Archives

Blog Archives

In New Brand of Philanthropy, Nonprofits Invest in For-Profits – NYT.com

News0 comments

 

BY STEPHANIE STROM

 

IMPACT INVESTING A private school in Hyderabad, India, is financed by a company set up by Gray Ghost Ventures.IMPACT INVESTING A private school in Hyderabad, India, is financed by a company set up by Gray Ghost Ventures.

When the W. K. Kellogg Foundation set aside $100 million in 2007 to invest in companies that could produce both social and financial benefits, it was considered revolutionary. Historically, major foundations had used mainly stocks, bonds, real estate and other traditional asset classes to build their endowments.

Now, such investments are increasingly common — and profitable.

In 2010, the Kellogg Foundation invested $5 million in Wireless Generation, a tiny educational software maker working to improve public education in New York City. Just 219 days later, it made a 25.9 percent return after Rupert Murdoch’sNews Corporation bought Wireless Generation for $360 million.

“The customer and market insights that the private companies we’ve invested in have, whether it be in food, health care, financial institutions or education, sharpened our ability to target our grant making and public policy efforts,” said Sterling K. Speirn, the foundation’s chief executive. “Similarly, I think the companies we have invested in are able to leverage not only our patient capital but the different kind of knowledge assets we bring to the relationship.”

Article Tools

  • FACEBOOK
  • SAVE
  • TWITTER
  • E-MAIL
  • GOOGLE+
  • PRINT
  • SHARE
  • PERMALINK

Philanthropy is taking its cues from Wall Street and Silicon Valley. The language of finance is so common that it is sometimes hard to tell the difference between an investment conference and a fund-raiser. Grants are referred to as investments, and public-private partnerships as innovations. Money used to buy vans, computers and buildings is called growth capital.

“It’s not just the language that is changing,” said Antony Bugg-Levine, chief executive of the Nonprofit Finance Fund. “The actual distinction between the two sectors, for-profit and nonprofit, is starting to collapse.”

The shift stems from a new generation of philanthropists, like Bill and Melinda Gates, Pierre and Pam Omidyar and Steve and Jean Case, hoping to stretch their dollars. As they see it, the pool of philanthropic assets — even at a whopping $4 trillion-plus — is too small to make a dent in seemingly intractable social problems like malnutrition, chronic homelessness, water quality and sanitation. So they are trying to find ways to reuse existing financing and to attract new types of capital.

“If we really want to produce transformational change, change in a disruptive, exponential kind of way, there is going to have to be more than philanthropic dollars involved,” said Steve Goldberg, a social investment adviser at Caffeinated Capital, which advises investors, governments and nonprofits.

In essence, the philanthropists want to enlist the capitalists — and they are making small inroads.

Last year, Morgan Stanley made a $12.5 million investment in the Bay Area Transit-Oriented Affordable Housing Fund, alongside foundations and government organizations. The housing group has financed a project in San Francisco’s Tenderloin district that will include 153 housing units and a development in San Jose that will provide 64 affordable housing units for older people.

Goldman Sachs has garnered attention for investing $9.6 million in the country’s first “social impact bond,” an emerging mechanism for harnessing private capital to underwrite social programs. The money helps finance a four-year program aimed at reducing the recidivism rate of male prisoners at Rikers Island. If recidivism declines by more than 10 percent, Goldman stands to make a $2.1 million profit. In the worst case, it loses at most $2.4 million.

Skeptics worry that some social services will be forgotten by deep-pocketed investors looking for financial returns. Programs that focus on feeding the hungry or on education may be particularly vulnerable amid cutbacks in government spending.

“Part of the problem with using the language of Wall Street in philanthropy — social impact bonds, impact investing — is the implication that there are market solutions to everything,” said Phil Buchanan, president of the Center for Effective Philanthropy, which generates data and research to help foundations. “In fact, many of the problems being addressed by nonprofits are a result of market failures.”

It is also too early to tell whether this is a philanthropy fad or a sea change in charity. Matthew Bishop, co-author of “Philanthrocapitalism,” said that while the movement had grown significantly since the book was published in 2008, it had not necessarily led to big changes in charitable giving and investing.

Impact investing, still a relatively small portion of philanthropy, could also face growing pains. Mr. Bishop pointed, in part, to the problems with microfinance, where pension funds, banks and other financial firms poured money into tiny loans meant to improve the lives of impoverished entrepreneurs.

As microfinance institutions began to act more like mainstream investors, they suffered from declining credit quality, rising competition and weak regulations. “If you just focus on the business model and don’t work on building the marketplace in which that business is to function — the regulatory infrastructure and so on — you can produce some pretty bad outcomes,” Mr. Bishop said.

The Gates Foundation, the world’s largest, is taking a blended approach, combining grants with targeted investments. It has a $1 billion pool for investments and loans that further its philanthropic goals, and it spends more than $3 billion a year on traditional giving. It recently made equity investments in biotech companies like Visterra and Genocea, which are working on technologies that complement the foundation’s work in global health.

The foundation has also made several deals aimed at reducing the price of vaccines. This year, it created a sort of purchase guarantee, effectively promising to buy aGlaxoSmithKline product. The deal gave GlaxoSmithKline the security it needed to invest in manufacturing a less expensive rotavirus vaccine.

“There’s a lot of potential for working with pharmaceutical companies and others to create access to products for the poor,” said Julie Sunderland, senior program investment officer at the Gates Foundation.

Other philanthropic ventures are also trying to leverage existing resources.

Gray Ghost Ventures, an investment firm established by Bob Pattillo, a real estate developer, provides capital for projects that address the needs of low-income communities around the world. It has invested in companies that cater to the poor, like D.light Design, which is developing low-cost lighting products for people without reliable electricity, and Babajob, a Web- and mobile-based job search and placement business aimed largely at India’s maids, gardeners and other household workers.

Gray Ghost has also set up the Indian School Finance Company to lend money to private schools, which serve more than 60 percent of the country’s students. Such schools find it hard to obtain financing for improvements and upgrades. The company is trying to fill that gap with midsize, market rate loans. “Making those investments can help them attract more students, so they generate income to pay off the loan and more kids get an education,” said Jennifer McReynolds, head of investor relations at Gray Ghost.

Mr. Pattillo’s private foundation, Gray Matters Capital, supports the project philanthropically. For example, it offers fellowships to recent college graduates to work on the administrative side of the private schools.

“We need to harness the best of both the capital markets and the social sector to address problems we cannot solve inside the two silos,” Mr. Bugg-Levine, the Nonprofit Finance Fund chief, said. “The ensuing confusion is a small price to pay if what it ends up in is adaptations that bring some sustainability to our social endeavors.”

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

Main0 comments

Microfinance-African-Youths
Organization:

The African Youths Organization

Solution Description

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

How will it improve our quality of life?

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

Triple Bottom Line Benefits

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

Issues, Barriers and Opportunities?

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

Road Map for the Microfinance Industry: Reaffirming Responsible and Client-Centered Microfinance

News0 comments

From the Microfinance CEO Working Group, January 2012

In less than 40 years, microfinance has spread around the world, today providing access to credit and other financial services to more than 205 million poor clients1, most of whom were previously ignored by mainstream financial institutions. From modest roots, microfinance has built a global network of institutions dedicated to serving low-income people. It has transformed our understanding about the power of opportunity.

In early 2011, a group of CEOs from microfinance organizations that work globally began to have regular, informal conversations about the future of the microfinance sector as it matures and faces new challenges. We found that we shared many of the same values and concerns, including a desire to work together to help improve our organizations and advance the industry. From these conversations emerged the Microfinance CEO Working Group (described further below).

Those values and concerns have led the Working Group to adopt a shared approach to the future of microfinance, which this paper outlines, and to urge others to endorse this approach.

The Challenges: Client Focus and Responsible Finance

As leaders in the microfinance industry, we applaud the achievements of microfinance practitioners around the world. Every day, legions of committed, passionate individuals rededicate themselves to their work in support of helping millions (and ultimately billions) of people gain access to financial services. We believe deeply that microfinance is a powerful tool for improving the lives of the poor and that the field has not yet reached its full potential. The number of poor people who could benefit from financial services is staggering: by some estimates, as many as 2.7 billion people in developing countries are unbanked2. The microfinance industry has much more work to do. However, in order for the industry to continue to serve as a vital and creative force in the world, it must recognize and actively address several issues that are crucial to its continued success.

First, the microfinance industry must raise its standards of responsibility to clients. For many years, microfinance organizations emphasized the twin objectives of achieving scale and financial sustainability. At times, in the focus on growth and institutional development, client interests were subordinated to the achievement of financial objectives. Furthermore, new forces were introduced as the industry grew, such as increased competition for clients in some saturated markets and the entry of players that lacked a genuine social-mission orientation. Problems of client over-indebtedness in a number of markets (India, Bosnia, Nicaragua, and Morocco, among others) have received substantial media, political, and in some cases regulatory attention, with repercussions for the larger microfinance community. To ensure greater focus on client benefit and prevent future problems, microfinance needs to develop robust practices to protect, effectively serve, and support clients. The industry needs high-quality and standardized principles and procedures that ensure ethical, transparent business and client safety.

Second, the sector must create real, measureable, social and economic value for clients.For too long, many microfinance organizations have relied on credit as their primary product offering. Recent research demonstrates that the poor live far more complex financial lives than previously assumed. While microcredit is a compelling tool that has helped millions grow their businesses and establish more stable lives, it is clear that clients need a range of services, such as savings and insurance. To effectively support people as they work to improve their lives, microfinance institutions (MFIs) should aspire to offer a broader array of products and services that are tailored to meet client needs. And they need to actively manage their social performance in order to hold themselves accountable for achieving the results they seek.

We envision a microfinance industry that protects its clients, is transparent, and measures and achieves social outcomes and impact.

Advancing Industry Standards Inside and Out: The Three Key Initiatives

We believe that careful, systematic efforts to improve our performance are vital. These efforts must span numerous fronts, including developing strong consumer protection practices and meaningful measures of transparency, and establishing industry standards for social performance. In this vein, we have focused our initial efforts on promoting and supporting three existing initiatives working to raise standards across the microfinance industry: the Smart Campaign, MicroFinance Transparency, and the Social Performance Task Force’s universal standards for social performance management.

All three of these initiatives are working to put in place an architecture that will assist the industry to reach and maintain its highest goals and standards. Each has made important initial accomplishments, and each will need full industry support in order to achieve its potential.

  • The Smart Campaign is an unprecedented effort to make client protection part of the DNA of microfinance. Declaring that “protecting clients is not only the right thing to do; it’s the smart thing to do,” the Campaign supports institutions as they ensure that they treat clients fairly and respectfully, and avoid the harm that improper use of financial products can sometimes cause3. The Smart Campaign assists the industry to integrate the widely endorsed Client Protection Principles thoroughly into practices at all levels. This year, the Smart Campaign will be piloting its certification program, through which institutions can demonstrate their adherence to the Client Protection Principles via third-party verification. The Smart Campaign has been endorsed by more than 2,400 microfinance organizations, investors, and individuals in 130 countries – reaching organizations that serve more than 40 million people.
  • MicroFinance Transparency focuses on moving microfinance to full pricing transparency. It has published detailed information on pricing by 317 microfinance institutions in 12 countries, representing more than 36 million client loans in all, with 14 additional countries forthcoming4. MFTransparency provides a public forum for MFIs to demonstrate their commitment to transparency and integrity, and serves as an important resource for comparative information for investors, regulators, and eventually, clients. MFTransparency also provides training and advice to ensure that disclosure strengthens the microfinance industry overall. Since 2008, nearly 900 industry leaders have endorsed MFTransparency’s work.
  • The Social Performance Task Force (SPTF) is a collective effort by more than 1,000 industry stakeholders to develop common tools for measuring social performance and mission fulfillment5. Subscribing to the belief that you can only manage what you measure, the SPTF aims to support microfinance organizations to effectively translate their social missions into reality. This ambitious initiative is in the process of developing “universal standards for social performance management” for MFIs and will ultimately establish benchmarks for performance measurement and management.

Over the past several months, the Microfinance CEO Working Group has worked to engage with each of these initiatives. We have urged the three initiatives to work more actively with each other in a smoother, more coordinated fashion. We have provided detailed feedback to the SPTF Steering Committee on the proposed universal standards and on the strategic direction of the SPTF going forward. We have met with Smart Campaign representatives for an in-depth discussion on the Campaign’s proposed certification program, in order to provide feedback and learn how our own organizations and affiliates can become involved. We are tracking our organizations’ participation in each initiative, as a challenge to one another to deliver on our word.

While we believe that these initiatives hold significant potential for the industry, we also continue to seek out and encourage exciting new ideas that hold power for the future. We note that there are other promising industry-wide initiatives under development, and we will comment on, endorse, and urge others to support some of them in due course. We also recognize that other networks of microfinance advocates and practitioners are proposing new standards and actions that are constructive steps, such as the Paris Appeal for responsible microfinance6, and the Seal of Excellence for Poverty Outreach and Transformation in Microfinance7.

As members of the Microfinance CEO Working Group, we commit to embed the principles and practices of the three initiatives into our own networks. But while our organizations’ networks collectively serve tens of millions of clients on five continents, we by no means represent microfinance as a whole. We call on our valued peers and colleagues throughout the industry to endorse these three initiatives and to accelerate their adoption within their own organizations.

At this moment, microfinance has an opportunity to build on past successes, learn from, and respond to the challenges it faces in order to be a more responsive, responsible, and transformative industry. By taking sincere and systematic action, we can build more successful financial institutions that help change the lives of the people we serve.

We welcome comment and feedback from the greater microfinance community and beyond.

Signed,

Michael Schlein, President and CEO
ACCION
David Simms, Board Chair Opportunity International Network
Rupert Scofield, President and CEO
FINCA International
Rosario Pérez, CEO Pro Mujer
Steve Hollingworth, President
Freedom from Hunger
Scott Brown, President and CEO VisionFund International
Alex Counts, President and CEO Grameen Foundation USA Mary Ellen Iskenderian, President and CEO Women’s World Banking

Accion, Finca, Grameen Foundation, Freedom from Hunger, Opportunity International, Pro Mujer, Vision Fund, WOmen's World Banking Logos

 

About the Microfinance CEO Working Group

The members of the Microfinance CEO Working Group believe that strengthening microfinance requires a unified voice and systematic change. Currently, members include ACCION, FINCA International, Freedom from Hunger, Grameen Foundation USA, Opportunity International, Pro Mujer, VisionFund International (World Vision’s microfinance arm), and Women’s World Banking. Initially convened by Asad Mahmood of Deutsche Bank, we have found inspiration in talking with each other about the obstacles facing the industry and each organization’s response. The group meets monthly, either in person or via phone, to discuss major issues and opportunities facing our organizations. The group has selected Rupert Scofield, CEO of FINCA International, and Mary Ellen Iskenderian, CEO of Women’s World Banking, as co-chairs. The Working Group is currently housed at the Center for Financial Inclusion at ACCION.

Though our approaches to microfinance vary in their implementation, all our organizations share the common goal of bringing financial and related services to those who have been traditionally excluded, helping them create new opportunities and better livelihoods for themselves and their families. These central tenets guide our thinking:

Collaboration is powerful. Working together, we are able to share concerns, find commonalities, and develop collective responses. We seek to speak with a cohesive voice, offering potent support to the most important solutions. We believe that drawing together with other microfinance industry groups to jointly advocate for responsible microfinance practices will strengthen the quality and impact of client services.
We must translate language into practice. Microfinance organizations need to go beyond declarations of commitment and develop the processes and procedures that transform those words into reality. This starts with us: Working Group members are committed to raising the standards of our networks and becoming an example to others.

The group has come together to respond swiftly to microfinance issues as they arise, providing a coordinated response to pressing challenges. We serve as a network of peers, sharing concerns and successes. We aim to learn from one another and continually identify ways to strengthen our organizations. We seek to identify and celebrate inventive ideas that offer the potential to improve microfinance’s reach and impact. And we support the dissemination of industry-wide standards and practices, focused on client needs, which will lay the groundwork for years to come.

If you have any questions or comments, please contact Meghan Greene, manager of the Microfinance CEO Working Group, at mgreene@accion.org