The <a href="https://www.centerforfinancialinclusion.org/about/what-we-do/fiec">Financial Inclusion Equity Council (FIEC)</a> has, for over a decade, brought together leading managers of equity investments in microfinance and financial inclusion in developing countries.  Our members have made equity investments of over $5 billion in institutions focused on under-served or un-served clients with the goal of improving livelihoods and opportunity.

Microfinance institutions (MFIs) and the clients they serve are currently facing severe economic challenges as a result of COVID-19. Many clients face uncertain incomes in the best of times and perhaps now more than ever, will need to rely on the vital role MFIs play in providing reliable access to savings, emergency loans and grants, health information and loans to restart businesses as lockdowns are lifted.

To ensure they can continue meeting their clients’ needs, MFIs will need the full support of the investor community and FIEC members stand ready to continue their support of this critical industry. Debt investors have begun to come together to <a href="https://www.covid-finclusion.org/investors">coordinate their responses</a> to COVID-19, particularly focused on near-term issues of liquidity and repayments. FIEC members support these timely efforts to address the immediate challenges. Meanwhile, FIEC members are <a href="https://www.covid-finclusion.org/post/preparing-for-insolvency-and-recapitalization-everybody-in-the-pool">preparing for the recapitalization</a> of MFIs that may face significant erosion of equity as they preserve their capacity to support their clients.

FIEC members commit to working with the entire investor community to achieve maximum cooperation among stakeholders and conserve resources. We will engage with the community to draw on previous experience to anticipate and resolve hurdles before they can impede a timely resolution. Further, FIEC members are committed to making financial instruments and structures available to help optimize financial outcomes while accommodating the diverse circumstances of creditors, shareholders, and other funders. Most importantly, we pledge to preserve our focus on social impact and commitment to patient capital.

The COVID-19 crisis presents an unprecedented challenge to the financial inclusion sector and the clients it serves. FIEC members resolve to work constructively and collaboratively with all members of the inclusive finance ecosystem to ensure the future viability and vitality of this critically important industry.

Financial Inclusion Equity Council (FIEC) Responds to COVID-19

The Financial Inclusion Equity Council (FIEC) is the first membership organization to bring together the leading private entities that make equity investments in financial inclusion throughout the developing world.

This year's convening will be hosted by FIEC member Citi Inclusive Finance.

<a href="https://www.centerforfinancialinclusion.org/about/what-we-do/fiec/">Learn more</a> about FIEC.

Financial Inclusion Equity Council (FIEC) Annual Meeting

Are you interested in a career in impact investing? Join us for a speed networking event where you'll have the opportunity to chat one-on-one with professionals working in both the public and private sectors, representing organizations such as Accion Venture Lab, Accion Global Investments, MicroVest, OPIC, USAID, and Quona Capital.

Location:

Center for Financial Inclusion at Accion
1101 15th St NW, Suite 400
Washington, DC 20005, USA 

Questions? Contact <a href="mailto:tjohnson@accion.org">Tess Johnson</a>.

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Breaking Into Impact Investing Speed Networking Event

This virtual industry dialogue will explore how innovative financing structures from different sectors help incentivize impact, and their potential applicability to financial inclusion. We'll explore specific examples of how innovative financing structures are being used to achieve concrete outcomes, including income share agreements, social impact incentive models, Good Jobs Good Business Toolkit, and the Women's Livelihood Bond.

Featuring:
<ul>
 	<li>Rashmi Khare, Director, Social Finance. Rashmi will discuss income share agreements,  an approach to align workforce development providers with recipients' positive economic outcomes.</li>
 	<li>Rory Tews, Programme Manager, Roots of Impact. Rory will explore the social impact incentive model – a funding instrument that rewards high-impact enterprises with premium payments for achieving social impact.</li>
 	<li>Kristy Henrich, Social Impact Analyst, Pacific Community Ventures. Kristy will advise on the Good Jobs Good Business toolkit which incentivizes quality jobs.</li>
 	<li>Anna Kanze, COO, Grassroots. Anna will share experiences from Aligning for Impact, an outcome-based financial incentive model for financial inclusion.</li>
 	<li>Natasha Garcha, Associate Director, Impact Investment Exchange (IIX). Natasha will discuss the Women’s Livelihood Bond</li>
 	<li>Danielle Piskadlo, Director, CFI will moderate and share experiences from Aligning for Impact</li>
</ul>
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Webinar: Innovative Financing Structures for Incentivizing Impact and Advancing Financial Inclusion

This virtual dialogue provides an opportunity for the <a href="/about/what-we-do/africa-board-fellowship-program/">Africa Board Fellowship</a> (ABF) network and <a href="/about/what-we-do/fiec/">Financial Inclusion Equity Council</a> (FIEC) members to discuss the role disruptive technologies play in advancing financial inclusion. This dialogue will also provide opportunities for peer exchange on investment evaluation and which technology solutions have the potential to be the most disruptive.

Discussion Topics:
<ul>
 	<li>The theme of financial inclusion week is “getting inclusion right”. What role do disruptive technologies have in advancing that agenda?</li>
 	<li>What are the most innovative and disruptive technologies that you are seeing in the FI sector?</li>
 	<li>Are there technologies from other sector that we should be watching/following?</li>
 	<li>How can investors evaluate different technologies for financial inclusion? What criteria to you use to assess which technology solutions have the potential to be the most disruptive?</li>
</ul>
Featuring:
<ul>
 	<li>Wayne Hennessy-Barrett, CEO, 4G Capital, ABF Fellow</li>
 	<li>Ami Dalal, Managing Director, FINCA Ventures, FIEC Member</li>
</ul>
Moderator:
<ul>
 	<li><a href="/bio/danielle-piskadlo">Danielle Piskadlo</a>, Director, Investing in Inclusive Finance, CFI</li>
</ul>
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Webinar: Disruptive Technologies Advancing Financial Inclusion

The following post was <a href="https://nextbillion.net/caveat-venditor-a-new-model-for-buyer-selection-in-responsible-microfinance-equity-exits/">originally published</a> on NextBillion.

<img class="wp-image-25527 alignleft" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2018/05/architecture-door-entrance-277552.jpg" alt="" width="615" height="461" />For most, socially responsible investing means just that – investing in a manner that not only generates financial returns but also produces positive social value. But what does it mean for an investor to be “responsible” when selling their holdings? How does one stay responsible at the very moment when one ceases to be an investor?

This is a basic challenge facing investors seeking to “exit,” i.e. sell their equity stakes to a new buyer. The issue isn’t entirely new. It first emerged in the mid-2010s, when several microfinance investment vehicles (MIVs) were starting to reach the end of their 10-year terms and were seeking to divest their assets. This issue was first addressed in the financial inclusion sector by a <a href="http://documents.worldbank.org/curated/en/914731468154465262/pdf/805400NWP0CGAP00Box385295B00PUBLIC0.pdf" target="_blank" rel="noopener">2014 paper</a> commissioned by CGAP and CFI, which first defined many of the key questions that socially responsible investors need to address when selling their equity stakes.

With another four years of multiple exits under the sector’s belt, <a href="http://www.inclusivefinanceplatform.nl/home" target="_blank" rel="noopener">NpM, Netherlands Platform for Inclusive Finance</a>, along with the <a href="https://fiecouncil.com/" target="_blank" rel="noopener">Financial Inclusion Equity Council</a> (FIEC) and the <a href="http://www.e-mfp.eu/" target="_blank" rel="noopener">European Microfinance Platform (e-MFP)</a> asked us to take a closer look at one particularly tricky part of the exit process – selecting a buyer that is suitable for the microfinance institution (MFI), its staff and ultimately its clients. The result is <a href="http://www.e-mfp.eu/sites/default/files/resources/2018/04/Buyer%20Selection%20in%20Responsible%20Microfinance%20Exits.pdf" target="_blank" rel="noopener">Caveat Venditor: Towards a Conceptual Framework for Buyer Selection in Responsible Microfinance Exits </a>– a new paper that goes beyond raising questions, and seeks to provide a template to help investors navigate the complex terrain of “responsible exits.”

The research – an investor survey, several in-depth interviews and a workshop during <a href="http://www.european-microfinance-week.eu/2017/" target="_blank" rel="noopener">European Microfinance Week</a> – found a mix of approaches applied by different investors. But these nevertheless shared many common elements aimed at making sure that the buyer will honor and pursue the social mission of the institution being sold. We consolidated these elements into a “Conceptual Framework for Buyer Selection” – a flowchart representation (plus explanatory notes) of the steps and criteria inherent in responsible buyer selection in microfinance equity exits.

<img class="aligncenter wp-image-25535" src="https://centerforfinancialinclusionblog.files.wordpress.com/2018/05/table.png" alt="" width="615" height="797" />

Overall, the consensus among investors was that social responsibility in the context of an exit largely means excluding those potential buyers who are deemed unsuitable and then applying the financial offer (how much a buyer is willing to pay) to select among those remaining. But that exclusionary process is driven by exceptionalism, i.e. buyers have to be obviously unsuitable to be eliminated from consideration, and such exclusions tend to be rare, based on factors like unclear ownership of the buyer, inability to trace the source of the buyer’s funds or suspicion of the buyer’s motives. And because such cases are rare, what this means in practice is that the financial offer is the dominant factor in the decision, much as in the world of purely commercial investors. We refer to this by a term borrowed from medicine, the First, Do No Harm principle.

However, there was an important dissenting view among some investors, which holds that the Do No Harm exclusionary criteria are insufficient for a social investor. After all, a commitment to a social mission is a positive one; it must do good, and not simply avoid doing harm. In effect, this view seeks to invert the process, first deciding whether the financial offer meets the selling investor’s predefined financial objectives, then considering its value to the institution’s social mission. That value need not be strictly mission-driven, nor is there any expectation that the ideal buyers are socially motivated NGOs. Rather, the question is of organizational fit. Extending the <a href="https://medical-dictionary.thefreedictionary.com/best+interest+standard" target="_blank" rel="noopener">medical analogy</a> somewhat, we call this the Best Interests approach. We believe that this model, with its positive obligation on the seller(s), is better aligned with pursuing a social mission while delivering a reasonable financial return – which is at the core of the social investment value proposition.

The framework consolidates the practices of different investors we spoke to but also advocates an evaluation process that moves beyond Do No Harm toward Best Interests while incorporating elements of both. It is structured so that questions are organized based on the type of transaction being contemplated: a minority or majority stake being sold, as part of a consortium of shareholders, or by a single investor.

The framework is not designed to be – nor could it be – one-size-fits-all: Each exit is dependent on the investee’s mission and the context in which it operates, as well as the seller’s own objectives. The framework should be thought of as providing a rubric that each seller can expand upon themselves. It can be thought of as a three-stage process:
<ol>
 	<li>Are there exclusionary factors that mean the potential buyer is manifestly unsuitable; and, if not, is there any reason to believe that regulatory approval for the purchase would be difficult or unlikely?</li>
 	<li>If not, is the initial, indicative financial offer within a predefined range that is acceptable to the seller(s) based on the overall double-bottom line objectives of the fund?</li>
 	<li>If so, how does the proposed buyer, and its strategic objectives for the MFI, align with the social mission and the other best interests of the MFI?</li>
</ol>
We believe that the responsibility of finding the right buyer lies very much with those doing the selling. And if the sale means handing over control – a majority stake – this creates an even greater burden. As we argue in the conclusion, “A buyer selection practice which gives primacy to the financial offer and considers social mission and strategic value to the investee – the investee’s best interests – only to reject egregiously unsuitable buyers, fails to keep in mind that the best interests of the MFI and its clients are, for the investors who put funds into the MIV, arguably the primary reason for investing in the financial inclusion sector in the first place.”

We hope this framework will serve as a resource for investors embarking on an equity sale. We hope it could also: help investors to brief external organizations that assist them in exit trajectories (investment banks, advisory firms, etc.); assist new categories of impact investors that have little experience in exits; and serve as a guide to potential buyers to help understand selection criteria and prevent interested (but unsuitable) buyers from wasting time on a futile due diligence process. We hope too that it will inspire further work on an issue which, as equity sales continue to grow, will only increase in importance.

<a href="https://nextbillion.net/authors/daniel-rozas/" target="_blank" rel="noopener">Daniel Rozas</a> and <a href="https://nextbillion.net/authors/sam-mendelson/" target="_blank" rel="noopener">Sam Mendelson</a> are co-authors of the joint NpM/e-MFP/FIEC research project on buyer selection in responsible exits.

Photos courtesy of <a href="https://www.pexels.com/photo/architecture-door-entrance-exit-277552/" target="_blank" rel="noopener">Pexels</a> and Braden Hopkins via <a href="https://unsplash.com/photos/4WJcte5CByc" target="_blank" rel="noopener">Unsplash</a> 

Have you read?

<a href="https://cfi-blog.org/2018/03/12/solving-the-puzzle-of-responsible-exits-in-impact-investing/">Solving the Puzzle of Responsible Exits in Impact Investments</a>

<a href="https://cfi-blog.org/2017/03/17/whats-responsible-about-impact-investing-exits/">What’s “Responsible” about Impact Investing Exits?</a>

<a href="https://cfi-blog.org/2013/03/20/four-challenges-for-impact-investing/" target="_blank" rel="noopener">Four Challenges for Impact Investing</a>

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Caveat Venditor: A New Model for Buyer Selection in Responsible Microfinance Equity Exits

Caveat Venditor: Towards a Conceptual Framework for Buyer Selection in Responsible Microfinance Exits goes beyond raising questions, and seeks to provide a template to help investors navigate the complex terrain of “responsible exits.” The paper is co-authored by Daniel Rozas and Sam Mendelson and is part of a joint research project on buyer selection in responsible exits of <a href="http://www.inclusivefinanceplatform.nl/home">NpM, Netherlands Platform for Inclusive Finance</a>, along with the Financial Inclusion Equity Council (FIEC) and the <a href="http://www.e-mfp.eu/">European Microfinance Platform</a> (e-MFP). Caveat Venditor focuses on one particularly tricky part of the exit process – selecting a buyer that is suitable for the microfinance institution (MFI), its staff and ultimately its clients.

With the growing maturity of the microfinance industry, a question that has come into sharper focus is how social investors committed to advancing responsible finance practices should “exit responsibly” from the microfinance institutions (MFIs) – and, increasingly, the broader category of financial service providers (FSPs) and other companies working in financial inclusion – in which they have invested.

Leveraging an industry consultation process, Daniel and Sam have consolidated investors’ own emerging principles and procedures in assessing potential buyers, and used the findings to produce a Conceptual Framework for Buyer Selection in financial inclusion equity exits. This framework serves as a resource for investors embarking on an equity sale, providing them with a concrete, industry-recognized framework to evaluate an exit. Additionally, it can:
<ul>
 	<li>Guide investor discussions with external organizations that assist them in exit trajectories (investment banks, advisory firms, etc.);</li>
 	<li>Assist new categories of impact investors that have little experience in exits; and</li>
 	<li>Serve as a guide to potential buyers to help understand selection criteria and prevent interested (but unsuitable) buyers from spending time on a futile due diligence process.</li>
</ul>
During the course of the research, a majority practice and opinion emerged (what we call the First, Do No Harm consensus), alongside dissenting voices that argue for an inversion (what we call, continuing the medical analogy, the Best Interests approach) of some of the processes and presumptions of this majority perspective. As a result, we have moved beyond just reporting what existing industry practice is, to incorporate in the output of this paper - the Conceptual Framework for Buyer Section – not only what is commonplace, but also what industry practice could – and perhaps should – look like.

&nbsp;

&nbsp;

Caveat Venditor: Towards a Conceptual Framework for Buyer Selection in Responsible Microfinance Exits

While the valuation of microfinance institutions (MFIs) may be more of an art than a science, the practice within the equity investment community remains opaque, inconsistent and overly complex. This paper summarizes the challenges impact investors face when valuing MFIs--from which methodologies to use and what assumptions to make, to how to factor in the social mission and fintechs. There is an urgent need for more shared, comparable and reliable data to effectively benchmark impact investments.
<h2>Why This Matters</h2>
With MFI valuations, the stakes are high—a high valuation may signal an overheating market while a low valuation can represent a missed opportunity. As MFIs and other institutions evolve and mature, and as social investors look beyond the known pool of investors for exit options, reliable valuation data and practices will only gain in importance.

Barring more transparent, consistent and precise valuation data and more robust valuation methodologies, microfinance will remain a less mature asset class and social investors will be limited to a relatively small pool of known actors with whom to transact.
<h2>Looking Forward</h2>
Impact investors need more reliable valuation data and standard valuation methods to make sound investment decisions and to pursue their financial inclusion objectives. The <a href="programs-a-projects/investing-in-inclusive-finance/financial-inclusion-equity-council">Financial Inclusion Equity Council</a> (FIEC) is working to address this need by developing a valuation database for its members to share valuation data confidentially and anonymously.
<h4><a class="wf_file" href="storage/documents/Valuing_MFIs_Brief_Final__Arabic.pdf">Download the Report (Arabic) &gt;&gt;</a></h4>
<h4 style="text-align: left"> </h4>
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Valuing Microfinance Institutions

The words “offshore” and “tax-haven” are often taboo rhetoric within the investment space. In this paper, the Financial Inclusion Equity Council (FIEC), with support from CFI, explores why and how equity impact investors use offshore vehicles. Our findings reveal that offshore vehicles offer key operational, legal, tax and reputational advantages and are a key part of the impact investment landscape.

Through interviews with Financial Inclusion Equity Council (FIEC) members, we sought to better understand the scope of offshore usage in financial inclusion and the factors at play when impact investors select a fund domicile. Convenience, transparency and reputational advantages are among the strongest drivers for choosing to offshore. However, divergent views exist among FIEC members regarding the tax implications of offshore vehicles.
<h3>Major Findings</h3>
<ul>
 	<li>Impact investors have legitimate reasons for using offshore financial centers (OFCs)—and tax status is not the driving factor. The main factors for choosing OFCs include:
<ul>
 	<li>Administrative Efficiency: OFCs have the legal, financial and administrative infrastructure in place to facilitate investment.</li>
 	<li>Human Capital: Accordingly, OFCs have specialized staff on hand to manage investments, such as lawyers, accountants and auditors.</li>
 	<li>Reputation: OFCs are reputable vehicles in international investing, which helps to validate their use for financial inclusion.</li>
 	<li>Convenience: OFCs may serve as a neutral base for multiple investors. Favorable time zones, shared language and currency also add to their accessibility.</li>
</ul>
</li>
 	<li>Two divergent perspectives exist between North American and European investors regarding the tax implications of OFCs. The North American perspective prioritizes tax minimization for shareholders/investors, while the European perspective prioritizes paying their fair share of taxes to the offshore country.</li>
</ul>
Challenge your assumptions about offshore funds and learn more about how these financial instruments contribute to financial inclusion.


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&nbsp;

Offshore Financial Centers for Financial Inclusion

<a href="https://www.centerforfinancialinclusion.org/offshore-financial-centers-for-financial-inclusion"><img class="alignright wp-image-23798" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/07/offshore.png" alt="" width="300" height="384" /></a>In the aftermath of the Panama Papers, the words “offshore” and “tax-haven” are often taboo rhetoric within the investment industry. Perhaps even more so in the impact investing space, where fund managers have both fiduciary and social responsibilities. The <a href="http://fiecouncil.com/">Financial Inclusion Equity Council</a> (FIEC; of which CFI is the secretariat) recently published the report <a href="https://www.centerforfinancialinclusion.org/offshore-financial-centers-for-financial-inclusion">Offshore Financial Centers for Financial Inclusion: A Marriage of Convenience</a> to better understand attitudes and practices when it comes to how equity impact investors use offshore financial centers (OFCs). To dive into this topic, CFI and consultants Daniel Rozas and Sam Mendelson interviewed FIEC members from the U.S. and Europe. Conversations resulted in varying opinions on the practice of using OFCs, with three key considerations for doing so: administrative efficiency, tax liabilities, and transparency and ethics.

Among all FIEC members interviewed, administrative efficiency was unanimously a primary driver in making the decision about where to domicile funds. Fund managers cited the importance of understanding local regulatory requirements, the presence of embassies, bank relationships, management facilities, remittance corridors, and convenience of location as important considerations in their decision. The reality is many low income offshore countries lack the infrastructure and capacity for supporting the administrative requirements of investments. Additionally, there are increasingly stringent AML/KYC requirements that disproportionately affect lower-income countries creating administrative burdens. The new CFI report states: “…this is at least one of the goals of using OFCs – not to avoid the regulators, but to outsource some of the reporting burden to entities that specialize in this service that have relationships to do it efficiently.”

When discussing OFCs, it’s impossible to not talk about tax liabilities, which is where opinions of North American and European FIEC investors were strikingly different. It comes down to a difference in philosophy on paying taxes. Most European investors interviewed emphasized the positive impact of taxes paid to support local infrastructure and economy. While across the Atlantic, the U.S. investor’s perspective is more focused on the investor and investee. Taxes are seen as burdensome that get in the way of “the primary objective – social investments to benefit the end-client.” The view is that tax treaties are in place for a reason and investors have a fiduciary responsibility to their investors. Doing otherwise would reduce funds available to their investees.

While OFCs might seem unethical as a means to reduce tax, all investors interviewed were aligned on the importance of transparency. There is no interest in hiding operations. This includes transparency to the target country, to the source country and to their public reputation. Efforts have been made in recent years to disincentivize countries from offering unclear banking services. Industry associations like the Organization for Economic Co-Operation and Development (OECD) work with governments to promote policies that improve economic and social standards through transparency.

A few weeks ago FIEC members met in Copenhagen for an annual meeting to discuss topics like this and other questions challenging the impact investing space. The group conversation about offshore incorporation was less polarizing than the previously-received feedback of individual interviews with members, who felt the Atlantic divide about tax justification was overstated in the paper.

Everyone agreed this is an area that is misunderstood, and that investors should aim for a structure that supports paying an appropriate amount of taxes. This means avoiding double taxation, while responsibly paying the fair share. There was less importance attributed in the conversation to deciding where to domicile and more emphasis on assessing the character of who to invest with.

Debates about OFCs and taxes will become increasingly interesting as more impact funds exit their investments and consider how to do so responsibly, a topic CFI has <a href="https://cfi-blog.org/2014/02/05/the-art-of-the-responsible-exit-in-microfinance-equity-sales/">already explored</a> and will continue to dig into this year.

For more, read <a href="https://www.centerforfinancialinclusion.org/offshore-financial-centers-for-financial-inclusion">Offshore Financial Centers for Financial Inclusion</a>.

Have you read?

<a href="https://cfi-blog.org/2017/05/11/fintech-in-microfinance-in-search-of-the-high-tech-high-touch-unicorn/">Fintech in Microfinance: In Search of the High-Tech High-Touch Unicorn?</a>

<a href="https://cfi-blog.org/2017/03/17/whats-responsible-about-impact-investing-exits/">What's "Responsible" about Impact Investing Exits?
</a>

<a href="https://cfi-blog.org/2017/01/26/a-tale-of-four-ipos-is-public-investment-in-microfinance-becoming-ok-again/">A Tale of Four IPOs: Is Public Investment in Microfinance Becoming OK Again?</a>

Offshore Financial Centers for Financial Inclusion: An Aligned Industry or Oceans Apart?

Lizzy Bolze

Tess Johnson

Danielle Piskadlo

Daniel Rozas

Sam Mendelson

Paul DiLeo

Anna Kanze

Ira Lieberman

Todd A. Watkins

Alex Silva

Europe and Central Asia

North America

Impact Investing

Social Impact Metrics

Challenges and Crises

Enabling Environment

Equity Investing

Financial Service Providers

Financial Technology

Trends

Responsible Exit

Responsible Investing

Valuation

Agent Banking

Mobile Banking

Payments

Credit

Microfinance

Microfinance Institutions

Initial Public Offering

Announcement

Event

Webinar

Blog Post

Report

Financial Inclusion Equity Council

<a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/867-valuing-microfinance-institutions"><img class="alignright wp-image-23848" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/07/valuing-microfinance-institutions.png" alt="" width="280" height="363" /></a>Where were you in 2006? I was living with friends in a “beach house” in San Diego. Since then, I lived in China, went to grad school, shifted careers, married, and had two kids. So much has changed in my life over the past decade. The same cannot be said on the topic of valuing socially-focused financial institutions.

In 2006, Clay O’Brien wrote the first-of-its-kind paper on “<a href="http://www.microfinancegateway.org/sites/default/files/mfg-en-paper-valuing-microfinance-institutions-2006_0.pdf">Valuing Microfinance Institutions</a>.” This paper surveyed members of the <a href="http://fiecouncil.com/">Financial Inclusion Equity Council</a> (FIEC) – which was then called the Council of Microfinance Equity Funds (CMEF) – and concluded that:
<ul>
 	<li>There was not enough transparency in terms of methodologies and benchmark data;</li>
 	<li>There was a need for a more robust, standardized valuation methodology; and</li>
 	<li>The social value of double-bottom line investments was not accounted for – or was accounted for negatively - in the valuation.</li>
</ul>
FIEC recently revisited the topic of valuing double-bottom line investments with its valuation working group to better understand how the topic has evolved over the past decade. What was found? Despite changes in the broader industry (new players, adjacent sector investments, etc.), very little has changed in terms of valuing financial inclusion investments. Our findings are compiled in a brief paper, <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/867-valuing-microfinance-institutions">Valuing Microfinance Institutions: Where Are We Now</a>.

To put it in perspective, imagine trying to sell or buy a house with no pricing information on what comparable houses in the neighborhood have recently sold for. No property listing service like <a href="http://www.mls.com/">MLS</a> showing historical purchase prices. No property apps like Zillow providing a helpful estimate. And no experienced brokers or agents to offer market intelligence. You would have no idea what the fair market value would be for that house.

Now imagine the house is for sale in a volatile market where no other houses have been sold for the past five years and no data is publicly available on prior sales. You would likely struggle to create a pricing model, relying on a lot of assumptions about how much you think the home and the neighborhood will appreciate in the future. Essentially, you’d be coming up with your “best guess” as to what that home might be worth.

For the most part, the above analogy holds true for equity investors in the financial inclusion sector trying to buy or sell a stake of their investments in a financial institution. To address these issues around transparency and comparables, FIEC recently launched a valuation database, allowing members to share valuation data anonymously with each other through a third-party academic institution which collects and analyzes the transactions, providing members with relevant, accurate and timely comparable valuation data.

To take the home analogy one step further, imagine that your home serves a social purpose that you value highly – for instance, it has solar panels on the roof. When you go to sell the house, those solar panels would limit your buyer pool to others who value the solar panels' energy efficiency just as highly as you do (or at least to buyers who don't mind the appearance of solar panels on the roof) - but the panels wouldn’t factor into the price they pay for your home.

The debate over whether or not to account for the value of the social aspect of a double-bottom line investment is one that still has no consensus among FIEC members. Even those who support explicitly pricing social impact have no mechanism within traditional financial valuation methodologies to do so.

At least in 2006, socially-focused investors were mostly valuing brick and mortar financial institutions. Valuations of investments in the financial inclusion sector have become even more challenging as investors venture into the land of early stage fintechs. How do you value an early stage business that could be the next Facebook or could go bust tomorrow?

Impact investors need more reliable valuation data and standard valuation methods to make sound investment decisions and to pursue their financial inclusion objectives.

<a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/867-valuing-microfinance-institutions">Read more about the topic in the new report</a> and let us know what valuation challenges you are facing in the comments.

Have you read?

<a href="https://cfi-blog.org/2017/07/05/offshore-financial-centers-for-financial-inclusion-an-aligned-industry-or-oceans-apart/">Offshore Financial Centers for Financial Inclusion: An Aligned Industry or Oceans Apart?</a>

<a href="https://cfi-blog.org/2017/01/26/a-tale-of-four-ipos-is-public-investment-in-microfinance-becoming-ok-again/">A Tale of Four IPOs: Is Public Investment in Microfinance Becoming OK Again?</a>

<a href="https://cfi-blog.org/2014/02/10/microfinance-equity-investing-different-context-similar-issues/">Microfinance Equity Investing: Different Context, Similar Issues</a>

Valuing Financial Inclusion Institutions: Where Are We a Decade Later?

Fintech is a shiny attractor for impact investors. Emerging financial technologies shimmer with disruptive potential for the delivery of a wide array of financial, educational, health, and social services for the poor. While microfinance still makes up a major share of impact investing portfolios, many investors <a href="https://cfi-blog.org/2017/04/20/microfinance-is-dead-long-live-microfinance/">appear to have moved on</a> to fintech, the next wave of creative destruction. Rather than be toppled by it, microfinance institutions (MFIs) look to ride that wave too, to extend reach, reduce costs and prices, improve and deepen client services, and improve risk management.

Fintech, whether new digital services or proprietary software used to evaluate and underwrite credit, brings glittery potential for MFIs, no question. But in fairy tales unicorns glitter too. Are MFIs chasing something equally illusory? Microfinance has decades of success growing and strengthening a high-touch business model. As growth slows, should MFIs now abandon that approach and use high-tech to go low-touch for cost efficiency? If MFIs stay their course, will they be overtaken by new entrants with new models, like Chinese online peer-to-peer lender Yirendai, which <a href="https://www.wsj.com/articles/yirendai-ipo-could-pave-way-for-more-fintech-listings-1450435842">went IPO</a> on the New York Stock Exchange last year? Or instead, will MFIs find innovative high-tech ways to further leverage their deep relationships with clients and understanding of client needs?

These were among the questions for 32 microfinance and impact investing participants and analysts from around the world who convened last month, hosted by Lehigh University’s <a href="http://cbe.lehigh.edu/martindale">Martindale Center</a>, with support from the <a href="http://calmeadow.com/">Calmeadow Foundation</a> and the <a href="http://fiecouncil.com/">Financial Inclusion Equity Council</a> (of which CFI is the secretariat).

The group broadly agreed that sticking with core competencies is very often sound advice. Additionally, several participants challenged the group by asking: has anyone yet seen a scalable, investible, high-tech, and high-touch financial inclusion unicorn? Mobile payments networks like M-Pesa and BiM are high-tech, but decidedly low-touch delivery channels. Low-touch too are big data algorithms like those of Yirendai and its corporate parent CreditEase used for automated credit scoring and risk management. However, as digital financial technologies like these mature, will base of pyramid (BoP) financial customers still need high-touch MFIs? As fintech-driven models become more sophisticated, can MFIs hope to deliver anything that technology sophisticated telecoms and global commercial banks can’t?

Turns out MFIs, clients, and even global banks themselves demonstrably think the answer is Yes, plenty. For example, the large Spanish multinational bank BBVA acquired and consolidated a number of MFIs in Peru and elsewhere in Latin America. Recognizing that as a global bank they had limited understanding of BoP client needs—and that, as one board member put it, “relationships matter”—BBVA keep their microfinance group administratively separate. They are, however, bringing the tech depth of the global bank to bear in the microfinance segment. For example, they have put forth a major push to bring things like handheld mobile connectivity, big data algorithms, and split second automation to roving microfinance field officers for use during meetings with clients. One key aim is to enable hyper-personalized product design, instantly tailored to widely diverse needs and situations of individual clients and their families. The vision: technology as a complement to high-touch relationships, not a substitute. The goal is to use both technology and the relationship to deliver greater value to the client—improving financial literacy, building a financial life beyond credit, providing investment and business-strengthening advice, and pointing the client towards relevant non-financial services like health, agriculture extension, or business planning.

Clients, voting with their feet and wallets, also clearly value high-touch. A <a href="http://www.themix.org/mixmarket/publications/measuring-performance-alternative-delivery-channels">recent study</a> by the Microfinance Information Exchange (MIX) on alternative financial services delivery channels found that even where tech, like mobile banking and ATMs, had expanded clients’ access to financial services, the fraction of active clients actually using those services is below 10 percent. It appears that people prefer dealing with people. Clients use banking agents—often non-staff individuals under contract in their communities—more than any other alternative delivery channel. And it’s a virtuous cycle: agents create the largest number of new touchpoints that become available to clients. In part this reflects the fact that fully automated transactions are a blunt instrument: ATMs are great at dispensing cash, but not so good at answering questions or responding to individual circumstances.

Similarly indicative, the value of client transactions at physical branches remains 30 to 60 times greater than at any other kind of point of service. High-tech may facilitate routine tiny transactions, lubricating the cash flows of daily life, but can’t substitute for client preferences for high-touch on big ticket transactions. Designing and creating superior options for these latter big ticket needs—saving for weddings and school fees, enabling microenterprise capital investments, weathering long illnesses, paying for funerals and solar lamps—is fundamentally at the core of microfinance’s value to the poor.

Despite broad agreement among workshop participants on the potential of fintech in microfinance, there was also significant unease about many MFIs’ abilities to effectively embrace it. It took decades of iteration and experience for leading MFIs to scale and achieve operational sustainability with their low-tech, high-touch model. Committing to high-tech introduces an entirely different set of skill requirements and partners for MFIs, and undoubtedly will bring a host of unforeseen new problems requiring experimentation to overcome. Yet given the pace at which new entrants are flocking into BoP financial services—thanks to MFIs proving the profit potential­—MFIs don’t have the luxury of decades to work out kinks this time around.

Are MFI budgets, or innovation management skills, or staff recruiting and training systems, or supply chains, up to the task? Are MFI leaders and governance boards fully on-board, and are they knowledgeable enough to drive tech-embracing changes? Will impact investors—tempted by shiny new things elsewhere—see their way to funding the experimentation, infrastructure, and institutional capacity-building needed? Are these critical actors – management, directors, investors – able to keep their heads and take the time to think through how their MFI business model can uniquely deliver value to the client, and what elements can be restructured or ceded in the face of new technologies and new entrants?

Another area of concern centered around the potential for fintech to exacerbate the digital divide. Cheap 2G/SMS mobile is everywhere, and mobile payments are already ubiquitous in some places. Yet it’s also clear, <a href="http://www.centerforfinancialinclusion.org/storage/CFI_MFS_Tech_FINAL.pdf">as outlined in the recent paper from CFI Fellow Leon Perlman</a>, that the infrastructure needed for smart phone-based (and hence more elaborate) digital financial services is not. Deep penetration of smartphones or reliable broadband internet remain a long way off for most of the world’s poor. In this context, it is well worth noting that compared to disruptive but infrastructure-reliant low-touch fintech entrants, MFIs are much better positioned to deliver high-tech services while mitigating the digital divide. Yirendai’s automated credit decisions scour the web and other sources to dig up information to score borrowers and enable direct peer-to-peer transactions, but they require digital footprints and robust digital access on both sides. Kiva’s main quasi-peer-to-peer lending model still relies on MFI relationships with clients. <a href="http://blog.microsave.net/key-new-year-resolutions-for-the-success-of-digital-financial-services/">As some observers have noted</a>, when the digital footprint is light, as is often the case with BoP clients, one-size-fits-all underwriting results in collateral damage with a high incidence of borrowers blacklisted after failing to repay a small “tester” loan.

High-touch MFIs also have a significant advantage as last mile <a href="https://cfi-blog.org/2017/05/04/can-mfis-deliver-what-poor-people-need/">delivery channels</a> for complementary services like health services, empowerment training, or sale and distribution of cookstoves. Pro Mujer in Latin America did <a href="https://promujer.org/2015/12/18/pro-mujer-featured-in-duke-paper-for-its-innovations-in-health-care/">half a million chronic illness screenings</a> for clients in the same places they go for microfinance services. Kenya’s impact-venture-capital-backed BURN Manufacturing partners with MFIs to finance and distribute cookstoves that save poor clients $200 annually in charcoal, improve their health, and cut carbon emissions.

Most importantly, long-term proximity to clients affords MFIs a window into the lives, needs, and dreams of the hundreds of millions of poor individuals they serve. Without that understanding, better designed, more tailored, higher impact products and services won’t come, no matter the tech. Commodified products will always be the driver behind fintech, but also will exclude as much as include. Microfinance first succeeded by devoting decades to exploring ways to deliver credit with a priority on inclusion. Some would argue that this has at times gone too far, but the revolutionary innovation remains: most poor people, like everyone else, can use credit productively and responsibly.

Exploiting fintech opportunities in microfinance won’t come easy, but MFIs that fail to search for the unicorn risk succumbing to nimbler competitors, or at minimum, will offer their clients suboptimal, lower impact services. At the same time, impact investors need to restrain their infatuation with the latest Bright Shiny Object and have the patience and discipline to help fuel the same sort of experimentation and capacity building that brought microfinance to the forefront of impact investing to begin with. This thoroughbred, horned or otherwise, has the pedigree and legs for the long haul. Bet on it.

Todd A. Watkins is Professor of Economics, and Executive Director of the Martindale Center for the Study of Private Enterprise at Lehigh University. Anna Kanze and Paul DiLeo are Investment Managers at Grassroots Capital Management, PBC. Ira Lieberman is President of LIPAM International.

Also check out the other blogs in this series: “<a href="https://cfi-blog.org/2017/04/20/microfinance-is-dead-long-live-microfinance/">Microfinance Is Dead; Long Live Microfinance!</a>” and “<a href="https://cfi-blog.org/2017/04/27/time-to-ditch-impact-investings-unproductive-self-analysis/">Time to Ditch Impact Investing’s Unproductive Self-Analysis</a>” and ”<a href="https://cfi-blog.org/2017/05/04/can-mfis-deliver-what-poor-people-need/">Can MFIs Deliver What Poor People Need</a>?”

For video recordings of the Martindale Center event discussions, <a href="https://www.youtube.com/playlist?list=PL30fMMRd3G_6gzZfFsSeOrSqntz90KSNR">click here</a>.

Have you read?

<a href="https://cfi-blog.org/2017/04/19/alternative-delivery-channels-not-all-are-created-equal/">Alternative Delivery Channels: Not All Are Created Equal</a>

<a href="https://cfi-blog.org/2015/03/03/what-impact-investors-could-learn-from-microfinance/">What Impact Investors Could Learn from Microfinance</a>

<a href="https://cfi-blog.org/2014/06/18/impact-investing-landscape-trends-to-watch/">Impact Investing Landscape: Trends to Watch</a>

Fintech in Microfinance: In Search of the High-Tech High-Touch Unicorn?

<img class="alignright wp-image-23576" style="border: 0 solid #000000;" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/05/eb-accion_march-2011_kiki-flavien_fisherman_72-1.jpg" alt="" width="330" height="220" />We’ve identified the problem: Microfinance is no longer sexy. It’s old news. It can’t deliver “impact,” and its effect on alleviating poverty was oversold and has underwhelmed. It’s well and good to offer working capital loans, but at the end of the day, the poor need education, health care, water for drinking and irrigation, roofs, and electricity together with a wide variety of financial services. It’s time for investors seeking real innovation to move on to the next big thing that will transform the lives of poor people and save our planet. Never mind microfinance’s decades-long track record of listening to the poor and underserved clients and effectively developing products and services based on their needs.

Of course, we issue these statements with considerable sarcasm. But, all joking aside, industry trends and shifting sentiments are presenting investors with a real question: Should they abandon the reliable and successful platforms and infrastructure that microfinance institutions (MFIs) have built? In turn, MFIs are saddled with the question of whether to stick to what they know best, or instead, to use their platforms to deliver expanded product offerings that increase access to other essential services.

These were among the questions regarding the future of microfinance addressed by 32 microfinance and impact investing participants and analysts from around the world who convened last month, hosted by <a href="http://cbe.lehigh.edu/martindale">Lehigh University’s Martindale Center</a>, and sponsored by the <a href="http://calmeadow.com/">Calmeadow Foundation</a> and the <a href="http://fiecouncil.com/">Financial Inclusion Equity Council</a> (of which CFI is the secretariat).

In those discussions, there was wide agreement that even as MFIs have commercialized and scaled, they've listened to their clients. MFIs have hard-earned advantages in accessing the poor, understanding their needs, and serving as distributors. The path forward is clear: a wider array of services is beneficial to clients, and product diversification remains the siren call of future growth and profitability.

But that widening diversification, while long anticipated, has for the most part been sluggish. Though product data is scarce, services beyond working capital loans and savings products remain a stubbornly small percent of portfolios of large MFIs – no more than 10 to 15 percent. Microinsurance also has enormous growth potential for MFIs, either in partnership or directly, to address the needs of the underserved: the demand is huge, as the vast majority of poor people still lacks access, and commercial insurers tend to be short of good delivery channels to reach most low-income informal sector markets. However, uptake of microinsurance still remains slow.

In short, the waves of diversification into multiple products notwithstanding, microfinance remains at core, credit. A key challenge for the industry, as the conversations at Lehigh highlighted, is that impact investors are gravitating to new opportunities well beyond financial services. They don’t necessarily see MFIs as key to impact investing, yet they struggle with scaling-up in other sectors (alternative energy is a notable exception), due to the lack of sustainable, i.e. investible, institutions. The opportunities are an appetizing smorgasbord: health care, education, affordable housing, solar energy, irrigation for small farmers, potable water, agricultural value chains, and so forth. But none of these match the financial intermediation skill sets of MFIs. What’s more, microfinance and the broader financial inclusion industry remain the largest target of impact investors, by assets under management, in annual investor surveys.

But can MFIs succeed as impact players outside of their core microlending and savings businesses? A few examples give hope.
<ul>
 	<li>Equity Bank in Kenya actively supports education, including through capital improvement and equipment loans for schools, handling payroll for teachers, and special savings accounts for paying school fees.</li>
 	<li>BRAC in Bangladesh offers a wide array of client services, run as separate businesses from their huge microfinance business. Among other services, BRAC operates thousands of primary schools for girls, a (stock-exchange listed) bank targeting small businesses, and advisory services for entrepreneurs.</li>
 	<li>Pro Mujer offers health care screening and other health care assistance, largely subsidized by their MFI operations.</li>
 	<li>Higher Education Finance Fund (HEFF), managed by OMTRIX, Inc. in Costa Rica, has financed MFIs throughout Central and South America to develop higher education loans for students. HEFF needed to provide significant technical assistance to its MFIs for product development and marketing to get education loans off the ground.</li>
 	<li>Caspian Impact Investment Advisers, a private impact fund manager focused on socially responsible businesses in India, helped develop the nascent affordable housing market in India by making investments in affordable housing providers as well as by supporting the microfinance institutions in their portfolio, like Equitas and Ujjivan, to expand into housing loans.</li>
 	<li>Pamiga Association, which provides technical assistance and financing to a network of 12 rural MFIs in East and West Africa, offers loans through its finance company to its network MFIs for solar energy and water for irrigation. Over the past few years, it has become clear that to do so successfully Pamiga will also need to offer financing to SMEs that can go the “last mile” and install, maintain, and offer installment payment systems (pay-go) to their clients.</li>
</ul>
There is clearly no one way to address product diversification. Subsidies, commonly seen as anathema to “investing”, may be necessary in the initial stages to incubate product offerings till they become sustainable. If investors and donors push to expand impact investing beyond alternative energy and microfinance, whether in education, health care, housing, or agricultural value chains, they will need viable institutions with adequate capacity to do so. A main lesson from microfinance is that targeted subsidies are a good way to build such institutional capacity. For those MFIs with the institutional capacity and financial sustainability to get there, targeted donor subsidies for technical assistance to build capacity for product diversification within the MFIs makes good sense. At the same time, there remains a need for like-minded investors to continue supporting successful microfinance business models because they have a proven track record and an unparalleled understanding of the needs of the poor and disenfranchised populations they serve.

The next post in this series will explore digital financial services.

Dr. Ira Lieberman is President of LIPAM International. Todd A. Watkins is Professor of Economics, and Executive Director of the Martindale Center for the Study of Private Enterprise at Lehigh University. Anna Kanze is an Investment Manager at Grassroots Capital Management, PBC. 

Also check out the other blogs in this series: “<a href="https://cfi-blog.org/2017/04/20/microfinance-is-dead-long-live-microfinance/">Microfinance Is Dead; Long Live Microfinance!</a>” and “<a href="https://cfi-blog.org/2017/04/27/time-to-ditch-impact-investings-unproductive-self-analysis/">Time to Ditch Impact Investing’s Unproductive Self-Analysis</a>”

For video recordings of the Martindale Center event discussions, <a href="https://www.youtube.com/playlist?list=PL30fMMRd3G_6gzZfFsSeOrSqntz90KSNR">click here</a>.

Image credit: Accion

Have you read?

<a href="https://cfi-blog.org/2013/03/20/four-challenges-for-impact-investing/">Four Challenges for Impact Investing</a>

<a href="https://cfi-blog.org/2017/03/22/how-water-org-took-a-leap-of-faith-into-social-impact-investing/">How Water.org ‘Took a Leap of Faith’ into Social Impact Investing</a>

<a href="https://cfi-blog.org/2016/11/29/what-to-consider-when-investing-in-green-microfinance/">What to Consider When Investing in "Green" Microfinance</a>

&nbsp;

Can MFIs Deliver What Poor People Need?

<img class="alignright wp-image-23528" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/04/notes-514998_1920.jpg" alt="" width="314" height="206" />Discussion of impact investing has grown increasingly heated. There’s a conference nearly every week. Several weekly clipping services­—even a daily one—share news of the latest investments and conversions: 100% for impact! New benchmarks! New sectors! Perpetual motion! What fuel is creating this heat? The cold conviction that someday soon, all investing will be impact investing!

Meanwhile, in a parallel universe worried about losing its gravitational pull, a debate waxes and wanes over whether microfinance should be disqualified as an impact investment, either because its subsidized, non-profit origins magnetically repel VCs or because randomized controlled trials find that the average benefit to clients of microcredit is modest.

Which is ironic, because microfinance and its sister star, financial inclusion, remain the largest impact sectors in annual investor surveys.

This hyperactivity and incoherence can only mean one thing: the term “impact investing” has achieved its financial industry apotheosis: it means whatever we need it to mean. It’s a gaseous cloud that shapeshifts depending on who’s looking.

Into this chaos stepped 32 microfinance and impact investing participants and analysts from around the world who convened March 31-April 1, hosted by Lehigh University’s <a href="http://cbe.lehigh.edu/martindale">Martindale Center</a>, with support from the <a href="http://calmeadow.com/">Calmeadow Foundation</a> and the <a href="http://fiecouncil.com/">Financial Inclusion Equity Council</a> (of which CFI is the secretariat). The mission: to explore what microfinance has achieved, what it can yet accomplish, and to seek out lessons that might inform the design and execution of other business models (potential impact investments) with non-financial as well as financial objectives.

The discussion largely acknowledged the reality that the impact investing nebula is whatever an investor thinks it is. It’s not that the activity the term purports to encompass has consolidated into an important position in the investment universe, but rather that the term has outlived its usefulness. It is time to jettison the term and in its place require more specificity, rigor and accountability from investors and entrepreneurs.

The dialogue reflected the many perspectives that animate impact debates. Must impact investments improve the lives and prospects of the poor? Or can activities that have no deliberate targeting of the poor, like renewable energy in rich countries or organic baby food, qualify? Do high, market, or superior financial return—pick one—disqualify a company? Does any company that provides products and services that poor or marginalized people purchase automatically qualify? Does an impact business model that achieves commercial success and reliable access to conventional capital lose its impact label? Are impact companies only those that require non-commercial impulses—eternal subsidy or heartstring-tugging photos—to push capital their way?

Despite reprising these long-running debates with no more consensus than in previous iterations, a more pragmatic and substantive alternative emerged to the “Impact or Not” movie we’ve been reliving like Groundhog Day for the last few years.

What signal triggered the consensus? The largely unremarked fact that “impact” is no longer a matter of faith or intention. Rather, four decades of experience and research have tested the efficacy of specific business models, products and services in achieving their non-financial goals, such as better school attendance, better health, or greater productivity. So too, much progress has been made in collecting data, setting conventions, and benchmarking performance with respect to non-financial value. Just maybe, the nebula’s multiple dimensions and fuzzy borders can be mapped.

The filter that separates microfinance and all “impact” businesses from other investments is a more demanding standard that requires assessment of the kind of non-financial value that is both intended and actually created. From this perspective, the holy grail of impact metrics—a common scale that will enable us to rank the impact of budget schools, working capital loans, health screening, and off-grid energy—is an unnecessary distraction. Instead, as several participants insisted, impact can take many forms, but investors must clearly state what they intend in terms of non-financial results, subject to the same scrutiny and third-party validation as their financial statements.

With the non-financial objective specified and research in hand, investors can decide for themselves what impact they wish to consider. More low-income finance? Increased school attendance by girls? Less carbon? Jobs? Savings?

Likewise, the continually recurring conversation on trade-offs between impact and market returns can be exited. Just as impact is in the eye of the investor, so too are good or poor returns.

Only two standardized contrivances need be of use: an “anti-hypocrisy” screen, like the Global Impact Investment Rating System (<a href="http://giirs.nonprofitsoapbox.com/about-giirs/about">GIIRS</a>), that scrutinizes a company’s HR, supply chain, environmental, and community practices to ensure the company isn’t making the world better by exploiting its workers or consumers or ravaging its community; and a corporate structure, like the Public Benefit Corp in the U.S., that discourages a company from abandoning its non-financial objectives once it achieves commercial viability thanks to the impact subsidy it enjoyed.

The Lehigh gathering focused on how microfinance could leverage its uniquely successful business model and market penetration to generate even more financial and non-financial value and retain its ability to innovate and execute at scale. This discussion delivered a welcome escape from the unproductive noise and hype surrounding the term “impact,” and redefined the challenge and the way forward based both on the microfinance experience and the solid base of research it has inspired.

Paul DiLeo and Anna Kanze are Investment Managers at Grassroots Capital Management, PBC.  Todd A. Watkins is Professor of Economics, and Executive Director of the Martindale Center for the Study of Private Enterprise at Lehigh University.

Also check out their related commentary: <a href="https://cfi-blog.org/2017/04/20/microfinance-is-dead-long-live-microfinance/">Microfinance Is Dead; Long Live Microfinance!</a>

For video recordings of the Martindale Center event discussions, click <a href="https://www.youtube.com/playlist?list=PL30fMMRd3G_6gzZfFsSeOrSqntz90KSNR">here</a>.

Have you read?

<a href="https://cfi-blog.org/2015/03/03/what-impact-investors-could-learn-from-microfinance/">What Impact Investors Could Learn from Microfinance</a>

<a href="https://cfi-blog.org/2017/03/22/how-water-org-took-a-leap-of-faith-into-social-impact-investing/">How Water.org 'Took a Leap of Faith' into Social Impact Investing</a>

<a href="https://cfi-blog.org/2017/03/17/whats-responsible-about-impact-investing-exits/">What's "Responsible" About Impact Investing Exits?</a>

&nbsp;

Time to Ditch Impact Investing’s Unproductive Self-Analysis

Most foundations and development finance institutions have moved on from microfinance, in search of the leading edge of innovation and impact. They have concluded that their work is done now that leading microfinance institutions (MFIs) have definitively cracked the capital markets with healthy balance sheets and two large, heavily oversubscribed Indian IPOs just in the last year. Meanwhile, impact investors, particularly in the U.S., are divided on whether microfinance is, or ever was, an impact investment. In any case, they prefer to focus their attention on new “disruptive” business models. In impact industry publications, conferences and even terminology, microfinance is dead; yesterday’s solution at best.

Fortunately for people at the bottom of the pyramid (BOP), no one told microfinance that it has died. The robust IPOs and active trend of mergers and acquisitions indicate healthy commercial capital market interest. More importantly, the industry now has a central role in national financial systems all over the world, with hundreds of millions of clients, affected household members likely approaching one billion, and penetration into the majority of low-income communities in the world. The idea that the poor can constructively use and be sustainably provided with a comprehensive range of financial services—unthinkable 20 years ago—is no longer debated. Policymakers and mainstream financial institutions have recognized that a dynamic BOP finance sector fosters both equitable and sustainable development and the health of national financial systems and economies. And simply from an institutional standpoint, as David Roodman has noted, “From the point of development as industry building, support for microfinance has succeeded…in building microfinance institutions and industries that cater to poor people, create jobs, that enrich the national economic fabric.” It also bears mentioning that the poor people at heart of the industry are overwhelmingly female.

In the context of these mirror image appraisals, 32 microfinance and impact investing participants and analysts from around the world convened March 31 - April 1, hosted by Lehigh University’s <a href="http://cbe.lehigh.edu/martindale">Martindale Center</a>, and sponsored by the <a href="http://calmeadow.com/">Calmeadow Foundation</a> and the <a href="http://fiecouncil.com/">Financial Inclusion Equity Council</a> (of which CFI is the secretariat) to explore what role microfinance will play going forward. Overall, the group agreed that while dead to some, microfinance is alive and kicking on the ground and vigorously generating diverse business models and approaches to building economies and social value.

Around the world, microfinance is employing evolving models as it takes its place in the financial and economic development landscapes: mainstream commercial banks downscaling; specialized banks branching into SME lending, housing and other subsectors; mobile banking; agricultural finance; and microinsurance. And in nearly all countries, a substantial subset of MFIs are continuously experimenting on ways to blend commercial and social missions, building on sustainable financial foundations to diversify product offerings beyond microcredit to meet more of their clients’ varied needs.

As we will explore in subsequent blogs in this series, these various models challenge microfinance to revisit its role in creating social value for the client. The pursuit of scale and efficiency often—but certainly not always—implies “mission drift”. It also remains to be seen whether mission-led MFIs are the most effective means to build social value for poor clients in a world where mobile and digital technologies can reach the previously excluded at a fraction of the cost of traditional microfinance models and potentially deliver valuable information and education as a bonus.

More fundamentally, skepticism over the future of microfinance reflects doubts that today’s leading incumbent MFIs—once the disruptive innovators themselves—can ever generate disruptive forces of the magnitude needed to make meaningful progress towards achieving objectives as ambitious as the Sustainable Development Goals. Quite conceivably, the future lies with new models, like digital financial services, that reduce costs through substitutes for face-to-face interaction, reduce risk via data and algorithms, and increase outreach by saying yes to more potential clients with customized, individually-tailored product design and delivery.

The future of microfinance and the challenge for those who prioritize social value for clients is in taking advantage of the strengths of incumbent MFIs, particularly their proximity to clients: a four-decades-deep, hard-earned understanding of heterogeneous needs at the BOP. As donor and impact investor attention is captured by shiny new frontiers—health care, budget schools, smallholder agriculture, off-grid energy—MFIs that want to build on the value of this experience face two challenges.

First, those in the microfinance sector must convincingly deliver to impact investors the (often unwelcome) message that MFIs—professionally governed, managed and staffed, with reliable access to capital markets, diversified product offerings, and unique penetration at the BOP—offer the best available platform to design, test and in many cases deliver—directly or as orchestrator—products and services to create social value. Even where new channels or specialized institutions can be effective, as in the case of mobile money or housing finance, new entrants will need to learn how to fit narrow product expertise into the complex and sophisticated financial lives of poor people, much as microfinance needed to learn that clients need more than a three month group loan with weekly repayments.

Second, while the bulk of microfinance portfolios may be fully commercially sustainable and attractive to conventional investors, innovation and experimentation to reach the still-excluded continue to require patient, mission-aligned investors, grant subsidies or below-market financing—the model that fertilized microfinance to begin with. More than the success of microfinance on purely commercial terms, this central and essential role of subsidy—not for market distorting price reductions, but rather for innovation, infrastructure and capacity building—is the salient takeaway from microfinance for impact investing more broadly.

The fact that so many donors and impact investors view microfinance as dead undermines the ability of the industry to further strengthen through trial and error the robust business model that underlies its current success and stature—and inspires today’s exuberance for “impact investing”.  Microfinance is alive, well and firmly integrated into global mainstream capital markets. But to reclaim top rank status as a destination for impact investments, MFIs must redouble efforts to distinguish themselves by focusing on client outcomes and serve as the labs of innovation in product design and delivery to build social value.

Paul DiLeo and Anna Kanze are Investment Managers at Grassroots Capital Management, PBC.  Todd Watkins is Director of the Martindale Center at Lehigh University. 

For video recordings of the Martindale Center event discussions, <a href="https://www.youtube.com/playlist?list=PL30fMMRd3G_6gzZfFsSeOrSqntz90KSNR">click here</a>.

Todd Watkins contributed to this post.


Have you read?

<a href="https://cfi-blog.org/2016/12/07/can-social-missions-be-preserved-in-initial-public-offerings/">Can Social Missions Be Preserved in Initial Public Offerings?</a>

<a href="https://cfi-blog.org/2017/01/26/a-tale-of-four-ipos-is-public-investment-in-microfinance-becoming-ok-again/">A Tale of Four IPOs: Is Public Investment in Microfinance Becoming OK Again?</a>

<a href="https://cfi-blog.org/2017/04/12/whos-responsible-for-responsible-impact-investing-exits/">Who's Responsible for 'Responsible' Impact Investing Exits?</a>

&nbsp;

Microfinance Is Dead; Long Live Microfinance!

Jeffrey Riecke

&gt; Posted by Alex Silva, Executive Director, Calmeadow, and Jeffrey Riecke, Senior Communications Specialist, CFI

<img class="alignright wp-image-23248" style="border: .5px solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/03/keys-1317391_1920.jpg" alt="" width="245" height="228" />Impact investors, social investors, responsible investors…regardless of name, they claim to serve the greater good. In the world of financial inclusion, impact investors are supporting the development of financial markets that have inadequately served the base of the economic pyramid.

What happens when social investors exit from their financial inclusion investments?

Some exits are non-controversial, but what if responsible investors sell their stake to an investor that doesn’t place priority on the social mission? The risk of mission drift or abandonment is real, and responsible investors must consider it as they make their exit decisions. With financial inclusion sector trends suggesting that impact investing exits are going to become more frequent, it’s worth examining the topic in greater detail.
<h3>Investors exit for many reasons </h3>
It’s important, especially for critics of impact investors, to recognize that a decision to exit may arise from any number of factors, including factors internal to the investor.
<ul>
 	<li>When a market has been proven viable and starts to attract fully-commercial capital, investors might “declare victory and go home”. Many financial inclusion investors are doing just this.</li>
 	<li>In other cases, an investor’s strategy might change. Perhaps an investor decides to focus on a different region or sector.</li>
 	<li>The investor is thirsty for money, for any number of reasons. Perhaps it is experiencing internal financial challenges or increased capital requirements, or it has a higher priority investment opportunity to pursue.</li>
 	<li>Markets can become risky. The enabling environment of particular countries can change. For instance, isolationist policies might spur opposition to foreign-owned businesses.</li>
</ul>
<h3>Exiting responsibly </h3>
Responsible exits support the preservation of the investee’s social mission, and they take place at a time that’s best for the industry.

A good lens for considering whether an exit is responsible is the reason for the investment in the first place. If the investment was initially socially motivated, then investors should not simply be motivated by financial returns when they exit. Financial return (the price offered) is important, but it shouldn’t be the only criteria. For example:

The Multilateral Investment Fund (MIF) of the Inter-American Development Bank (IDB) has been a long-time investor in microfinance organizations. Generally, they’ve been diligent about every stage of investing, including thinking about their exit strategies up front, when they invest. They have normally exited to similarly socially-minded organizations. This enables continuity in the investee organizations for the treatment of clients, and also continuity for staff. When the MIF sold its investment in CALPIA, a microfinance institution in El Salvador, it sold to responsible buyers committed to financial inclusion.
<h3>Exiting irresponsibly</h3>
Let’s contrast this with not-so-responsible exits where the values or missions of the original investor and the new buyer are not matched. If an investor sells its stake in a microfinance institution to an entity that has no experience or demonstrated interest in financial inclusion, this presents the heightened possibility that the buyer will not continue the practice. It may raise prices, reduce service quality, or move upmarket, among other things. Not-so-responsible-exiting can entail selling investment stakes to the highest bidder across a variety of stakeholder types. We have seen instances of investments sold to entities like consumer lenders with reputations for profit-first practices. We have also seen instances of sales to governments, with the result that the newly government-owned institution damages a market by offering highly-subsidized interest rates, making it difficult for other institutions to compete on a level playing field.
<h3>When investors hold investments too long</h3>
We’ve also seen instances where impact investors hold investments in markets where local commercial banks or bona-fide investors are interested. In these cases the impact investors’ money would be better used elsewhere. Why don’t these investors sell?

Often, they simply do not want to reduce their portfolios. For example, many development finance institutions (DFIs) and microfinance investment vehicles (MIVs) are measured and rewarded by the size of their portfolios. It’s not necessarily about the return (financial or social). This is especially true if the investors are paid a percentage fee based on how much they have invested, which creates a perverse incentive against selling assets.

In Colombia, where commercial banks are increasingly interested in microfinance, an NGO owned a controlling stake in an MFI. A potential buyer bid to buy the entire bank from the NGO and merge it with the bank’s operations. Onlookers might have speculated that this presented a risk of mission drift. Maybe the buyer just wanted the banking license. Maybe it just wanted the savings deposits. Both concerns were easily set aside: the buyer was already a licensed commercial bank and the NGO-owned bank had few depositors. In fact, the commercial bank was positively interested in entering the microfinance market and serving Colombian micro-entrepreneurs. For its part, the commercial bank had a lower cost of funding and better IT systems. It had the resources to make the MFI and its services better than the NGO could. Accordingly, the NGO could have declared victory, taken its money, and done other things in Colombia, like support microfinance in rural areas or advance public health. Unfortunately, the NGO was not able to see the benefits of the possible transaction and opted not to sell.
<h3>Impact investing trends</h3>
The financial inclusion industry is evolving. There is an increasing diversity of inclusive finance providers and investors, from commercial banks to fintech companies. At the same time, for many of the impact investing vehicles created in the last decade, their investment horizons are coming to a close. We can expect to see more exits and more variety in those exits. Until now, most of the inclusive finance impact investment exits have involved DFIs or microfinance networks selling to MIVs or vice versa. Suddenly, other types of players are coming in, including those with little history with microfinance, and this may rattle many participants in the industry. This trend will increase, and there is nothing inherently wrong with that. We might even see an influx of players who are better able to eliminate financial exclusion! What is potentially wrong would be misplaced motivation. “The fundamental things apply”: if you exit to a buyer that has a questionable history, you are not acting responsibly.
<h3>Greater industry action</h3>
More attention needs to be brought to this subject. Organizations like the <a href="http://fiecouncil.com/">Financial Inclusion Equity Council (FIEC)</a> work continuously to facilitate discussion in this space and move the industry forward. A few years ago CFI and CGAP produced a paper, <a href="http://www.cgap.org/publications/art-responsible-exit-microfinance-equity-sales">The Art of the Responsible Exit in Microfinance Equity Sales</a>. We’re seeing groups like the European Microfinance Platform regularly convening conversations at seminars and events. These are important contributions, but much more attention needs to be paid among investors and industry players. Surely some exiting investors are simply happy that someone is buying, and they aren’t necessarily thinking about the consequences.

And for those who are thinking about the consequences and considering the best path forward, pragmatism is key. Investors have responsibilities to their own funders, both financial responsibilities and responsibilities to uphold any social mission that attracted those funders. They should not sell to the high-priced but questionable offer, and neither should they opt for capital-starved social investors. Perhaps the pragmatic and social course is to work harder and find a buyer “in the middle”.

Have you read?

<a href="https://cfi-blog.org/2013/03/20/four-challenges-for-impact-investing/" target="_blank" rel="noopener">Four Challenges for Impact Investing</a>

<a href="https://cfi-blog.org/2015/03/03/what-impact-investors-could-learn-from-microfinance/">What Impact Investors Could Learn from Microfinance</a>

<a href="https://cfi-blog.org/2016/01/27/the-impact-investing-landscape-in-west-africa/">The Impact Investing Landscape in West Africa</a>

What’s “Responsible” about Impact Investing Exits?

2017 was certainly an eventful year. And our year at CFI was no exception. Through our <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/cfi-fellows-program">CFI Fellows Program</a> and partnership with the Institute of International Finance, <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/mainstreaming-financial-inclusion">Mainstreaming Financial Inclusion</a>, we produced thought-provoking research on fintech partnerships, the role of human touch in a digital age, breakthroughs in insurance and more. In the client protection area, 24 financial institutions were <a href="http://smartcampaign.org/certification">Smart Certified</a>, bringing the total number of certified institutions to 94. <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/abf">The Africa Board Fellowship Program</a> continued to make a difference at the governance level of financial institutions across Africa, and now roughly 200 CEOs and board members have participated in the program. And more…

Before we celebrate the New Year, we wanted to pause and look back at some of our favorite moments of 2017.
<h3>Financial Health as a Global Framework</h3>
We developed a new model for assessing financial health. <a href="http://bit.ly/FinHealthGlobal">The financial health framework</a> was developed through a project led by the Center for Financial Services Innovation (CFSI) with CFI and Dalberg as partners. The framework offers a globally applicable model for financial health that includes six indicators of financial health and four contributing factors that are particularly relevant to the developing world.

<img class="aligncenter wp-image-24830" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/12/maria_angelica_mora_sandoval_snackseller_crediconfia_2013-8.jpg" alt="" width="615" height="410" />
<h3>Modelo Perú: Unique Model, Unique Challenges, Bright Future</h3>
In partnership with the Institute of International Finance (IIF), we assessed Modelo Perú, the first nationwide interoperable payments initiative and produced <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/794-modelo-peru-cfi-brief">an issue brief</a> that reviews the challenges and highlights possible solutions – ranging from improving incentives for banking agents to penetrating rural areas to engaging with nationwide consumer goods distributors.

<img class="aligncenter wp-image-24831" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/12/bim.png" alt="" width="615" height="455" />
<h3>The Smart Campaign Tackles Digital</h3>
<a href="http://smartcampaign.org/">The Smart Campaign</a> launched the <a href="http://smartcampaign.org/about/fintech-protects-community-of-practice">Fintech Protects Community of Practice</a>, a group of providers who will collaborate to build industry will and know-how to address emerging consumer risks in digital financial services. The Campaign also released a brief, “<a href="http://smartcampaign.org/tools-a-resources/1136">Tiny Loans, Big Questions,</a>” on the most pressing <a href="https://www.youtube.com/watch?v=6-o0wumsA34&amp;w=560&amp;h=315">consumer protection risks of digital loans</a>.
<h3>It’s All About Governance – In Africa and Beyond</h3>
<a href="http://www.centerforfinancialinclusion.org/programs-a-projects/abf">The Africa Board Fellowship (ABF) Program</a> has matured, and has now built a community of board members and CEOs of financial institutions across the continent who consult each other when they need to think through a challenge or find out what’s happening in other places. To date, roughly 200 CEOs and board members have participated. Revisit this year’s seminars and discussions through <a href="https://www.flickr.com/photos/148835654@N02/albums/with/72157675555469372">photos</a>, <a href="https://cfi-blog.org/tag/africa-board-fellowship/">blog posts</a> and <a href="https://www.youtube.com/watch?v=8flyHNiuKJY&amp;feature=youtu.be">video</a>. Also held this year was the <a href="https://cfi-blog.org/2017/04/18/its-all-about-governance/">Middle East and North Africa (MENA) Governance and Strategic Leadership Seminar</a>, a short program on governance in the region, incorporating the peer-exchange model developed through ABF.

<img class="aligncenter wp-image-24833" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/12/34656213976_fc4f3f5975_z-7.jpg" alt="" width="615" height="410" />
<h3>A Partnership for Responsible Financial Inclusion </h3>
The Microfinance CEO Working Group changed its name to <a href="https://responsiblefinancialinclusion.org/">the Partnership for Responsible Financial Inclusion</a> (PRFI), recognizing that it is no longer a working group, but a deep and active partnership committed to advancing financial inclusion in a responsible manner. For more, <a href="http://bit.ly/MCWG2016">here’s the PRFI’s annual report</a>, which details the group’s key accomplishments and activities of the past year.

<img class="aligncenter wp-image-24834" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/12/eb-accion_march-2011_kiki-flavien_fisherman_72-1-1.jpg" alt="" width="615" height="410" />
<h3>Strategic Leadership During Uncertain Times </h3>
<a href="http://www.centerforfinancialinclusion.org/collaborators-a-sponsors/harvard-business-school-accion">The Harvard Business School - Accion Program on Strategic Leadership in Inclusive Finance</a> convened for its 12th year, bringing together 71 financial inclusion leaders spanning 30 countries to prepare themselves to meet some of the most pressing challenges facing the industry. Among the themes hottest for participants that week were: the role of the biggest players in driving the financial inclusion sector; coping with volatile political scenarios; and contesting data ownership.

<img class="aligncenter wp-image-24835" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/12/accionindia2016025-1.jpg" alt="" width="615" height="410" />
<h3>Global Momentum for Consumer Protection</h3>
Twenty-four financial institutions were <a href="http://smartcampaign.org/certification">Smart Certified</a> in 2017, bringing the total number of certified institutions to 94, who collectively serve over 41 million clients. The Campaign published the <a href="https://smartcampaign.us5.list-manage.com/track/click?u=394352ae963270aef6c51680d&amp;id=e6a02f4822&amp;e=875d1d828c">Consumer Protection Resource Kit</a> and <a href="https://smartcampaign.us5.list-manage.com/track/click?u=394352ae963270aef6c51680d&amp;id=4379354e81&amp;e=875d1d828c">new promotional videos</a> sharing the journey to Smart Certification of four Smart Certified institutions. Financial institutions can use these resources to explain the value of client protection to the parties they work with.

[youtube https://www.youtube.com/watch?v=ZnQjkUShz40&amp;w=560&amp;h=315]
<h3>FIEC Spoke Out on Impact Investing Issues</h3>
<a href="http://fiecouncil.com/">The Financial Inclusion Equity Council</a> (FIEC, of which CFI is the secretariat) released two new reports. <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/867-valuing-microfinance-institutions">Valuing Microfinance Institutions: Where Are We Now?</a> provides a snapshot on how valuation of socially-focused financial institutions has evolved over the last decade. <a href="http://bit.ly/OffshoreFinclusion">Offshore Financial Centers for Financial Inclusion: A Marriage of Convenience</a> examines how and why impact investors decide to use offshore financial centers.

<img class="aligncenter wp-image-20919" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/03/thumb_0b24f5cdece64252a7c0fb6e130a3cf3.jpg" alt="" width="600" height="400" />
<h3>How Financial Institutions and Fintechs Are Partnering for Inclusion</h3>
<a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/872-how-financial-institutions-and-fintechs-are-partnering-for-inclusion">Our joint-report</a> with the IIF on <a href="https://www.youtube.com/watch?v=xY7v1q_fyvE&amp;w=560&amp;h=315">fintech-bank partnerships</a> took a critical look at how financial institutions are organizing to take advantage of the great opportunity of collaborating with fintechs, and the challenges they face in doing so. The report includes case studies that dive into the mechanics of 14 effective fintech-bank partnerships working at the base of the pyramid in emerging markets.
<h3>CFI Fellows Investigated Mobile Money, Human Touch, and Agent Banking</h3>
Leon Perlman released <a href="http://bit.ly/MFSTech">his CFI Fellows report</a> looking at the advantages, disadvantages, and challenges of the existing and evolving mobile technologies, services, platforms, and user devices. Alexis Beggs Olsen <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/cfi-fellows-program/782">investigated</a> how comfortable consumers in Kenya are with digital financial services and when they most need to speak to a person, to best leverage human touch in Kenya’s digital financial services landscape, while Misha Sharma and Shreya Chatterjee <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/cfi-fellows-program/781">examined</a> whether banking agents in India are equipped to help their low-end consumers transition to using digital services.

<img class="aligncenter wp-image-24840" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/12/accionindia2016011-1.jpg" alt="" width="615" height="410" />

We thank you for your support this year and for all your efforts to advance financial inclusion around the world. We wish you all the best for the New Year.

Image credits: Accion

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CFI’s Year in Review

<a href="http://bit.ly/2gl8Ojj"><img class="alignright wp-image-22517" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/12/ipo-covver.png" width="280" height="363" /></a>2016 has been dubbed “the year of IPOs” in India: as of September, there had been 21 initial public offerings (IPOs) worth nearly $3 billion, according to Indian news source Livemint. Among these are two high-profile IPOs for microfinance institutions (MFIs): Equitas Financial Holdings and Ujjivan Financial Services. IPOs are seen as the hallmark of commercial success, but in those industries like financial inclusion that are driven by social missions, inevitable questions arise over whether organizations can preserve their double bottom line priorities when they go public. The cases of these two Indian MFIs offer some answers to this increasingly pertinent question.

But before we get to that, let’s look at why these institutions went public in the first place.

Never waste a good crisis, right? In 2010, when the Andhra Pradesh crisis froze microlending in India, regulators and MFIs rose to the occasion and implemented measures that restored confidence in the microfinance industry and helped cement the social mission of microfinance in India. Most notably:
<ul>
 	<li>Social Standards – In an effort to promote responsible lending, a group of the largest for-profit MFIs in the Indian microfinance sector formed the Microfinance Institutions Network (MFIN). MFIN developed a Code of Conduct by which members commit to client protection, ethics, and transparency, and the group began to “self-police” adherence to responsible lending principles.</li>
</ul>
<ul>
 	<li>Credit Bureaus – The members of MFIN also collaborated with High Mark Credit Information Services to form the first credit bureau to track microfinance borrowing in India. All MFIN members contribute data to the microfinance credit bureau.</li>
</ul>
Five years later, the microfinance industry in India has rebounded, and at the same time the regulatory and investment environment has improved. A new category for MFIs, called Small Finance Banks (SFBs), was created by the Reserve Bank of India (RBI) to allow some of the more advanced Indian MFIs to become more formal financial institutions, provided they maintain their focus on the poor. In 2015, the Reserve Bank of India gave provisional approval to 10 entities to convert into Small Finance Banks within one year. The SFB license requires, among other things, that ownership is at least 51 percent domestic. Two of the institutions looking to convert – Equitas and Ujjivan – needed to restructure their ownership to meet the domestic ownership requirement. They decided the easiest and fastest way to transfer roughly 40 percent of their equity was an initial public offering, which both did in 2016.

Both IPOs were successful. They transferred the required amount of ownership from foreign to domestic shareholders, crowding-in local investors; demonstrated demand by local investors for MFI stock by being oversubscribed; raised necessary operating capital for their respective MFIs; and maintained focus on the social mission by “hardwiring” it into the IPOs.

The last point warrants additional examination and explanation. In fact at the September SOCAP and SEEP conferences, the big question was: How can a company – specifically one in an industry serving vulnerable clients like financial inclusion – hardwire the social mission so that it is preserved in an IPO? A new <a href="http://fiecouncil.com/">Financial Inclusion Equity Council</a> (FIEC) paper further examines exactly how this can be done. (CFI serves as the secretariat of FIEC.) Here are a few examples:
<ul>
 	<li>Company By-Laws – Equitas made a commitment to dedicate 5 percent of its profits to social programs and wrote that commitment into its bylaws.</li>
</ul>
<ul>
 	<li>Shareholder Agreements – Ensuring all investors know what they are buying into can be accomplished via shareholder agreements. For example, Mexican MFI Compartamos inserted a “poison pill” clause into its shareholder agreement stating that if any investor tried to undermine the social mission, the sale would be void.</li>
</ul>
<ul>
 	<li>Company Policies – Aligning management and employees’ interests with both social and financial bottom lines can be enshrined in company policies. For example, positioning management compensation to avoid excessive executive enrichment helps companies focus on more than just profits and dissuades public perception of profiting at the expense of vulnerable clients. Equitas developed a policy that the CEO can’t make more than 40 times more than the lowest paid employee. Additionally, both founders of Equitas and Ujjivan had limited stakes in the companies and encouraged employee ownership through Employee Stock Ownership Programs (ESOPs).</li>
</ul>
<ul>
 	<li>Strong Boards – Of key importance is developing a board that is united and strongly committed to the social mission, has independent members, and is not controlled by a single member or devoted to a single member or investor’s interests.</li>
</ul>
For more details and additional findings, read the new FIEC paper, “<a href="http://bit.ly/2gl8Ojj">How to IPO Successfully and Responsibly—Lessons From Indian Financial Inclusion Institutions</a>”.

Have you read?

<a href="https://cfi-blog.org/2016/07/22/more-in-for-impact-whats-up-in-socially-responsible-investing/">"More in for Impact": What's Up in Socially Responsible Investing?</a>

<a href="https://cfi-blog.org/2015/03/11/miv-governance-the-case-of-africap/">MIV Governance: The Case of AfriCap</a>

<a href="https://cfi-blog.org/2016/05/04/equitas-ipo-forges-path-for-investing-in-inclusive-finance/">Equitas IPO Forges Path for Investing in Inclusive Finance</a>