Archive for the ‘Blog’ Category

By Hope Neighbor

On Friday, I talked about principles to guide efforts to improve the quality of charitable giving. Today, I’ll talk about another opportunity to achieve social impact – by addressing the $120 billion market opportunity for impact investments for individuals. Today, these dollars are “hiding in plain sight,” in individuals’ investment accounts.

In addition to charitable giving, the Money for Good research analyzed Americans’ demand for impact investments, and what was required to meet that demand. In other words, what do American investors need to make more impact investments? To get at the answer to this question, we surveyed 4,000 Americans with household incomes of $80,000 and above. Here’s what we found:

To start, there’s a strong, untapped appetite for impact investments. Almost 90 percent of the individuals surveyed expressed openness to impact investing. We calculated a market opportunity of $120 billion for these investments, with half of that opportunity in investments of under $25,000. What’s more, even the very affluent are interested in smaller investments: over half those with household income of over $1 million a year still want to make impact investments of $10,000 or less. Long story short – there is a very large market for small impact investments that is largely unmet in the market today.

In addition, we found that Americans won’t cannibalize their charitable giving in order to make impact investments. When asked where they would draw the funds to purchase impact investments from, only 10% said that they would pull the money from their charitable giving.

Finally, we found that individuals were more receptive to impact investments if they are positioned as investments, not alternatives to charity. Americans are 1.8 times more likely to make an impact investment if they’re placed in an investment mindset rather than a charitable one.

The Money for Good research yielded several findings that point to how to best open up the retail impact investing opportunity. First, Americans want to receive information from and transact through their standard financial services provider; financial advisors were by far the top place investors would turn to learn about impact investment opportunities.

Second, Americans break out into six specific investor segments. The segments include Safety First, Socially Focused, Quality Organization, Hassle Free, Personally Recommended, and Skeptics. The first three – Safety First, Socially Focused, and Quality Organization – represent over 80% of the impact investing market opportunity we identified. Each of these segments has different core motivations for making impact investments – Safety First prioritizes downside risk protection, Socially Focused prioritizes the cause the investment is addressing, and Quality Organization investors want to invest with a reputable organization that has a strong track record and business plan.

Third, we found that there are five barriers to investment that are common across all those open to impact investing. Interestingly, the five barriers are all related to the immaturity of the market, not the social or environmental impact investments are having.

Building on these findings, there are seven steps that we believe will help to open up the retail impact investing market:

1. Clarify what impact investing means for individuals and professionals
2. Structure products with small initial investments (<$25,000)
3. Tailor products and messages by segment, to appeal to different motivations
4. Make opportunities accessible to retail investors, as many existing impact investment opportunities are open only to accredited investors
5. Position these as investments, not as alternatives to charity
6. Address market immaturity barriers, to provide confidence to investors
7. Build awareness of impact investing overall and the specific opportunities available today with investors and their advisors

We’ve heard many times that opening the retail market will be too hard – too hard even to try. In conversations in the past six weeks, that’s not what we’ve heard from those with deep retail investing or banking experience. Instead, we’ve heard that there are gaps in knowledge that make it difficult to know how to address the retail impact investing opportunity today. More must be understood about financial advisors’ incentives, retail distribution networks, and how impact investments can be structured and sold to accommodate those incentives instead of being defeated by them. We also need to understand the economics and expected social impact of different retail impact investing alternatives. But once the sector is armed with this knowledge, we believe that it will have the insights that it needs to attack this $120B market opportunity “hiding in plain sight.”

Impact Investing

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Capitalism is tackling the world’s biggest social and environmental problems-and giving investors a new way to do well by doing good.

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By Ron Cordes
May 1, 2010
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Pretend it’s 2007 again, and you must choose between two investment opportunities. One is a pool of U.S.-based mortgage-backed securities packaged by a huge Wall Street firm. The other is a fund with stakes in small, obscure, mostly privately held lending institutions around the world. These so-called microbanks make unsecured loans to people who earn less than $2 a day and lack anything resembling collateral.
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I can guess which one most of you would have picked. And while we all know what happened to mortgage-backed securities since then, the microbank investment has returned a consistent 6% annually over the past three years. What’s more, the loans those obscure little banks made (loans as small as $50 in some cases) have enabled entrepreneurs living in some of the world’s least developed countries to start or expand small businesses and begin to pull themselves and their families out of pervasive poverty.
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I know this because I invest in those microbanks, as do a growing number of pension funds, foundations and high-net-worth individuals. I am also an active participant in an emerging investment category called impact investing. Although it’s barely on most investors’ radar screens today-and despite the fact that some microbanks have been in the news recently for doing more harm than good in these developing countries-I still firmly believe that in the coming decade impact investing could fundamentally reshape how your clients “do well by doing good,” how the planet’s biggest problems get solved and how you bring value to wealthy investors.
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MAKING AN IMPACT

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Impact investing combines the often-opposed forces of capitalism and social justice to achieve two main goals:

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* Solve the major social problems of our time, including global poverty, infant mortality, a lack of clean water, homelessness, substandard education and global warming; and

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* Generate reasonable financial returns for the companies, organizations and investors addressing those issues.

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Impact investors pursue these twin goals by making debt or equity investments in social enterprises-companies and groups that use market-based solutions, such as sustainable business models and profit motives, to address social and environmental issues. Social enterprises are nothing new, of course. Thousands of these small, privately held firms have sprouted up around the world. The most famous is Grameen Bank, a microlender whose founder Muhammad Yunus was awarded the Nobel Peace Prize in 2006.

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Here’s what is new: As more of these firms have achieved their initial social goals, they’re looking to expand their operations and do more good for more people in more countries. Much like traditional small companies, they’re looking to the capital markets to help fuel their growth. This could significantly affect traditional charity and philanthropy as well as socially conscious investors (and the advisors who serve them).
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A BETTER WAY

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Impact investing is a response to some of the shortcomings in existing methods for enacting positive social change. Take government aid. For decades, it has largely failed to create meaningful and lasting social good due to an often ineffective use of resources and endemic government corruption in many of the world’s poorest nations.

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And traditional charity, while important, doesn’t have the scale to address the world’s biggest social issues by itself. The scope of problems like the lack of clean drinking water (which affects 960 million people) and proper sanitation (2.5 billion people) is enormous, especially for organizations that must rely solely on donations and the goodwill of others to make a difference.

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Within the investment arena, traditional socially responsible investment options, such as SRI funds, tend to focus on identifying and avoiding big companies with perceived negative business practices or products. More recently, ESG funds have sought to identify and invest in large companies demonstrating strong environmental, social or corporate governance characteristics. Both funds serve important missions. But they aren’t designed to provide targeted support to the types of privately held firms developing innovative solutions to the world’s social problems.

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By contrast, the new breed of social enterprises circumvents the limitations of government aid and traditional philanthropy by allocating financial and intellectual capital directly to entrepreneurs motivated to solve their own problems. This model is rapidly gaining acceptance in the marketplace as more of the developed world sees the world’s poor as deserving of our investment, not just our charity.

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Affluent baby boomers are a key driver of change here. Boomers are regaining their sense of social activism now that they’re older and have more time and financial resources. As they start to define their success beyond their bottom line, they’re looking for new ways to use their resources to create sustainable good. In addition, mid-career professionals in their thirties, forties and fifties are getting off the corporate treadmill and using their experience to support socially driven for-profit businesses.

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Social enterprise is also becoming popular among Gen Yers. As with the boomers before them, these students are highly socially conscious. Unlike their elders, they’re looking to integrate their drive to create change into an entrepreneurial career track right now.

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GETTING STARTED

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This momentum means you should start raising the issue of impact investing with your clients now-both to spark interest and position yourself as a pioneer. Your powerful message: You are driven to help your clients connect their investment capital with the social values and concerns that are important to them as human beings and to infuse their portfolios with a deeper sense of meaning and purpose.

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Chances are, impact investing will resonate most among affluent investors with $2 million or more in investable assets. These investors have less concern about outliving their savings-they’re at a level of affluence that enables them to explore the type of impact their wealth can have on the world around them. And most impact investments today are structured as private debt or equity funds, which are available only to accredited high-net-worth investors.

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Within that group, target your initial conversations to clients who have indicated an interest in leaving a legacy that demonstrates their passions and values-clients for whom a meaningful connection resonates. When these clients hear they can achieve social good while retaining the assets in their portfolios and use impact investing to leverage their traditional philanthropy, they will recognize an exciting new conversation.

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Your initial conversations should answer three questions:

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* What broad-based issues are of greatest concern-poverty, education, healthcare, housing, the environment or some combination?

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* Is there any particular geographic focus (country or region)? Is there a preference for domestic issues versus problems in foreign markets?

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* How much of the portfolio should be allocated to impact investments? Given the embryonic nature of the industry and the lack of products, begin with a modest allocation-2% to 4% of the portfolio-and build from there as the industry grows.

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Next, identify specific investments and discuss their appropriateness based on the client’s goals, assets and risk tolerance. As noted above, options include private equity and debt funds (and funds-of-funds), which can carry minimums of $50,000 or more and can be highly illiquid, requiring holding periods of several years before investors can realize any gains.

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It’s also important to be realistic about the current state of impact investing. It’s still early in the game. Lack of an organized infrastructure and intermediation capabilities makes it difficult to find social enterprise projects. In addition, there’s no universal criteria for how to measure the social or environmental results of these investments, making apples-to-apples comparisons of various investments challenging.
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ADVISOR OPPORTUNITY

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Despite the complexity, advisors who begin these conversations soon will have a distinct competitive advantage. This advantage has three parts. First, there’s an opportunity to appeal to affluent boomer clients yearning to live lives of significance as they age and reconnect with the desire to create social good they felt when they were younger. They’ve achieved financial success and are now starting to think about their “life footprint”-the lessons, values and legacies they want to pass along to their heirs and to society. Introducing impact investing lets you talk to these clients about their core interests and values-a topic their other advisors likely aren’t addressing.

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Second, from an overall prospecting and referral standpoint, impact investing is new and interesting to many ideal client segments. It’s a fresh conversation to have with investors who are tired of hearing the same old stuff.

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But the biggest impact is in client retention and multigenerational opportunities among affluent families. Currently, less than 10% of the next generation retains their parents’ advisors. Advisors can use impact investing as a multigenerational glue to engage not just their wealthy older clients, but also those clients’ children and grandchildren as families work together to define their social impact beliefs and strategies. Use the social enterprise movement to talk to younger generations about issues they care about deeply-more deeply than beating the S&P 500.

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Early adopters are already embracing impact investing (see “Veteran Advice,” above), and the infrastructure is being put into place. While it’s not for everyone, impact investing could resonate with baby boomers, affluent clients and multigenerational families-and be crucial to the growth of your practice in the decades to come.

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Ron Cordes is co-chairman of Genworth Financial Wealth Management and president of the Cordes Foundation.

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Investing into Microfinance Investment Funds

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This paper aims to measure the performance of microfinance investment vehicles (MIVs) in terms of risk and returns to investors. The study included 11 MIVs (in the form of mutual funds) and their sub-funds that publish data monthly. The authors describe the funds as “commercial MIVs that focus mainly on financial objectives while their social and development contribution is a sort of value added that sets these funds apart of traditional mutual funds.” The funds primarily invest in debt instruments with maturities of no more than five years and have more than half of their investments in the microfinance sector.
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The period for the study is January 2006 to March 2009, which notably includes a major portion of the global financial downturn. The mean monthly return on assets (based on net asset values per share) for the MIVs was modest but positive throughout the study period. The average monthly return for the MIVs was 0.36 percent. This compares favorably to the Morgan Stanley Capital International (MSCI) World Index, which measures the performance of developed country equity markets (-0.99 percent), and the MSCI Emerging Markets Diversified Financials Index, which measures equity performance in emerging markets (-0.40 percent). It also compares favorably to the JP Morgan Emerging Bond Index (EMBI+, 0.27 percent) and the four-week US Treasury Bill, an asset that is considered to be virtually riskfree (0.26 percent). The MIVs, however, did not perform as well as the Markit iBoxx USD Overall Index, which consists of corporate bond issues and bonds issued by the US government and government-sponsored agencies (0.41 percent).
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Though MIVs in this study saw increased annual returns each year from 2006 to 2008, the authors point out that these MIVs could suffer from the downturn further into 2009 and 2010. The MIVs also compared favorably to the above-mentioned benchmarks in terms of risk. In terms of total risk, measured by standard deviation in monthly returns, the MIVs had a lower mean (0.32 percent) than all other indices except for the “risk-free” Treasury Bills
(0.15 percent). There was increased volatility for the benchmarks in monthly returns starting in 2008 due to the financial downturn, but this is not seen in the MIVs data, though the earlier warning about possible repercussions after March 2009 again applies.
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Additionally, the authors find that there is no positive correlation between mean MIV returns and either equity market index, indicating that MIV investments may serve well in portfolio diversification. The same cannot necessarily be said for the correlation with fixed-income indices, as there were not enough statistically significant results to make a conclusion in this regard.
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Lastly, the authors compare MIV performance to the same indices using a risk-adjusted monthly return measurement. Including only statistically significant results, MIVs outperformed the other indices by 14 to 16 basis points. However, during times of positive global market sentiment (pre-financial downturn), MIVs lagged behind the MSCI World Index (other indices were not included in this regression).
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By Karel Janda and Barbora Svárovská, published by the Institute of Economic Studies, Faculty of Social Sciences Charles University in Prague, 2009, 35 pages, available at: http://www.microfinancegateway.org/gm/document-1.9.41460/Investing%20into%20Microfinance%20Investment%20Funds.pdf
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A great article below in response to the NYT article from last week. One thing not mentioned is that not-for-profit MFIs charge similar, if not higher, rates of interest as do for-profits. Thus, the “complaints” lobbied against the for-profits should be brought against the not-for-profits, if not more so. However, all players are significantly better for clients than local moneylenders!

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The rich get richer, the poor get richer, the New York Times gets outraged

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by Don Watkins on 4/23/10
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Look out world: the rich are getting richer by helping the poor get richer. The New York Times warns us that “Big Banks Draw Profits From Microloans to Poor.”
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According to the Times, “Drawn by the prospect of hefty profits from even the smallest of loans, a raft of banks and financial institutions now dominate the field, with some charging interest rates of 100 percent or more.” Now critics of these companies are complaining that the reputation of microloans will be “tarnished by new investors seeking profits on the backs of the poor…”
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But profits aren’t made on anyone’s backs. They are made by creating value and are a sign of mutual gain. Nike profits by making great shoes. Amazon.com profits by running a quality online bookstore. McDonald’s profits by serving delicious food to anyone willing to spend a few bucks. They all profit by making us better off (otherwise we would patronize their competitors). Well, microloan companies profit by providing the poor with a service they desperately need at prices they willingly pay.
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No, suggests the Times, those prices aren’t paid willingly: the poor are taking those loans because they are “too inexperienced and too harried to understand what they are being charged.” But the only example the Times can dredge up to illustrate this point is a Mexican entrepreneur who used microloans to successfully expand her t-shirt factory five times over, and who can now pick up the phone and get a fresh infusion of cash for her business within the span of a day. That’s not a scandal–that’s inspiring.
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Microloan companies deserve their profits and have a moral right to every penny they can earn through voluntary trade. To succeed, they have to be willing to accept the risks inherent in making small loans to incredibly poor people in incredibly poor countries that don’t exactly regard property rights as sacrosanct. Indeed, the Times article itself grudgingly admits that these facts probably account for the relatively high interest rates microloans often carry.
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While the Times treats news of industry profits as a shocking revelation, the only thing shocking is its shock. Why else would companies be willing to brave the vicissitudes of shyster governments and deliver capital to tiny businesses at a moment’s notice but for the profit motive?
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Opponents of microloan companies have an answer to that. The Times quotes economist Muhammad Yunus: “Microcredit should be seen as an opportunity to help people get out of poverty in a business way, but not as an opportunity to make money out of poor people.” Read that sentence again, because what it denounces is viewing the poor as traders rather than charity cases.
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Profit is a benevolent force that creates a harmony of interests among all producers, rich or poor–and any attempt to reduce industry profits can accomplish only one thing: to reduce the poor’s access to capital and prevent microloan companies from reaping the rewards they’ve earned.
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An excellent article below which enumerates the difficulty of using an interest rate only to determine “good” vs “bad”. This article also illustrates well the value of the for-profit model, driving higher financial and social returns. This seems like a contradiction in terms, but the empirical evidence begs the question of superior social impact for not-for-profits in the sector. … PLEASE READ THE ENTIRE ARTICLE …

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How to Tell Good MFIs from Bad MFIs

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by Richard Rosenberg: Tuesday, March 16, 2010

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Most of us working in microfinance want microloan clients to be paying interest rates that are as low as possible. While we have the same vision, there is disagreement about how to determine whether an interest rate is an appropriate one.

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Some people, including Mohammed Yunus, are worried about the growing commercialization of microfinance, including the entry of profit-motivated owners and managers.  They are concerned, reasonably enough, about possible “mission drift,” especially in the form of interest rates rising to (or staying at) excessive levels. In his book and in many presentations, Professor Yunus offers a straightforward formula for judging MFIs and their objectives:

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• If you’re a real microlender who cares about the poor, then your interest margin (the difference between the rate you charge when lending to your clients and the rate you have to pay when you borrow from your funding sources) should be no more than 10%. That’s the “green zone” where true microlenders operate.
• If your interest margin is 10-15%, a big warning sign is flashing because you’re in the yellow zone.
• Anything above 15% is the red zone, where you’ve left true microcredit behind and joined the loan sharks.

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Unfortunately, when you look at the evidence, this appealingly direct formula turns out to be pretty far off the mark.

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To begin with the conceptual problem, the formula doesn’t allow enough room for legitimate differences in administrative costs among MFIs. For an MFI that makes especially small loans or serves a sparse rural clientele, administrative costs will inevitably be a higher percentage of loan portfolio, and the lion’s share of the interest rate spread goes to cover those costs. Application of the proposed formula could actually discourage outreach by such MFIs to poorer clients.

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But concepts aside, how does the formula match up against actual MFI experience? It turns out that this formula would place most of the world’s MFIs in the red zone—the average interest rate spread for MIX MFIs in 2008 was over 20%.  But to be fair to Prof. Yunus, that shouldn’t end the discussion.  After all, maybe plenty of the MFIs in the MIX are charging their borrowers rates that are way too high.

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Now let’s test the green-yellow-red formula against a group of Grameen-approved MFIs. Christoph Kneiding and I analyzed MIX data on Grameen along with several dozen MFIs that received support from the Grameen Foundation and reported to MIX. In 2007, for instance, 33 MFIs (representing about two-thirds of the Grameen Foundation recipients) reported to the MIX.  The only one in the green zone that year (interest spread below 10%) was Grameen Bank itself. Seven were in the yellow warning zone (10-15%). All the other 25 were up in the red zone (above 15%) and most of them way up in the red zone (between 30 and 55%). The three preceding years looked pretty much the same.

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The proportion of Grameen affiliates in the red zone was about the same as the worldwide proportion: for instance, 75% of all MIX MFIs were in the red zone in 2008, according to a new study by Adrian Gonzalez of MIX. NGOs were more likely to be in the red zone than for-profit MFIs, suggesting that interest spreads may be driven more by the higher costs of smaller loans than by profit maximization objectives. (Average loan size in NGOs is about a third of what it is in for-profit MFIs.)

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Has the Grameen Foundation has been fooled into working with a bunch of red-zone partner MFIs that are wolves in sheep’s clothing? Far from it. The Grameen partner MFIs that look so terrible on the green-yellow-red test actually appear quite strong—in fact, well above average—on indicators normally thought to be associated with commitment to the poor, such as average loan size.  Nor do they appear to be inefficient: they average considerably lower on cost per borrower than the other MFIs in their countries.

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It’s disappointing that simple formulas can’t help much when it comes to appraising things like mission drift or fairness of interest rates. It takes a more complex analysis (see, for example, the CGAP papers on microcredit interest rates and Banco Compartamos).  I hope we see a lot more MFI-by-MFI analysis, in which the reasonableness of interest rates is judged by the reasonableness of the costs and profits that produce those interest rates. We all want to see MFIs charging clients rates that are as low as possible, so we need analytic tools that can do a credible job of separating the sheep from the goats in that regard.

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The Girl Effect: The powerful social and economic change brought about when girls have the opportunity to participate in their society.
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WHY GIRLS?
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Because when adolescent girls in the developing world have a chance, they can be the most powerful force of change for themselves, their families, communities and nations.
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But while those 600 million girls are the most likely agents of change, they are invisible to their societies and the world.
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From the Nike Foundation
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Microfinance Shows Strong Equity Valuations Despite Crisis

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WASHINGTON, March 3 /PRNewswire-USNewswire/ — Sustained demand for microfinance equity, in the face of the worst financial crisis in decades, continued to propel valuations in this sector higher throughout 2009 and the medium-term outlook remains positive, according to a new report by CGAP, a microfinance group based at the World Bank, and J.P. Morgan.
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“Microfinance institutions encountered the harshest market conditions in more than a decade during 2009, with most showing a clear deterioration in asset quality and profitability,” said Xavier Reille of CGAP, co-author of the report. “And yet most MFIs continued to maintain strong reserve and capitalization levels, and investors continued to show faith in the sector.”
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The CGAP/J.P. Morgan report shows that equity valuations continued to rise across all regions in 2009, with MFIs in the private equity market trading at a median of 2.1 times book value – a 62 percent increase since 2007. Public investors significantly increased their commitments to microfinance last year, and the private sector continued to establish new microfinance equity vehicles, including new funds from Blue Orchard, Triodos, and Developing World Markets.
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“The investor community, both public and private, continues to be interested in microfinance, though we think that they are becoming more selective,” said Nick O’Donohoe, Global Head of Research for J.P. Morgan and co-author of the report.
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The relative youth of the microfinance equity market means there are few established performance benchmarks, making assessments difficult. However, the CGAP/J.P. Morgan report is bridging this gap by drawing on analysis of 200 private equity transactions between 2005 and 2009 and trading information on eight publicly-listed low-income financial institutions to assess the strong performance of the microfinance equity market.
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Indian MFIs are continuing to attract the strongest investor interest, comprising 30% of all microfinance equity transactions in 2009. Indeed, equity valuations for Indian MFIs are trading at nearly six times their book value, or three times the global median, a performance the CGAP/J.P. Morgan analysis suggests is not sustainable over the longer term.
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The strength of MFI equity valuations masks the impact of the global financial crisis on the sector. The CGAP/J.P. Morgan report shows that loan portfolio quality began to deteriorate rapidly after January 2009, with past due loans over 30 days jumping to a median of 4.7 percent from 2.2 percent over the first five months of 2009 although it has moderated since then and thus far remained stable in 2010. The effects of the downturn were far from uniform however, with MFIs in South Asia and South America showing few signs of impact, while others in Eastern Europe and Central Asia particularly were more affected. However, very few MFI failures have been reported and most institutions remain well capitalized with equity ratio unchanged in the 18 to 20% range.
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Judging by the performance of listed low-income financial institutions, the most comparable listed vehicles to MFIs, investors believe the sector will emerge from the crisis in good shape. These stocks have strongly outperformed emerging market banks (as measured by the MSCI Emerging Markets Bank Index) and by the end of 2009, had rebounded to pre-crisis levels or new historical peaks.
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The CGAP/J.P. Morgan report argues that the decline in asset quality at MFIs will likely slow, but not curb, growth in their asset base, while placing a focus on improved risk management. Valuations likely will continue to be underpinned by continuing public and commercial sector demand in the medium-term, further buoyed by local bank acquisitions of MFIs and an expected initial public offering by SKS, India’s largest MFI – in 2010.
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About CGAP
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CGAP (The Consultative Group to Assist the Poor) is the world’s leading resource for the advancement of microfinance. CGAP provides the financial industry, governments and investors with objective information, expert opinion, and innovative solutions to effectively expand access to finance for poor people around the world. More information:  www.cgap.org
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About J.P. Morgan
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J.P. Morgan is the investment banking arm of JPMorgan Chase & Co. (NYSE: JPM), a leading global financial services firm with assets of $2.0 trillion and operations in more than 60 countries. JPMorgan Chase is a leader in investment banking, financial services for consumers, small business and commercial banking, financial transaction processing, asset management and private equity. The firm serves millions of consumers in the United States and many of the world’s most prominent corporate, institutional and government clients under its J.P. Morgan and Chase brands. Information about J.P. Morgan is available at www.jpmorgan.com.
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In this paper, the authors, Karel Janda and Barbora Svárovská, first introduce microfinance institutions as an alternative investment instrument. They argue (convincingly) that beside socially responsible features of microfinance, there exists also significant portfolio enhancement opportunity in microfinance investments. Then they provide an overview of possible ways how to evaluate the correlation between microfinance related financial instruments and conventional financial market measures of risk and return.

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This paper is available for download at: http://mpra.ub.uni-muenchen.de/19486/1/MPRA_paper_19486.pdf

Sparking a Savings Revolution

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There’s an old saying about poverty: Give me a fish, and I’ll eat for a day. Give me a fishing rod, and I’ll eat for a lifetime.

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There are many variations in that theme. In Somalia, I heard a darker version: If I buy food, I’ll eat for a day. If I buy a gun, I’ll eat every day.

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But these days, there’s evidence that one of the most effective tools to fight global poverty may be neither a fishing rod nor a gun, but a savings accounts. What we need is a savings revolution.

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Right now, the world’s poor almost never have access to a bank account. Cash sits around and gets spent — and, frankly, often spent badly.
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“We used to buy a three-liter bottle of Coke every day,” recalled Socorro Machado, a 49-year-old homemaker in a village here in northwestern Nicaragua. That was a bit less than a gallon, and the cost of $1.75 consumed a large share of the family’s budget.
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Then Catholic Relief Services, an aid organization, arrived in the village with a new program to promote savings. It provided a wooden box with a padlock and organized savings groups of about 20 people who meet once or twice a month, typically bringing 50 cents or $1 to deposit in the box.
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Some of the money is lent out to start a small business, but the greatest benefit of these programs seems to be that they provide a spur to save.
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“Now we buy a bottle of Coke just once a week, and we put the money in savings,” Ms. Machado said. She saves about $5 a month in her own name and another $5 a month in her son’s name and has plans to buy a computer for him eventually.
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Some people in the development world argue that microlending has been oversold, and there has been a bit of a backlash against it lately — including a “no pago” movement here in Nicaragua. This “don’t pay” effort has been orchestrated by the leftist government of President Daniel Ortega.
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I don’t agree with the criticisms of microloans, for I’ve seen how tiny loans can truly transform people’s lives by giving them the means to start small businesses. Even so, there’s evidence that the most powerful element of microfinance is microsavings, not microloans.
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One of the ugly secrets of global poverty is that a good deal of suffering is caused not only by low incomes but also by bad spending decisions. Research suggests that the world’s poorest families (typically the men in those families) spend about 20 percent of their incomes on a combination of alcohol, cigarettes, prostitution, soft drinks and extravagant festivals.
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In one village here in Nicaragua where children were having to drop out of elementary school because they couldn’t afford notebooks, a midwife, Andrea Machado Garcia, estimated to me that if a man earned $150 working in the mountains as a day laborer during the coffee harvest, he might spend $50 on alcohol and women and bring back $100 to support his family.
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One challenge is that those men don’t have a good, secure way to save money, and neither do poor people generally. It just sits around, itching to be spent. It’s also vulnerable to theft, covetous family members and demands for loans from relatives.
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In West Africa, money collectors called susus operate informal banks but charge an annualized rate of 40 percent on deposits. Yes, you read that right. You pay a 40 percent interest rate on your savings!
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In Kenya, two economists conducted an experiment by paying the fees to open bank accounts for small peddlers. They found that the peddlers who took up the accounts, especially women, enjoyed remarkable gains. Within six months, they were investing 40 percent more in their businesses, typically by buying more goods to be resold.
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Many aid groups including CARE and Oxfam now offer savings programs in some form, and the Bill and Melinda Gates Foundation is studying how best to promote financial services for the poor. A Web site, www.matchsavings.org, lets donors match a poor person’s savings to increase the incentive to build a savings habit.
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So it’s time for a global microsavings movement. Poor countries should ease the regulations (such as requirements for banking licenses) that make it hard for nonprofits to operate microsavings programs.
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Hugh Aprile, a Catholic Relief Services official here, noted that savings schemes are very cheap to start because no capital is used to provide loans. “It’s people using their own money,” he said, “to build far more than they ever thought they could.”
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Maybe it’s hard for us to believe considering how much animus there is toward fat-cat bankers in the United States, but the world’s poor might benefit hugely from the ability to bank their money safely.
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We read this recently from ProCredit’s website and agree with their sentiments and approach. We do not want to minimize nor exaggerate the social impact of microfinance, but want to use it for what it can do best calling upon other approaches and parties to bring their efforts to bear toward poverty alleviation.

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Microfinance and our expectations

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Microfinance has gained an increasingly high profile; the UN’s “International Year of Microcredit” in 2005 and the Nobel Peace Prize awarded to Mohammad Yunus in 2006 attracted considerable media attention. ProCredit Holding consciously chose to make few appearances at the activities surrounding these events. We found the claims and hype regarding what microfinance can achieve to be excessive.

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In principle, we welcome efforts to highlight the challenges and opportunities faced by neglected target groups. We fear, however, that the importance attached to microfinance – presented as the cure-all to eliminate poverty – will raise expectations that cannot be fulfilled. If these expectations are disappointed, the public may be disillusioned and lose interest.

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In contrast to this mostly short-lived rash of activity, we focus on building stable institutions that make vital contributions to building the financial sectors of the countries in which we operate. This long-term orientation calls for patience, tenacity and moderate expectations based on realism.
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Microfinance is hardly the solution to problems of abject poverty. However, a functioning and inclusive financial system makes a contribution to a country’s development. Stimulating and accelerating such processes takes time. It requires stable institutions whose owners take a long-term view and whose staff are well-trained and can win customers’ trust. This is precisely the focus of our efforts.
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