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Investing In Inclusion: How To Deliver Financial Services To The World’s Poor – Forbes

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Editor’s Note: Michael Schlein brings more than 25 years of experience in international banking, management, and public service to his role as president and chief executive officer of Accion. Previously he served in senior executive roles at Citibank and the US Securities and Exchange Commission.

Modern financial markets exclude billions of the world’s poor. That’s a failure of those markets—and a failure of imagination. A more financially inclusive world would give billions of people living in poverty access to a full range of important financial services, yielding a high rate of return by economic, social, and societal measures. The challenge is how to achieve this in a responsible, sustainable way that provides the greatest number of people with the financial tools they need to improve their lives in the shortest amount of time.

That is precisely the mission of Accion, a global nonprofit dedicated to creating a financially inclusive world. We operate in poor communities throughout Latin America, Africa, India, and China and see firsthand how these services help transform lives, create opportunities, and build stronger, more resilient communities.

As nonprofits, Accion and our peers can take chances that the private sector cannot. Over our 50-year history, we have helped build 64 microfinance institutions in 32 countries that today serve millions. In the last few years alone, we have supported institutions in rural communities such as the Amazon and Inner Mongolia and expanded the array of financial services for the poor beyond credit to savings, insurance, and payments.

One point is clear: philanthropy, though critically important, is insufficient to achieve full financial inclusion. We need to harness the capital markets and create institutions that deliver both social and financial returns. Though we are a nonprofit, we work to build sustainable, scalable, for-profit companies dedicated to serving the financial needs of society’s most vulnerable members: those living in poverty.

Today, traditional lending institutions largely ignore the poor. And some nonprofit organizations discount the for-profit motives of the private sector, seeing them as exploitative and off-mission. Neither view is accurate. In fact, for-profit microfinance is sustainable, scalable, and socially progressive—complementing nonprofit services and creating an entire industry of institutions that can compete for clients, expand access, and accelerate innovation.

Twenty years ago, Accion helped create Bolivia’s BancoSol, which today is one of the world’s best-known microfinance institutions. Its creation as a commercial institution dedicated solely to serving the poor was controversial, unprecedented—and a rousing triumph. As the world’s first for-profit bank dedicated to serving the poor, BancoSol tapped the debt and equity markets, attracting both foreign investment and expertise. It focused on strong management and operations, better governance, innovation, and improved responsiveness to clients. To date, BancoSol has loaned more than $2 billion to more than 1.5 million clients. It has a 90 percent client-retention rate and a 99 percent repayment rate. Its success has spurred competition and innovation in what is now one of the most robust microfinance markets in the world.

Accion also helped build Peru’s Mibanco, which launched in 1998. Today Mibanco has more than 400,000 active borrowers and more than 100 locations throughout the country. Mexico’s Compartamos Banco, in which Accion was a major founding investor, is equally impressive. Its operations grew so quickly and efficiently that, in 2007, it launched an initial public offering with a monumental response. Thousands of other microfinance institutions were inspired by Compartamos’ success, which in turn creates more competition and better services for the poor.

Accion is proud to have helped launch and grow these pioneering institutions, which are models for the world and whose collective outreach has brought financial services to millions who would otherwise be left out.

For-profit microfinance is also promising for investors. Take Accion Investments in Microfinance (AIM), a for-profit equity fund created in 2003 to provide capital to microfinance institutions (MFIs) working in challenging markets where such funding was typically unavailable. AIM was designed as a “double bottom line” equity fund, one that measured success in both profitability and social impact.

Over the past decade, AIM has produced annual returns of nearly 16 percent, making it one of the most successful microfinance equity funds ever. In the process, it helped build some of the strongest MFIs in the world, including BancoSol, Mibanco, and the Accion Microfinance Bank—the leading microfinance bank in Nigeria. Before AIM’s investments, those institutions collectively served a total of 386,000 borrowers and 245,000 depositors. Today, they reach almost 1 million borrowers and 1.2 million depositors who might otherwise have no access to financial services.

The future of financial inclusion goes beyond traditional microfinance. We also embrace venture capital and technical assistance for start-ups, with bold, disruptive business models aimed at helping those living in poverty. For example, Accion is investing in companies such as DemystData, which leverages big data—huge sources of information that can be analyzed to help financial institutions broaden their outreach to poorer clients. Others, like Tiaxa, use mobile technology to make small “nano” loans over the phone, which can help reach people living in remote communities. Still others are pushing the boundaries of inclusion, offering financial products such as life insurance to South Africans living with HIV/AIDS—an idea that was unthinkable just a few years ago.

Although it is still too early to determine the impact of these brand-new companies, they have the potential to have a significant impact on the lives of our clients. We need to invest in more fast-moving, innovative ideas like these. Although the financial-inclusion movement is rapidly evolving, it remains young and has much to learn. Growing pains are normal, but they must be addressed head on to strengthen the industry and inspire the next generation of institutions that will create greater opportunities for the poor.

Accion’s Center for Financial Inclusion is a good start. It brings together industry players to tackle common challenges and create the conditions to achieve full financial inclusion on a global scale. For example, the center’s Smart Campaign promotes the protection of clients through greater transparency, prevention from overindebtedness, and the provision of means to address concerns. In just three years, its client-protection principles have been endorsed by more than 1,000 microfinance institutions in 130 countries representing more than 60 million clients.

By building competitive, commercially viable financial institutions that provide a healthy return on capital and by taking bold risks and investing in innovative ways to expand financial services to the poor, Accion and our partners are spurring new opportunities and sustainable progress throughout the developing world, and helping to bring billions more into the global economy. That is how change happens!

This article is part of “The Art and Science of Delivery,” an anthology of essays published by McKinsey & Company in honor of the 10th Anniversary of the Skoll World Forum. It is the most recent installment of McKinsey’s ongoing series, Voices on Society, which convenes leading thinkers on social topics. (Copyright (c) 2013 McKinsey & Company. All rights reserved. Reprinted by permission)

Impact Investing Helps Advisors Stay Ahead Of The Curve – FA

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MARCH 20, 2013 • TIM FREUNDLICH

Financial advisors take note: your impact investing offerings will soon define whether you are ahead of the curve or whether you will be trying to catch up in years to come. JP Morgan’s recent Perspectives on Progress report, released in partnership with the Global Impact Investing Network (GIIN), found that impact investing among the fund managers interviewed will grow 12.5 percent to reach $9 billion in 2013.

But it’s just the sector’s expected growth that’s important, it’s how the shifting mindset of clients is already changing the landscape for financial advisors.

Last year’s Gateways to Impact survey of financial advisors found that nearly half of them already have clients engaged in sustainable investing, while 72% of advisors expressed interest in recommending sustainable investments to their clients.

“We’ve seen firsthand the growing interest in investments that have both financial and social ROI,” says Kathy Leonard, a financial advisor with UBS Financial Services and head of the Boulder, Colo.-based Leonard Social Investment Group,. “Impact investing has emerged as the dominant global trend that will drive future financial market opportunities.”

While the term “impact investing” is relatively new, it’s based on more than 40 years of evolution in socially responsible investing. Impact investments are investments made into organizations and funds that generate measurable social and environmental impact as well as financial returns.

Going beyond the definition, impact investing is about investor intention to create real and measurable positive outcomes for the world. As individuals seek “blended value” investment options that combine economic and social value creation, and as fund managers develop track records that support the claim of a range of positive outcomes including––but not limited to––market rate returns, impact investing is poised to attract significant capital going forward.

To successfully direct a portfolio of investments to achieve its full potential, investors must do two things:

• First, they and their wealth managers must reconceive the overall investment strategy to allow for consideration of more than just financial performance.

• Second, investors need a more comprehensive understanding of, and access to, the array of investment instruments available to them to construct their portfolios.

For financial advisors who are ready to incorporate impact investing, here are some tactical ways to get started:

Become more knowledgeable about the field. Several resources are readily available, including:

• The Global Impact Investing Network (GIIN) is a nonprofit organization dedicated to increasing the scale and effectiveness of impact investing. Their website includes an online impact investing resource center that features research, news clippings, events, useful links, and GIIN publications about impact investing.

• The ImpactAssets 50 is a screened roster of private debt and equity fund managers offering impact investment strategies across a variety of asset classes, issue areas, and geographic areas. The IA 50 is available online at www.impactassets.org and focuses on filtering for track record and commitment to impact investing at the firm level and is a starting place for investors and their advisors who are looking for credible firms across thematic areas of impact investing.

• Impact Investing: Transforming How We Make Money While Making a Difference, co-authored by Jed Emerson and Antony Bugg-Levine, is the first book on the topic of impact investing and charts the growth of the field while explaining the “blended value” proposition for investors, funders, and entrepreneurs.

Know what is available to your clients:

• Find out if your firm offers sustainable investment products. These may be ESG (environmental, social, governance) or socially responsible mutual funds, community development bond funds, or Calvert Foundation’s Community Investment Note.

• Identify a community development bank in your area. Using these institutions for basic checking and savings can be an easy first step to put a client’s money to work for positive local impact.

• For clients with philanthropic capacity, there are donor-advised funds such as ImpactAssets’ Giving Fund that specialize in impact investing and offer a range of private debt and equity impact investment options. These funds interface directly with financial advisors, allowing them to maintain management of assets.

• Talk to peers who have been helping clients incorporate impact investing into their portfolios and learn from their experiences.

Talk with your clients:

• By asking your clients about their interests and overall portfolio objectives you can determine if impact investing is a good fit and if so, what kinds of products will align with their interests.

• Discuss your client’s comfort with liquidity or lack thereof, intended impact area and/or geographic focus, and their expected risk and return to help narrow the field of appropriate impact investments.

Rather than investing capital for simple financial returns, an investor engaged in pursuit of multiple returns will need to be directly involved in working with his or her asset managers to ensure that their portfolio reflects the desired impact strategies. And asset managers and advisors will increasingly provide leadership to their clients in constructing solutions that meet this appetite.

Impact investment approaches are gaining momentum and will be the baseline for the next generation of investors. This year that will see impact investing expand beyond high-net-worth investors and have a greater presence among mainstream retail investors.

Financial advisors who are receptive and informed when clients seek a broader definition of ROI will be positioned to take advantage of this growing market opportunity and will go a long way in ‘future proofing’ their client relationships.

 

Tim Freundlich is president of ImpactAssets, a nonprofit financial services firm that increases the flow of capital into investments that deliver financial, social and environmental returns. Its impact investment strategies, donor-advised fund and knowledge resources provide a dynamic platform for wealth managers and the clients they serve to advance social or environmental change through investment. ImpactAssets seeks to shed light on—and drive capital to—the field’s most promising organizations and initiatives, helping to build the field of impact investing.

 

http://www.fa-mag.com/news/impact-investing-helps-advisors-stay-ahead-of-the-curve-13694.html

Grameen Koota raises $10 million USD (or 532 million INR) in its 3rd round of equity funding lead by Creation Investments

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Grameen Koota raises $10 million USD (or 532 million INR)
in its 3rd round of equity funding lead by Creation Investments

February 27, 2013 – Bangalore, India: Grameen Financial Services Pvt Ltd (GFSPL), popularly know as Grameen Koota today announced its third round of equity funding of $10 million USD (or 532 million INR) lead by Creation  Investments Capital Management (Creation Investments Social Ventures Fund II, L.P. USA.  Two current investors also invested in this round – Incofin Investment Management (IIM Impulse 2, Mauritius) and MicroVentures (MVHS.p.a, Italy and MV SICAR, Luxembourg).

GFSPL has been working with poor and low-income households for the past 13 years and has provided these households with diverse financial and developmental services that caters to all life-cycle needs of its over 350,000 clients spread across three states of Karnataka, Maharashtra and Tamil Nadu. The equity  funding comes close at the heels of the instiution receiving $3.9 million USD (or 210 million INR) in debt funding through unsecured, redeemable, non-convertible debentures (NCDs) from Global Commercial Microfinance Consortium II B.V., Netherlands, a fund managed by Deutsche Bank.

Speaking on the new equity infusion, GFSPL Managing Director Suresh Krishna, said “The newly infused funding will add to the growth of the company and help Grameen Koota achieve its target of reaching out to over 10 lakh poor and low income households.  The capital will also strengthen our vision towards extending and expanding our loan operations to other neighbouring states.”

GFSPL understands that micro-lending cannot happen in isolation and therefore has rigourously engaged in social development activities including entrepreneurial education, health, sanitation, etc. Commenting on the equity raised, Founder-Chairperson, GFSPL  Vinatha Reddy,  added “Ours has been a constant endevour towards being a well run MFI with a firm social purpose and we are happy that existing investors have reposed their faith in Grameen Koota’s work by increasing their stake, as we welcome Creation Investments, our new investor. ”

For Creation Investments, the equity funding is just the beginning of a long relationship with GFSPL. Speaking about the capital infusion, Creation Investments co-founder/director Ken Vander Weele said  “We are excited in partnering with a leading MFI like Grameen Koota that has brought about innovative loan products and are constantly evolving themselves to cater to the financial needs of the poor in India.“

Paolo Brichetti, Chairman of MicroVentures, a veteran in the social capital investment space in developing countries such as India, believes that the equity raised will only benefit the company and further enhance its activities towards accomplishing its  vision. He said, “Our relationship with Grameen Koota has deepened a further notch and we are glad that we continue to back an MFI like Grameen Koota that continues to remain a benchmark within the Indian Microfinance sector.”

Speaking on the follow-on investment in GFSPL, Aditya Bhandari (Regional Director, Incofin South Asia) stated “Grameen Koota’s instant brand recall amongst clients and its strong focus on client relationship makes it as one of the best MFIs in the world. We are excited to once-again support GFSPL in its vision to create long term sustainable value for all stakeholders (clients included).”

About Grameen Financial Services Private Limited:

Grameen Financial Services Private Limited (GFSPL), a microfinance institutions headquartered in Bangalore, popularly known as Grameen Koota has over 350,000 clients with 1300 employees working out from 168 branches in Karnataka, Maharashtra and Tamil Nadu. It had loan outstanding of about $84 million USD (or 4.5 billion INR). Being socially focused Microfinance Institutions; Grameen Koota has over a decade of experience in micro lending towards Joint Liability Groups formed exclusively of women from poor and low income households with other support products like Water, Sanitation, Health Care, Energy Efficient Cook Stove etc. For more information, visit www.gfspl.in

About Creation Investments Capital Management

Creation Investments is an alternative investment management company with over $100 million in assets under management. Named a leading Impact Investment fund manager by ImpactAssets50 in 2011, Creation Investments Capital Management, LLC currently manages 4b Capital Fund A, L3C, Creation Investments Social Ventures Fund I, and Creation Investments Social Ventures Fund II, with a focus on private equity and control equity investments in Microfinance Institutions, Small-and-Medium Enterprise lenders, BOP Financial Services Providers, and other Social Ventures in emerging markets seeking to maximize financial and social returns on investment. Investments in microfinance and social ventures create opportunities through access to capital and needed products and services for those living in poverty to engage in small-business activity, income generation, and significantly impact those living at the bottom of the economic pyramid.

About MicroVentures

The MicroVentures initiative was started-up in Italy by a group of private social entrepreneurs with previous experience in the field of social venture capital and business cooperation with the Developing Countries. The initiative has gradually expanded into an international network of affiliates, which includes the Bangalore-based MicroVentures India (specialized in providing debt to indian MFIs), Bina Artha Indonesia and  MicroVentures Investments SICAR, a specialized investments fund based in Luxembourg, which provides equity  and debt financing to promising Microfinance Institutions in Asia and Latin America.

About Incofin Investment Management

Incofin Investment Management (www.incofin.com) is a specialized fund management company with more than 10 years of experience in microfinance and currently more than 350 M EUR assets under management. Incofin IM manages the following funds and facilities: Incofin CVSO (40 M EUR), Impulse (46 M EUR), Volksvermogen (10 M EUR), VDK (75 M EUR), Rural Impulse Fund I (30 M EUR), Rural Impulse Fund II (120 M EUR), BIO (10 M EUR) and Fair trade Access Fund (20 M EUR). Investors are mainly Western Europe and US based, including ~50% public investors (DFIs such as IFC, KfW, EIB, FMO, BIO etc) and ~50% private (institutional investors such as banks, pension funds etc). The total investment portfolio includes over 100 MFIs in more than 44 countries around the world. Incofin IM has a strong track record, having executed more than 566 transactions since 2003.

 

http://in.reuters.com/article/2013/03/06/grameen-koota-raises-10m-round-led-by-cr-idINDEE92504P20130306

 

http://www.legallyindia.com/201303043483/Private-equity-/-VC/tatva-jsa-on-us-social-vc-s-7m-pe-in-indian-mfi-grameen

 

http://www.ivcpost.com/articles/6926/20130306/grameen-koota.htm

 

http://www.thehindubusinessline.com/companies/grameen-koota-raises-rs-5320-cr-equity-fund/article4482251.ece

 

http://www.thehindubusinessline.com/industry-and-economy/banking/grameen-koota-raises-over-rs-53-cr-in-third-round-of-funding/article4479058.ece

 

http://articles.economictimes.indiatimes.com/2013-03-05/news/37469982_1_incofin-grameen-koota-microfinance-firm

 

http://www.altassets.net/private-equity-news/by-news-type/deal-news/creation-investments-leads-10m-grameen-equity-financing.html

 

http://blogs.ft.com/beyond-brics/2013/03/08/india-hint-of-recovery-in-microfinance/#axzz2N14VCTtL

Making a profit from making a difference – FT.com

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August 5, 2012 5:40 am

Making a profit from making a difference

By Sophia Grene

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Copyright The Financial Times Limited 2012.

Notre Dame, MIT Economists Demonstrate Wage Impacts of Large Microfinance Program

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JULY 20, 2012 BY  LEAVE A COMMENT

Fonkoze Credit Center – Participants in Chemen Lavi Miyó, a program offered by Fonkoze (a microfinance organization). The participants meet twice a week in Mirebalais, Haiti, to learn basic life skills. Photographer: Laura Elizabeth Poh

A major argument in favor of microfinance is that the poor who live in areas without banking services will gain higher returns on investments and increase their assets when provided with credit.

But a notable new study from the Consortium on Financial Systems and Poverty presents some of the first real evidence of microfinance impacts and indicates that the true returns of expanding access to credit are much more complex. Some of the greatest benefits to alleviating poverty, the study suggests, may be in the impact the programs have on driving up wages.

The research, by economists Joseph P. Kaboski of the University of Notre Dame and Robert M. Townsend of the Massachusetts Institute of Technology, examined changes in behavior resulting from the Thai Million Baht Fund. This initiative by the government in Thailand transferred one million Thai baht (about $24,000 at the time) to each of 77,000 villages throughout the country. The goal was to increase available credit and stimulate the economy. The findings were published earlier this year in the journal Applied Economics.

The CFSP study found that the village fund had the desired effect of increasing overall credit in the economy, and, in fact, in the long run, the program led to an overall expansion of credit. More significant, the authors argue, is that that wages increased by approximately 7% in a typically-sized village during the first two years that were tracked.

“This paper is the first real evidence we have on wage impacts of microfinance,” notes Kaboski. “The impact on wages is important in terms of the potential of microfinance as a poverty reduction program. Only a relatively small fraction of the poor want to borrow from microfinance, but a much greater share of the poor work, and might therefore benefit indirectly from an increase in wages. We are far from understanding the mechanisms, but there is great potential here.”

The authors suggest that the wage impacts may be because the fund led to a more efficient distribution of capital to entrepreneurs, which then increased the demand for labor. The study recorded that the wages increased for general non-agricultural labor, such as construction in the villages, but not for professional occupations or occupations outside of the village.

Additionally, the study showed, other effects of the injection of credit were more short-lived, including a notable jump in consumption, and increases in borrowing, business and labor income, and investment in agriculture.

The authors report that further examination of the data is underway. Their findings are based on an economic model they developed, using data captured as part of the Townsend Thai Data project, a monthly household panel survey that Townsend has led since 1997.

The paper, “The Impacts of Credit on Village Economies,” was published in the journal Applied Economics earlier this year.

Source: AAAS EurekAlert

Photo:  Bread for the World 

http://greenbuildingelements.com (http://s.tt/1iuIn)

Using Small Loans to Generate Big Profits – Microlending Drives One of Africa’s Most Ambitious Banks – WSJ.com

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By SOLOMON MOORE

NAIROBI, Kenya—At a recent group-lending meeting in the Kawangware slum, about 10 miles from downtown, Jackson Munyovi sought $350 to build a new shanty for his wife and two children.

 

image

Nichole Sobecki for The Wall Street JournalJackson Munyovi borrowed $350 to build a new shanty for his two children and wife.

The 31-year-old welder asked fellow church congregants and friends to co-sign a loan to finance building materials. A church deacon vouched for the borrower’s assets, including a few metal-shop machines and his marital bed, and Mr. Munyovi promised to repay the loan in six months, plus 8% interest.

And with that, Equity Bank Group—one of Africa’s most ambitious banks—snagged another customer.

The Kenyan bank has enjoyed a booming business lending to people with little collateral beyond the potential disgrace of letting friends down. Equity executives aren’t shy about a business model that leverages societal mores and shame—often the strongest collateral to be found on a continent where formal credit records are scarce beyond the biggest cities.

“If a woman secures a mortgage with her matrimonial bed, she will never default,” declares Chief Executive Officer James Mwangi. “And other women will support her just to ensure that that matrimonial bed is not removed when the husband is not there. Here, social relationships are more valuable than economic relationships.”

In this field, known as microlending, Equity executives say their main competition isn’t other banks—it is the bedroom mattresses where many Africans store their savings. Nearly 90% of Equity’s customers are first-time bank clients, Mr. Mwangi said.

The unbanked represent about 80% of Africa’s adult population, or 326 million people, according to banking-industry estimates. Most of those people are employed in Africa’s massive informal sector—a term describing an untaxed, unregulated part of the economy.

Among African microfinance institutions, both public and private, performance has lagged behind similar lending organizations elsewhere, according to a recent study by the Consultative Group to Assist the Poor, a microfinance-policy-research group supported by the World Bank. Only 25 African microfinance institutions have assets greater than $30 million, compared with Latin America and the Caribbean with 105 institutions and 62 in Europe and Central Asia.

Leveraging Friends in Kenya’s Slums

Nichole Sobecki for The Wall Street JournalWorkers take a break at Jackson Munyovi’s metal shop.

Other Kenyan banks, particularly Kenya Commercial Bank, also are expanding their customer bases by targeting small borrowers in the informal economy, but none have caught up with Equity, which pioneered the idea of signing the unbanked in Kenya and fortified its position with the nation’s largest network of storefront banking agents.

That leaves Equity with few competitors in Africa and none that can match its scale.

The bank started out as Equity Building Society in 1984, a mortgage financier for low-income Kenyans. The company nearly collapsed by the 1990s due to management shortcomings, a downturn in the nation’s banking sector and nonperforming loans topping 54% of its portfolio.

Mr. Mwangi joined the bank in 1993 after working for Ernst & Young and Trade Bank, a now-defunct Kenyan bank, and was its chief executive officer by 2004. He is credited with fashioning its microlending strategy and steering it toward profitability by targeting individuals with deposits of less than $200 and little collateral beyond the willingness of friends and neighbors to vouch for them.

For the bank, amorphous social relationships that bind communities—church and mosque associations, tribal and familial relationships, company and school affiliations—became a hard asset.

In their lending decisions, executives used a hybrid approach that combines hard-nosed cultural analysis with microlending techniques. Such methods are common at nonprofit institutions, but Equity has used them to make money.

In 2011, pretax profit surged 42% to $150 million, making it Kenya’s second-most profitable bank after Kenya Commercial Bank. About a third of Equity’s loans in 2011 were noncollateralized payday advances for as little as $12 for civil servants who agreed to repay the loans with 10% interest taken out of their next paycheck.

An additional 11% of Equity’s loans were to small enterprises such as fruit stands, used-clothing racks and hair salons. Collateral can include anything from furniture, household appliances or the business’s assets.

Upon repayment, borrowers can qualify for loans of $590 and then $886 to be paid over the same term. The final step for new borrowers is a $1,200 loan to be paid within a year.

Godfrey Chege is one such customer: He received a loan for almost $1,200 from Equity to expand his chicken-selling business. He and his wife pledged their bed as collateral.

Eighteen months after Equity opened an office in Kibera, one of the world’s largest slums, the branch had more than 15,000 clients, according to Francis Mbindyo, a manager of the recently opened Kibera branch.

Customer lines at other Equity bank branches often snake out the front door. Mr. Mbindyo says borrowers must also be part of a loan group of at least a dozen people willing to be co-signers.

Nonperforming loans accounted for 2.7% of Equity’s total portfolio, according to the company’s most recent quarterly statement.

For 88% of Equity’s customers, the bank was the first bank at which they ever opened an account, and more than three-quarters of Equity’s loans are unsecured by collateral.

Equity also uses an agency model in Kenya, paying commissions to storefront operators who act as remote bank tellers in rural areas. The bank had nearly 4,000 agency locations in March 2012, compared with 875 at the beginning of 2011. One-fifth of Equity’s cash transactions are done through agents, according to company statements.

Equity is also expanding regionally. The bank has opened a total of 51 branches in Uganda, South Sudan and, most recently, in Rwanda and Tanzania. Those forays were preceded by yearlong executive-training programs for local staff, said Mr. Mwangi.

“We want to be an international bank that is a local bank in every community,” he said.

Fruit farmer Thomas Kimote’s first Equity loan was for about $200 four years ago. He used the money to expand his operation and he now supplies several of Kenya’s largest grocery stores.

“I am more of distributor now,” said Mr. Kimote.

Mr. Mbindyo, Equity’s Kibera branch manager, said that Mr. Kimote’s business had resulted in other customers for the bank, including his suppliers, his drivers and others linked to his enterprise.

A version of this article appeared July 23, 2012, on page C1 in the U.S. edition of The Wall Street Journal, with the headline: Finding Big Profits In Many Little Loans.

LEAP Zones: A Legal, Economic, Administrative and Political Framework for Free Cities

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Mark Klugmann

April 20, 2012 | Universidad Francisco Marroquín | 10 min
Click here to watch the video. An excellent session on the importance of legal, administrative and political structures to stimulate economic development.
http://newmedia.ufm.edu/klugmannleapzones
Mark Klugmann is the creator of the LEAP Zones model (a legal, economic, administrative and political framework for a free city/charter city. He served in the White House as speechwriter to Presidents Ronald Reagan and George H.W. Bush; then, he moved to Chile where he helped Jose Piñera to create the International Center for Pension Reform.
In El Salvador, he assisted two governments in reforming pensions, telecom, ports, dollarization, labor rationalization, security policy and family legislation, collaborating with Juan Jose Daboub and Manuel Hinds. <b>In Honduras, he began working with President Porfirio Lobo, then leader of the Congress. He also collaborated with Octavio Sánchez who launched and leads the creation of Special Development Regions for Honduras, based on the LEAP Zones model that Klugmann created and brought to Honduras. Klugmann has lectured on his methodology at the World Bank and Harvard’s Kennedy School, testified on reforms before legislative committees in the US, UK and Chile, and worked closely with 6 governments in Latin America. He is on the board of Americans for Tax Reform Foundation.

Doughnuts Defeating Poverty – NYT.com

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OP-ED COLUMNIST

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Published: July 4, 2012 53 Comments

MASUMBA, Malawi

Damon Winter/The New York Times

Nicholas D. Kristof

Nicholas D. Kristof/The New York Times

Biti Rose Nasoni in the village of Masumba, Malawi.

If you want to understand some of the best new ideas to chip away at global poverty, an excellent place to start is the Nasoni family hut here in the southern African nation of Malawi.

Alfred Nasoni and his wife, Biti Rose, have had seven children in this village of Masumba. Two died without ever seeing a doctor. Alfred and Biti Rose pulled their eldest son out of school in the fourth grade because, they said, they couldn’t afford $5 in school costs for a term. And they farmed only part of their 2.5 acre plot because they lacked money for seeds.

Yet poverty is sometimes romanticized, and it’s more complicated than that. Alfred, 45, told me that even as his children were starving, he spent an average of $2 a week on local moonshine and 50 cents on cigarettes. He added that he also spent $2 or more a week buying sex from local girls — even though AIDS is widespread.

All this hints at an uncomfortable truth: The suffering associated with poverty is sometimes caused not only by low incomes but also by self-destructive pathologies. In central Kenya, a recently published government study found that men, on average, spent more of their salaries on alcohol than on food.

It’s a vicious circle: despair leads people to self-medicate in ways that compound the despair.

Yet there are escape hatches. In 2005, Biti Rose joined a village savings group founded by CARE, the international aid group. These “village savings and loans” are among the hottest ideas in development work. They now serve some six million people in 58 countries.

After recent financial crises, plenty of Americans love to hate banks, but many of the world’s poor don’t have that luxury: more than 2.5 billion people worldwide don’t have a bank account, according to a landmark World Bank report, “Measuring Financial Inclusion.”

The poor typically receive a pile of cash once or twice a year, at the end of a harvest, and then have no good way to save it. That increases the risk that some of it will be squandered.

In some African countries, cellphones are emerging as the new banking system. But here, and in much of the world, the solution is savings groups like Biti Rose’s. She and 19 other members met weekly and each deposited the equivalent of about 10 cents. The money was then lent out to members, and CARE coached them on how to start small businesses.

With a loan of $2, Biti Rose started making and selling a local version of doughnuts, which she initially sold for 2 cents each. “People really liked my doughnuts,” she noted, and soon she was making several dollars a day in profit. Inspired by her example, Alfred began growing vegetables and selling them; he turned out to be a shrewd businessman as well.

Seeing an upward trajectory in the family fortunes, Alfred cut out the girlfriends and curbed his drinking, he says.

Biti Rose and Alfred then had the resources to buy seed and fertilizer for all their own land and to lease an additional two acres as well. These days, they hire up to 10 farm laborers to work for them. In the old days, they harvested less than one bag of corn a year; this year, their harvest filled seven ox carts.

All savers aren’t that successful, of course, but there’s no doubt that the nudge to save money and start businesses can be transformative and self-sustaining. CARE moved on in 2009 to take its model to more needy areas in Malawi, but the savings groups around this village multiplied anyway. Other farmers envied Biti Rose and Alfred replacing their leaky grass roof with a tin one, and they decided to start their own savings groups. The idea has even spread, without CARE’s help, across the border to villages in Mozambique.

Yet I think there’s something going on here beyond microsavings and entrepreneurship.Esther Duflo, an economist at the Massachusetts Institute of Technology and co-author of an exceptionally good book called “Poor Economics,” argues that outside interventions sometimes work partly when they give poor people hope. That’s precisely what I’ve seen in many countries: Assistance succeeds when it gives people a feeling that a better outcome is possible, and those hopes become self-fulfilling as people work more industriously and invest more wisely.

For Alfred and Biti Rose, their hopes are now focused on their younger children (the oldest has married). Biti Rose never went to school at all, but she is planning to send her younger children to university.

She is also planning future purchases, including the first television in the area. But don’t think Biti Rose is going to kick back. She sees the TV as an investment.

“I’m a businesswoman,” she said firmly. “I can’t give anything away. If there’s a soccer match or something, anybody who comes in my house to watch will have to pay a fee.”

Morgan Stanley Smith Barney Announces Launch of Investing with Impact Platform

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Investing with Impact Platform offers an investment approach targeting risk-adjusted financial returns as well as positive environmental and social impact

Submitted by:Morgan Stanley

Categories:Socially Responsible Investing,Finance

Posted:Apr 26, 2012 – 01:30 PM EST

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NEW YORK, Apr. 26 /CSRwire/ – Morgan Stanley Smith Barney today announced the launch of a new investment platform designed to help clients align their financial goals and their personal values. The Investing with Impact Platform offers clients and Financial Advisors a broad range of investment options.

The concept of integrating social and environmental impact into investment decisions is not new, but its growing importance has led to a greater opportunity set for investors. Nearly one in eight dollars under professional management in the U.S. or about $3.07 trillion follows investment strategies that consider corporate responsibility and societal concerns.1

“This is an important initiative for Morgan Stanley Smith Barney,” said Andy Saperstein, Head of Wealth Management, U.S., at Morgan Stanley Smith Barney.”We hear frequently from clients and Financial Advisors about the importance of integrating sustainability themes into their investment portfolios. Now through the Investing with Impact Platform, MSSB is able to offer our clients an action-oriented approach to combine financial returns and their personal values.”

At launch, the Investing with Impact Platform will offer clients access to many opportunities spanning public and private market products through their Financial Advisors. This is the first phase in Morgan Stanley Smith Barney’s focused effort to meet investors’ desire for investment opportunities that center on positive social and environmental impact, without sacrificing financial performance potential. The launch of the Investing with Impact Platform will provide a substantial base on which to expand our offerings over time.

“Our goal is to build this into a robust offering to meet our clients’ needs, regardless of their impact priorities or what their portfolio fit might require,” said Paul Hatch, Head of Investment Strategy & Client Solutions at Morgan Stanley Smith Barney. “With over four million clients who have more than $1.7 trillion of investable assets, we are in a unique position to extend the reach of an ‘investing with impact’ program to one of the largest sets of investors in the world. Even a fraction of this total represents a substantial amount that could be invested in support of the common good.”

“At Morgan Stanley and MSSB, sustainability is at the core of our business and now, with the launch of the Investing with Impact Platform, we are able to help our wealth management clients align their investments with their desire to positively impact their communities,” commented Audrey Choi, Head of Global Sustainable Finance at Morgan Stanley. “We believe investments targeting positive environmental and social impact should be available to all investors from individuals to large scale institutions, and we look forward to continuing to broaden the reach.”

To find out more about the Investing with Impact Platform at Morgan Stanley Smith Barney, please contact your Financial Advisor or email InvestingwithImpact@mssb.com.

Morgan Stanley Smith Barney, a global leader in wealth management, provides access to a wide range of products and services to individuals, businesses and institutions, including brokerage and investment advisory services, financial and wealth planning, credit and lending, cash management, annuities and insurance, retirement and trust services.

For further information about Morgan Stanley Smith Barney, please visitwww.morganstanleysmithbarney.com.

Morgan Stanley (NYSE: MS) is a leading global financial services firm providing a wide range of investment banking, securities, investment management and wealth management services. The Firm’s employees serve clients worldwide including corporations, governments, institutions and individuals from more than 1,300 offices in 43 countries. For further information about Morgan Stanley, please visit www.morganstanley.com.

©2012 Morgan Stanley Smith Barney LLC. Member SIPC. CRC 493016 / 04/12

1 U.S. SIF: The Forum for Sustainable and Responsible Investment, Report on Socially Responsible Investing Trends in the United States, 2010

Sequoia Capital bets on another microfinance player

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Bangalore Feb 02, 2012

After backing SKS Microfinance, Sequoia Capital is now betting on another microfinance player, Bangalore-based urban poor-focused Ujjivan Financial Services, a member of the Grameen Network, Bangladesh. Sequoia Capital on Wednesday said it had participated in the fifth round of equity financing by Ujjivan, and was now the single-largest shareholder, with a stake of around 15.7 per cent.

It added it had raised Rs 127.9 crore ($25.5 million). Two new foreign institutional investors (FIIs), FMO (Netherlands Development Finance Company) and WCP Mauritius Holdings III (Wolfensohn Capital Partners), along with current investors, participated in this round. The existing investors are Lok Capital, Unitus Corporation, Elevar Equity, Caspian Advisors, besides Sequoia. With the latest round of fund raising, private equity funds have invested a total of Rs 230 crore and hold 83 per cent in the company. The promoters group, led by Samit Ghosh, managing director, Ujjivan, hold around four per cent and has so far disbursed Rs 2,800 crore.

Mohit Bhatnagar, managing director, Sequoia Capital, said India continued to be a preferred investment destination for FIIs and it was heartening to see fundamentally strong organisations in the microfinance sector were a key focus. Samit Ghosh said, “We thank our existing investors who continue to reiterate their commitment to us and welcome our two new investors. This round of equity funding will make Ujjivan one of the best capitalised MFIs in the country”. With this round of equity funding, the last being in 2009, Ujjivan’s capitalisation has more than doubled to Rs 230 crore. Kotak Investment Banking was the advisor and arranger of the transaction.

 

Sanjiv Kapur, managing director, Wolfensohn India Advisors Pvt Ltd, said, “This is the first investment for Wolfensohn in the Indian microfinance sector, endorsing our faith in the sector and in Ujjivan’s financial inclusion model.” Sudha Suresh, Ujjivan’s chief financial officer said the additional capital would help increase the loan book from the current Rs 600 crore to around Rs 1,600 crore, given the Reserve Bank of India’s 15 per cent capital adequacy requirement for MFIs that are non-banking financial companies.

“We are very happy to work with Ujjivan, which is constantly searching for ways to better serve the urban poor. Their firm focus on their mission to alleviate poverty and strong business credentials make Ujjivan a very interesting partner for FMO” said Keesjan de Kruijf, senior investment officer, FMO.

“When we look for large MFIs which are truly client centric, transparent, have good systems, great leadership, and are sincere in its social objectives, Ujjivan is the only MFI which comes to our minda. Our investment is built around making it the borrower of choice for the base of the pyramid, across the country”, said Venky Natarajan, managing partner, Lok Capital.

Ujjivan serves over a million clients in 20 states and 49 under-banked districts across the country.

Recently, Ujjivan received the ‘Microfinance Organisation of the Year’ award and was ranked No1 in the microfinance industry as the best company to work for in India.

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