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Articles, papers, etc.

What Is Financial Inclusion?

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More than two billion adults world-wide don’t have bank accounts. Financial inclusion, or the delivery of mainstream financial services at affordable costs, is a step toward fixing this. Photo: Getty

Mobile Banking for the Unbanked – HBS

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Published: June 13, 2011
Author: Carmen Nobel

Executive Summary:

A billion people in developing countries have no need for a savings account–but they do need a financial service that banks compete to provide. The new HBS case Mobile Banking for the Unbanked, written by professor Kash Rangan, is a lesson in understanding the real need of customers. Key concepts include:

  • The case teaches the lesson of meeting your customers’ actual needs, not the needs as you perceive them.
  • WIZZIT offered traditional banking services via mobile phones. M-PESA realized that the target audience did not need traditional banking services, but rather a simple way for workers to transfer money home to their families.
  • The M-PESA service induces carrier loyalty among the Safaricom customers who use the service.

    In many developing countries it’s common for a person to have a mobile phone but not a bank account. In fact, more than 1 billion people fit this description, and the number is only likely to increase. To that end, many companies are considering how to give residents access to banking services via their handsets. The GSM Association predicts that by 2012, nearly 300 million of the previously “unbanked” will be using some form of mobile banking.

    “The mistake a lot of us make is to look at the folks at the base of the pyramid and assume that they must need the same types of services we need.”

    The Harvard Business School case study Mobile Banking for the Unbanked explores two very different examples of mobile financial service models: WIZZIT, a third-party startup that teamed with a major bank to provide standard banking services via mobile access to impoverished residents of South Africa; and M-PESA, an initiative launched by the mobile network operator Safaricom (in conjunction with Vodafone) to offer a new type of financial service to the poor residents of Kenya.

    Ultimately, the more successful of the two, M-PESA, realized that the intended customers didn’t really want bank accounts at all—they wanted effective ways to send money home to their families.

    The case’s key lesson is the importance of meeting the real needs of your target audience, not the needs as you perceive them, says professor V. Kasturi “Kash” Rangan, who authored the case with research associate Katharine Lee and teaches it in his second-year elective course Business at the Base of the Pyramid.

    “The mistake a lot of us make is to look at the folks at the base of the pyramid and assume that they must need the same types of services we need,” Rangan says. “Everybody needs food. We need education, and so do the poor. We need banks, so they must need banks. But that’s the wrong way of approaching it. The ecosystem in which they live is very different from ours. They’re on weekly or even daily wages, and their family circumstances are different. So we’ve really got to dig in and figure out what their real needs are and their pain points.”

    The problem with WIZZIT

    WIZZIT entered the mobile banking market in 2004 because the mobile phone penetration rate in South Africa was almost 100 percent, thanks in large part to the onset of prepaid services that offer low-cost handsets and the opportunity to buy airtime in advance.

    “A subscription model doesn’t appeal to the poor at all,” Rangan says. “They don’t want to pay a fee for something they might not use.”

    Moreover, more than half of South Africa’s population had no access to a bank account. This was largely because half of the population lived below the poverty line, and banks, understandably, were not eager to serve a moneyless customer base.

    “Banks find it an unprofitable proposition to serve people who make less than three dollars per day,” Rangan says.

    Still, WIZZIT’s founders thought there was a noble and viable business model in bringing banking to the poor, via a mobile banking platform that could be used on even the most primitive cell phone. They succeeded in finding an engineer to develop the platform, but quickly ran into a major regulatory roadblock. Per the South African government, only licensed banks were allowed to take deposits. The cost of a license was the equivalent of $34 million—a hefty fee for a startup—and the South African Reserve Bank was wary of issuing new permits. Hence, the WIZZIT execs began searching for an established banking partner. Time and again the top-tier banks turned them down, so the company ended up teaming with a second-tier bank, the South African Bank of Athens.

    “Banks find it an unprofitable proposition to serve people who make less than three dollars per day.”

    By 2009, WIZZIT was not yet profitable. The banking partnership proved problematic in that it was hard for a second-tier bank to compete with its larger brethren, which by 2008 were forced by government mandate to offer low-cost banking options for the poor. But WIZZIT also suffered because the founders failed to recognize the true needs of their target customers.

    “WIZZIT essentially took a banking service like the one we have here—depositing salaries in the bank that we draw down to make payments—and decided that this is what the poor wanted, too,” Rangan says. “Of course the founders were very creative in bringing the costs down dramatically and improving access, so the poor could afford to bank. The problem is that this is not the way that the poor think of money. They hardly have any savings. Their main need is money-transfer.”

    The success of M-PESA

    In many developing countries, including Kenya, most of the population lives in rural areas, but the majority of bank branches and jobs are in the cities. To send money home, a city worker had to seal his wages in an envelope and pay a courier to travel for hours to the village. Alternatively, the worker could travel to the village himself, but that meant paying a hefty percentage of his wages for bus fare, plus a day of lost work.

    Safaricom and Vodafone initially built M-PESA, a money-transfer application that resides on a phone’s SIM card, as a tool for microfinance organizations to collect loan payments. (“M” stands for “mobile,” and “pesa” is the Swahili word for “money.”) But soon after launching the service in 2007, they realized their mistake and quickly repositioned the service with the slogan, “Send Money Home.”

    “The beauty of M-PESA is that they understood a fundamental theorem of marketing: understand what your customers really want,” Rangan says.

    To create a distribution channel, M-PESA franchised thousands of mom-and-pop convenience stores to act as M-PESA agents at their existing places of business, such that customers could transfer money and receive money conveniently.

    In order to use the service, the customer hands his money to the agent, plus a transfer fee (about 40 cents). Through a computerized process secured by multiple passwords and PINs, the agent transfers the payment to the customer’s phone. Rather than hiring a courier or hopping on a bus, the customer simply hits “send” to transfer the money to a family member’s phone.

    “Then, ka-ching! The family member goes to an agent in her village and cashes the money from her phone,” Rangan explains.

    Rangan says his students are generally quick to realize why M-PESA is popular among customers. But they wonder how such an application can also be good for the carriers’ bottom line. After all, the company is not allowed to pay interest on savings or to invest the float, per government orders; Kenya, too, has strict banking regulations. And how much revenue can anyone garner from a 40-cent fee that customers pay once a week, if that?

    “Students first take a look at M-PESA and think, ‘This is CSR [corporate social responsibility]! Where’s the double bottom-line?” Rangan says.

    “Why not harness the power of business to take care of their needs?”

    The answer is in the sheer number of registered M-PESA customers,some nine million as of January 2010. More than $600 billion has been transferred through the service, which has garnered revenues of about $100 million—and would have earned even more were regulations more lenient, Rangan says.

    Perhaps more importantly, the service induces loyalty and additional phone usage. “For Safaricom it’s a profitable opportunity not just because of the fee it makes from the mobile transactions, but because it makes existing customers sticky,” Rangan says. “The company provides an essential service, it is helping the person send money home. He will stay with Safaricom. Plus, as soon as his wife gets the money, what do you think she’s going to do? She’s going to call him on the phone, and that will increase mobile usage!”

    Lessons learned

    Rangan is currently tracking mobile financial services in India, the Philippines, and Indonesia, where several banks are beginning to see the value of such services and, consequently, are entering trial partnerships with mobile operators.

    “It’s not going to be the Nokias, Motorolas, or Microsofts that are going to lead the charge,” he says. “Not even the mobile network operators. It’s going to be the banks because they have the licenses.”

    In teaching the case in class, the goal is not to put the spotlight on mobile banking, but rather to consider the opportunity of serving an enormous underserved population.

    “What I want my students to also take away is to realize that there are 4 billion people on this planet who live on less than five dollars per day,” Rangan says. “If we depend solely on charities and governments to take care of them, we’ll have to wait for centuries before we banish poverty. Why not harness the power of business to take care of their needs?”

    About Faculty in this Article:

    HBS Faculty Member V. Kasturi Rangan

    V. Kasturi Rangan is the Malcolm P. McNair Professor of Marketing at Harvard Business School.

    Microfinance Innovation In Africa

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    Roger Voorhies, ex_CEO for Opportunity International Bank of Malawi, speaks about the success and growth of OIBM, one of the leading MFIs in Africa. He concisely addresses the innovations they made in the field, using customer-centric models for product development to impact the client best.

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    Part 1

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    Part 2

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    Microfinace Beats Blue Chips

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    Editor’s Note: Garrett Wyse co-authored a feature story in the December issue of Microfinance Focus Magazine titled: Microfinance & Philanthropy, the New Realities. The author’s (Garrett Wyse and Jerome Peloquin) predicted that, as a result of the financial crisis, an investment in a developing country would be more secure and more profitable than a traditional “blue chip,” stock. In this follow up piece, “Microfinance Beats Blue Chips” Mr. Wyse demonstrates proof positive of his predictions.

    The report for the fund’s performance dropped into my mail box on Jan 13th. With all the news in the media about various funds performance, the meltdown of various financial instruments markets and the imminent recession in most of the world, I was far from confident about my portfolios performance.

    Shares I had bought a number of years back had been performing exactly according to the funds predictions for the past five years, the length of time I have had the shares. Well to be perfectly honest I only have one share, in a microfinance investment fund called Blue Orchard (even this was in a bit of trouble as the fund is managed on a day to day basis by Dexia the EU bank backed by two governments and with a strong pedigree in banking. Alas they were also feeling the pinch, the government had to help prop up the bank, but my fund within the bank was solid, so there was the chance that the contagion from the toxic debts may overwhelm my fund also. Which would have been a double tragedy, because the ultimate people responsible for paying into my fund and keeping its price up are none other than the poorest people in the world).

    My money is invested in 99 MFI’s in 30 countries from Argentina to Cameroon and Cambodia to Ukraine, and just about everywhere in between. Since the first of Blue Orchards funds’ inception in 1998, the fund managers stated goal was that the fund would return 200 basis points above LIBOR (six months rate), The London Interbank Offered Rate (a combination of a basket of interest rates). LIBOR itself has fallen in recent months and so I was fully aware that my return would fall in line with this, but would it be able to maintain its targeted return? I need not have worried, my 2008 return was, wait for it, 5.67%, the last three years 5.17%, and the last five years 4.99%. The particular fund I have invested in, the Euro denominated one, started in April 2003 has return 27.04% since its inception.

    The Dexia Microcredit fund now invests in MFI’s with over 7.5 million clients let me say that again, 7 and one half million people have access to the funds that I invest, who otherwise would not. In short I am part of a fund facilitating access to credit for up to 7.5 million people at any given time and getting a healthy return annually on that investment, helping people to help themselves and doing very well financially simultaneously.

    The original Dexia fund denominated in US$ has fared even better since its inception in September 1998 returning 5.94% per year over the past five years and 65.36 % since inception. If we consider the performance of investment funds, pension funds and property portfolios over the past year, and likely the next few years then there appears to be a compelling argument for these funds to put their client’s money where it is safest, offers a stable return and has a track record of doing so in the toughest of times.

    Reframing the Poverty Problem

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    Marketing can help address social ills

    Based on the Research of Bobby J. Calder , Richard Kolsky And Maria Flores Letelier

    With billions of people living at the bottom of the income pyramid, some on less than $2.50 a day, the problem of poverty is as widespread as it is pressing. There are nearly as many plans to tackle poverty as there are charitable organizations addressing the problem. But one of the latest is so vastly different that is has some real possibility: What if poverty could be approached as a marketing opportunity rather than a social problem? Bobby Calder and his colleagues argue that it should.

    “Companies often approach issues like poverty as social problems more than as marketing opportunities,” says Calder, a professor of marketing at the Kellogg School of Management, “but the so-called bottom of the pyramid provides a vast marketing opportunity for innovative, socially-minded companies.”

    It is not breakthrough technological innovations that are needed to penetrate such markets, but rather novel marketing approaches that turn social problems on their head, allowing companies to make money while improving people’s lives and helping them rise out of poverty, explain Calder and his co-authors Richard Kolsky, a lecturer at the Kellogg School, and Maria Flores Letelier, a Kellogg School MBA alumnus.

    The so-called bottom of the pyramid provides a vast marketing opportunity for innovative, socially-minded companies.

    Over the past decade, many companies have taken a stand to address social problems such as poverty. Typically, such initiatives unfold in the form of corporate social responsibility (CSR) programs. “CSR programs can take many different forms, but they are all based on the idea to make money while doing good by engaging in altruistic initiatives” Calder says. Thus, most of the time CSR programs are executed with a hands-off approach, by simply providing monetary funding to socially worthy initiatives such as Pepsi’s Refresh Project. Less frequently, CSR practices are embedded in a company’s core business operations, such as Nike’s audits of contract factories overseas. Either way, CSR programs typically operate only on the sidelines of a company’s business.

    “By actually changing its business model,” Calder argues, “a company can bring CSR initiatives to the next level,” opening up markets where price, distribution challenges, or other barriers have made entry difficult if not impossible. Most CSR programs are executed in a top-down way, whereby a company offers a standardized solution to a social problem without altering its business model. However, by marketing to the bottom of the income pyramid like any other promising sector, companies can create new consumers which in turn allows for profit and improves people’s standard of living.

    Patrimonio Hoy
    Cemex, a Mexican cement manufacturer with a $15 billion market capitalization, developed an innovative CSR program named Patrimonio Hoy (Patrimony Today). The program aims to reduce the Mexican housing deficit—which has left more than twenty million people with inadequate shelter—while also benefiting CEMEX by stimulating consumer demand for housing materials in the low-income urban slums of Mexico. The families in these communities generally cannot afford to build a house all at once, but rather construct their own homes piecemeal by adding a room at a time.

    At first CEMEX attempted to market smaller bags of cement to low-income urban families as a more affordable solution. When the product failed to catch on, CEMEX realized that it needed to drastically rethink its business model, rather than its products. To do so, it needed to understand not only how people were living but also how they thought about construction. For more than a year, CEMEX employees and consultants immersed themselves in the urban slum of Mesa Colorada in the state of Jalisco, where they converted a tortilla shop into a garden office and conducted a series of learning experiments and in-depth interviews.

    They discovered that a significant barrier to building homes in the area to building was the inability to save enough money to collect all of the materials required. The families explained that committing to long-term projects was difficult because of unstable employment in the area. They would “rather not tempt fate” by undertaking a large financial commitment. Moreover, even when they tried to purchase construction materials, Patrimonio Hoy participants had nowhere to store them. Theft is common in such impoverished neighborhoods, and weather conditions often spoil the products before they can be used.

    Additionally, some residents acknowledged that even when they received larger sums of money, such as year-end bonuses, they often spent the money preparing for festive celebrations or other, more immediately gratifying things.

    The ultimate barrier to home construction, however, seemed to reside in one of the most deeply rooted values of these people: their communal culture. Given their traditional values involving tight communal relationships between extended family members and friendship circles, the families generally thought first of using their money for more social activities. CEMEX came to understand that this cultural barrier was the key to changing people’s attitudes toward home construction.

    Reframing the Task of Homebuilding
    CEMEX recognized the practical and cultural barriers that were preventing families from building homes and developed their business model accordingly. The company framed the goal of building a home as building a sturdy, long-lasting patrimony that can be passed down to the next generation. To create a sense of partnership in the construction process, CEMEX organized low-income families into self-financing cells where members were able to share frustrations and successes with other members of the community while at the same time receiving much needed social support. Finally, to overcome the practical barriers, CEMEX implemented a structured system that provided both products and expertise, allowing families to quickly add a room.

    Participants in Patrimonio Hoy pay about $14 a week for seventy weeks. They receive consultations with CEMEX architects and scheduled deliveries of materials that coincide with the building phases. All building material prices are kept stable for the life of the project. This shields consumers from sudden price hikes and supply shortages that are common in free markets. Moreover, if work becomes scarce, consumers can store their materials in a secure CEMEX facility. Consumers found that the program enabled them to build homes more cheaply and three times faster than they could on their own. Thus far, more than 70,000 Mexican families have completed their projects.

    CEMEX’s success can be partly attributed to their novel approach. “The process involved complete immersion into the community’s culture so that the company could develop an understanding of the population from the inside out, rather than the other way around,” Calder says. Setting up shop in their target market brought to light the reasons why conventional marketing approaches had failed in the area. Calder and his co-authors conclude that if companies can market to the bottom of the income pyramid in ways that reflect the culture and values of their audience, the companies will be rewarded with new markets and new consumers.

    Related content:

    Interview with Professor Bobby Calder:  Reframing the Poverty Problem. Download Audio Interview (MP3).

    Serb, Chris. 2010. Leading the Field. Thoroughly revised for 2010, the second edition of Kellogg on Marketing offers the latest insights from the discipline’s top thinkers. Kellogg School of Management Web page, August 14.

    Money For Good: $120 Billion Impact Investing Market Opportunity

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    By Hope Neighbor

    HopeOn 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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    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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    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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    Richard Rosenberg on the Compartamos Controversy

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    Richard Rosenberg, consultant to CGAP, speaks about the spectacular success and controversy around the IPO of Compartamos, one of the leading MFIs in Latin America. He concisely addresses the core issues of their transformation from a NGO to a for-profit and the impact of the IPO.  Upon a thorough review of the facts and reflection, the Compartamos case reveals the potency of the for-profit model  in delivering the most value to all stakeholders, individually and as a whole.

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    Part 1

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    Part 2

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    Part 3

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

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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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