Microfinance Equity Investing: The Early Days of CMEF

> 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.

In 2003, the Council of Microfinance Equity Funds (CMEF) was formed by a handful of equity investors in microfinance with the goal of sharing, developing, and disseminating industry best practices in equity investing.

I recently had the pleasure of catching up with Jim Kaddaras, who was Vice President of Special Projects at Accion from 2001-2003. He was instrumental in launching the CMEF in 2003, and also led the charge on the creation of Accion Investments. Jim is now a Partner at Developing World Markets, and is still a Council member.

Q: What did the landscape of microfinance equity investing look like in 2003?  

Jim Kaddaras: It wasn’t much of a landscape – it was more of a scatter shot.

Accion owned stakes in some of their Latin American affiliates and Accion Investments was just launching in 2003. Procredit was a player (they were called IPC back then and their banks had separate names). FINCA had some equity investments and ShoreBank had a smattering of equity holdings.

ProFund had been around since 1995 as the first investment company focused on microfinance equity but it was winding up when the Council started. Africap was just starting, based on the ProFund model. Various other Council members, plus the development finance institutions (DFIs) and several non-profit networks, held a handful of equity investments.

Q: What was the goal of the Council when it was formed?

JK: We felt that by gathering people who had been making equity investments in a one-off way, we could help to develop and disseminate best practices in the field.

Q: Who were the Council members in the early days?  

JK: I believe the founding members were Accion, Oikocredit, Doen Foundation, ProFund, ShoreBank, and Triodos. Other early members were Africap, Andromeda Fund, Calvert Foundation, Citigroup, DID, Deutsche Bank, Open Society Institute, Opportunity, SARONA, SIDI.

Calmeadow in Toronto was also present at the creation. Its founder, Martin Connell, was a Canadian businessman who wanted to do something social and funded a lot of early studies and research.

Q: Where was the first Council meeting? What topics were discussed?

JK: An early meeting was hosted by Oikocredit at their office in Amersfoort, in the Netherlands. The first couple of meetings were focused on getting organized as a Council, discussing who else should be invited to join the Council, and building consensus around the idea of having members pay dues, which was a very controversial topic at the time.

In those early meetings we also focused on setting out the lay of the land as it currently stood so everyone was starting from the same vantage point. And we discussed what type of research and writing the Council should focus on.

Council members represented much smaller organizations back then and we faced issues of how, given our limited capacity, we would cover the world and provide help to MFIs far away. We discussed ways to provide more effective governance in an efficient manner and debated the use of head office staff vs. trusted local directors to serve on boards. We explored the potential for sharing directors among investors in joint investments, and discussed how best to execute this concept of “piggy-backing” off of like-minded investors.

Q: What were some of the early CMEF publications?

JK: The first Council publication was the Characteristics of Equity Investments in Microfinance, which I co-authored with Beth Rhyne. This report looked at where equity investments were in microfinance by region and country, and so tried to quantify and describe the investment landscape in microfinance. The report also examined the role investors were playing at the time – were they active on boards or passive?

The report also focused on effective corporate governance. It focused on how boards should be organized, which committees were important and why, and how to strike the proper balance in terms of a relationship between governance and management—that is, how to ensure that the power wasn’t tilted too much in one direction or the other so the board was in charge of overall strategy and direction, and management was in charge of executing that strategy and managing day-to-day operations.

Q: What were some of the controversial topics when the Council started?

JK: The Council was made up of pretty like-minded investors so there weren’t too many controversial topics among members. But one of the big issues we discussed was what to do when you didn’t have like-minded investors on the board.

All of the Council members at the time were convinced that there should be a double-bottom line and everyone investing was trying to build the field, so making money was not the leading concern. Over time, it was recognized that to build the field, we had to draw other investors in, and to do that, we had to be able to offer a reasonable return. It seems now that some investors feel the social mission can be subordinated to financial returns, but that didn’t exist back then.

We, as equity investors, were also concerned about the role of NGOs in institutions that had transformed from an NGO into a for-profit entity. Often, the non-profit entity would get most of the shares of the for-profit entity in exchange for the microfinance operations it had previously housed, and we struggled with the issue of an NGO keeping up with the capital needs of a growing MFI. Sometimes the original NGO can act as a brake on the growth of the institution, and this is especially true when a strong founder is involved. It can be hard for the founder to let go of his or her “child.” It isn’t always easy from an investor perspective for the founders to be involved. Sometimes the NGO ends up with diluted shares as a minority stakeholder but there can still be complications (i.e. the NGO requires special rights associated with its shares). An NGO refusing to let go can drag the MFI down.

Now, much more diverse shareholdings make it more challenging to have like-minded investors on the board. It used to be like a family sitting at the table and now, sometimes there are strangers.

Q: Looking forward, what do you think will be important issues for the Council to tackle in the future?

JK: The Council has done the industry a great service in terms of supporting pioneer investors and drawing new investors into the field. Now, the Council’s most valuable contribution will be in continuing to promote the best practices in corporate governance, and in striking the optimal balance between the social mission and financial returns.

It will be important for the Council to help shape where MFIs end up at the end of the day. Is the future of MFIs to become part of the mainstream banking system, or will they continue to operate separately as specialized institutions?

The Council should also focus on keeping the social mission of the MFI. How can we ensure this social mission remains – or is our job as social equity investors in microfinance essentially now done and we should move on to other things?

Have you read?

A $204 Million Leap for Financial Inclusion

Six To-Dos Now for Responsible Investors

A Journey to Understanding Risk as a New Board Director in “Governing Banks: MFI Edition”