Microfinance Equity Investing: Different Context, Similar Issues

> Posted by Danielle Piskadlo, Senior Program Specialist, CFI

The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.

The Council of Microfinance Equity Funds (CMEF) was recently renamed the Financial Inclusion Equity Council (FIEC) in order to reflect both the evolving nature of the industry and Council membership.

In my recent interview with Jim Kaddaras on the landscape of microfinance equity investing in 2003, it quickly became evident that in some respects much has changed over the past decade, while in other ways many of Jim’s comments still ring very true today.

Different Context:

Since 2003, like the expanding industry, Council membership has both grown in numbers and also changed in composition. For instance, a few direct financial service providers have joined the Council as they have now started to invest equity regionally.

Likewise, as impact investing has become far more mainstream in the last decade, some members (e.g. Triodos Organic Growth Fund and responsAbility Fair Trade Fund) have increasingly started to invest in adjacent impact investments. These investments go beyond traditional microfinance to include agriculture, housing, energy, etc. However, microfinance is still by far the majority of most Council members’ portfolio – and also the main proven model for returns.

In addition to the advent of new adjacent impact investment funds, the Council now increasingly has other “beyond microfinance” topics on its agenda, including disruptive technologies and the incredible potential for mobile banking given the now ubiquitous presence of mobile phones.

Similar Issues:

Despite these changes, the overarching focus and purpose of the Council is still very much the same – convening equity investing leaders to take stock of the relevant industry trends, to share knowledge and information to broaden views, and to develop and promote industry standards and best practices.

Council membership is still focused on private social investors with equity investments in financial institutions. This focus and membership, ensures that Council meetings cover topics relevant to all our members and also fosters a sense of trust and a willingness to share openly.

There is still a desire among social investors to share experience and discuss challenges with like-minded investors – be they collaborators, competitors or both. And through these convenings, members still swap ideas, contributing to a shared view of the industry’s future, and walk away with a better understanding of how others are dealing with similar situations – or at the very least with a sense of camaraderie.

Likewise, many of the main topics being discussed by the Council in 2003 – best practices for ensuring effective governance, protecting clients from over-indebtedness, balancing a double bottom-line, promoting a social mission, and coping through times of transition –  are issues that Council members continue to grapple with today.

From Transformations to Responsible Exits:

When the Council was formed, one of the main challenges among the members was the transformation of financial institutions from NGOs to MFIs, and more specifically, the difficulty of getting founders to let go so the institution could move to the next level.

In reference to this transformation, Jim spoke of the difficulty for parent NGOs to let go of their children. This is the same analogy that Daniel Rozas recently used in his blog on responsible exits to describe equity investors. In 2003, investors were pushing for the founders to let go of their NGOs and allow them to transform into MFIs. Now it is equally hard for investors to recognize when the time has come for them to also let go and exit the MFIs in order to, once again, allow the institution to grow and reach the next level.

After all these years, the Council is still convening the leading private investors making equity investments in financial inclusion with the objective of advancing common responsible investment practices. As the industry continues to evolve, we look forward to continuing to foster dialogue and exchange among Council members, helping them to navigate the future of financial inclusion equity investing together.

Have you read?

Microfinance Equity Investing: The Early Days of CMEF

The Art of Responsible Exit in Microfinance Equity Sales

Four Challenges for Impact Investing