doing good, and “social and financial” investments, where the investment product aims to produce returns comparable with the market.

“The second type appeals more to high net worth individuals,” says François Passant, executive director at Eurosif, the European social investment forum. “It’s got that entrepreneurial spin that resonates with them.” For people who got rich by building their own business, it feels more appropriate to help others by encouraging them to work for themselves than to give money, he explains.

Mr Szkiler remembers a presentation to JPMorgan about his business: “The global research guys were saying ‘hmm, that’s ambitious’, but the wealth management people said ‘that’s exactly what we’re looking for for our clients’.”

Truestone is about to start fundraising for its Global Impact Fund, which aims to return an annualised 8 to 10 per cent net over the medium-to-long term. With a six month lock-up period, the fund does require investors to be prepared to take a longer-term view, but Mr Szkiler is confident of reaching his target of £40m.

Institutional investors are not immune to the appeal of doing well by doing good, he adds. “We see institutional investors in that area, but so far really only the giants,” he says. Their motives may not be precisely the same as those of individuals: “There’s an element of looking for stable financial returns, even if modest, that are decorrelated with the rest of financial markets.

“There’s also a reputational benefit for the large institutional investor, and there is the concept of universal ownership,” he adds.

The theory of universal ownership states that beneficial owners in a fund not only have an interest in direct financial returns but also in making sure their investments work towards improving the world in which the investors live.

The categorisation of an investment vehicle as impact investment does not always come from the promoter. Nikko Asset Management has two World Bank Green Bond funds, invested in the triple-A issuer’s bonds – proceeds from which are used to fund climate change mitigation projects.

“We didn’t set it up as an impact bond, but it falls in that direction naturally,” says Stuart Kinnersley, Nikko’s European chief investment officer. “Investors are getting this positive externality in addition to the market returns you would expect.”

Nikko’s institutional vehicle has seen approaches from investors specifically interested because they have identified it as an impact opportunity. “Many people are questioning the current model of capitalism,” points out Mr Kinnersley. A version that makes explicit use of the structures of capitalism to improve the world seems attractive to many of those questioners.

Unsurprisingly, development financial institutions such as the German KfW bank or Triodos Bank are interested in impact investing, as are many charities that rely on income from an endowment and prefer to make investments related to their mission rather than arbitrary unrelated investments.

In the UK, there are plans afoot to raise the profile of impact investing and make it more accessible to retail investors. This is the aim of the Social Stock Exchange, likely to launch some time next year.

It is the brainchild of Pradeep Jethi, a former product developer at the London Stock Exchange, and is backed by the Rockefeller Foundation and the UK’s Big Society Capital.

“I want to use my capitalist skills to make the world a better place,” says Mr Jethi. “If we don’t do something, capitalism will eat itself.”

Copyright The Financial Times Limited 2012.