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Helping the poor just got popular

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Helping the poor just got popular

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By Sophia Grene,  Published: November 8 2009, Financial Times

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Since Muhammad Yunus won the Nobel prize in 2006 along with the Grameen Bank he founded for the poverty-bound entrepreneurs of Bangladesh, microfinance has entered the consciousness of the investment community.

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The concept of lending small amounts to very poor women, each borrower part of a group that is jointly responsible for repayment, has been extended and modified as it moved to different economies with other requirements. The common thread is providing relatively small loans to people who would otherwise not have banking facilities.

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While the original concept was all about lending a helping hand to lift people out of poverty, the inevitable result of the structure was that investors would see it as an opportunity.

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Grameen Bank itself cannot look for investment from outside Bangladesh for legal reasons, but a myriad of other microfinance institutions are not so bound and globally some $7bn (£4.2bn, €4.7bn) is invested in MFIs. An equivalent amount is committed by donation, but the invested money is expected to be repaid with interest.

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More than half of this money is from development finance institutions – state-led banks with a mandate to focus on poverty alleviation – but the rest comes from the private sector, institutional and retail investors hoping to get a return on their money.

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Triodos Investment Management has a retail fund with a track record going back six years, giving investors an annual return between 6 and 9 per cent. Last year, with the global financial system collapsing round our ears, the fund returned 7.5 per cent.

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This lack of correlation with the rest of the financial world is one reason for investors to put their money into microfinance, but it seems not to be the main one.

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“For retail investors, it’s the social aspect – in general they are not looking for the highest financial return,” says Marilou van Golstein Brouwers, managing director of Triodos Investment Management.

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“Institutional investors have to care more about return because of their fiduciary duties, but they are increasingly looking to invest some or all of their portfolios responsibly.”

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Asad Mahmood, who runs a social investment unit at Deutsche Bank, agrees. “You have to understand the duality of purpose. It is not a philanthropic effort, but nor is it wholly commercial. It is a new hybrid,” he says. Institutional investors, he suggests, come to the asset class with an enthusiasm for doing good, enabled to do so while fulfilling their fiduciary duty by the potential returns.

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Those returns are not all as straightforward as those of the Triodos fund. Mr Mahmood says he is just about to close a fund with several layers of debt- holders. The interest on senior debt – which gets paid out first – is 7 per cent, not to be sniffed at in the prevailing low interest rate environment. Investors prepared to take more risk can opt for a tranche of the investment paying 16 per cent, provided the underlying loan portfolio has a sufficient yield. This seems like a substantial profit to make out of lending to the poor, and Mr Mahmood is conscious of the dangers.

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“If you are providing financing to the poor and your only motivation is maximising profit, pretty soon there will be abuse.” He cites examples like the subprime mortgage brokers who foisted unaffordable mortgages on house buyers to generate commission for themselves.

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“As the industry grows, you will have differently motivated investors coming in. Some people will be interested in the low correlation, which is fine, but I don’t want people who are solely concerned with profit maximising to come in.”

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Nevertheless, pension funds have committed about $3bn to the asset class, according to a recent report from the World Microfinance Forum. Dutch pension funds PGGM and ABP have led the way with allocations of €200m and €180m respectively.

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The global financial crisis has not had a huge impact on the levels of investment in microfinance, according to research from Intellecap that appeared in specialist magazine Microfinance Insight earlier this year. What has changed is the form of the investment.

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Private equity microfinance investment is a growing sector. When global liquidity dried up, “the spread for debt financing was incredible”, says Mr Mahmood. “Equity financing was easier to raise.” According to further research from Intellecap, private equity investors have seen recent developments as much in the light of an opportunity in microfinance as a problem. Low valuations of the existing institutions and the low correlation of returns on microfinance with the global economic system make it an attractive proposition.

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Triodos’s fund is one-third equity, with the rest in debt.

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Microfinance is not immune to criticism. For many, it has strayed too far from Mr Yunus’s original idea of social lending; many microfinance institutions in eastern Europe and Latin America lend to established businesses, becoming essentially indistinguishable from traditional banks in the small and medium-sized enterprise sector.

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Others are uncomfortable with the idea of charging what can seem like punitively high interest rates to poor borrowers – microfinance is resource-intensive as lending has to be informed by detailed understanding of borrowers’ ability to pay in relatively informal economies.

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Still others see it as simply too small to make a difference – less than $15bn of capital globally is not going to change the world. But for investors who want to do something socially useful with their money, it looks set to remain an attractive option.

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Copyright The Financial Times Limited 2009.

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