As we navigate the choppy waters of the COVID-19 crisis, various groups within the investor community, including microfinance investment vehicles (MIVs), development finance institutions (DFIs), banks and other private funders, have pledged to coordinate and collaborate their responses in support of microfinance institutions (MFIs) who have been deeply impacted by the crisis. But what does that mean in practice?

We have seen multiple efforts happening simultaneously over the past month. For example, nine MIVs recently signed a <a href="https://www.covid-finclusion.org/investors" target="_blank" rel="noopener noreferrer">memorandum of understanding</a> outlining a coordinated response to COVID-19, particularly with respect to debt refinancing. The Netherlands platform for inclusive finance, <a href="https://www.inclusivefinanceplatform.nl/news/npm-members-issue-investor-statement/" target="_blank" rel="noopener noreferrer">NpM</a>, also came out with an <a href="https://www.inclusivefinanceplatform.nl/wp-content/uploads/2020/04/COVID-19-MS-V3-1.pdf" target="_blank" rel="noopener noreferrer">investor statement</a> on COVID-19, and a group of stakeholders led by Grameen Crédit Agricole Foundation signed a common pledge of key principles to protect microfinance institutions and their clients affected by the COVID-19 crisis. A <a href="https://centerforfinancialinclusion.org/covid-19-threatens-the-microfinance-sector-and-the-livelihoods-of-those-we-serve-building-a-coalition-for-collective-action/" target="_blank" rel="noopener noreferrer">recently announced</a> initiative of 14 organizations, the Microfinance Coalition, issued <a href="https://www.centerforfinancialinclusion.org/series/microfinance-coalition" target="_blank" rel="noopener noreferrer">a series of blog posts</a> calling on donors, investors and policymakers to support the microfinance sector. And the Global Impact Investing Network (GIIN) recently established the <a href="https://thegiin.org/r3coalition">R3Coalition</a> of impact investors and foundations which will mobilize and coordinate impact investors to fill financing gaps and quickly deploy capital to high-impact investment opportunities.

These initiatives are certainly commendable, but it is nevertheless concerning that many may have overlapping objectives and activities that draw on valuable financial and human resources which could be put to work on a coordinated response effort. In a recent CGAP investor coordination call, a participant poll found that many participants have been on 50 to 100 coordination calls in the past several weeks.
<h2>Too Many Cooks in the Kitchen?</h2>
The COVID-19 crisis is so vast and the impact so devastating that good intentions are leading to a plethora of responses. The result, however unintentional, is that we now have too many cooks in the kitchen, creating a somewhat frenzied and chaotic environment which may be slowing down our collective effectiveness and response.
<blockquote>We need a “master chef,” a central coordinating body for information, data sharing and aligning microfinance investor constituencies.</blockquote>
I would argue that there is a need for a “master chef,” a central coordinating body that serves not only as a forum for information and data sharing but also works to align the multiple microfinance investor constituencies in their response to the crisis, both in the immediate and longer term. CGAP is already stepping in to fill this role by gathering representatives from the investor constituencies (debt and equity, public and private), each with their own priorities but united in their commitment to supporting MFIs and their clients. This is not the time to test out a multitude of recipes; we need a global effort to agree on a basic framework for action that can be adapted to the individual context of the MFI.

The need for a global framework would not deter from initiatives that require specific local, regional or country responses. For example, the recent coordination in <a href="https://www.thehindu.com/business/sbi-to-extend-loan-moratorium-to-nbfcs/article31520920.ece">India</a> was effective at lobbying to extend the <a href="https://www.livemint.com/industry/banking/sbi-to-extend-moratorium-to-nbfcs-and-microlenders-11588774331563.html">moratorium instituted by the Reserve Bank of India</a> to non-bank financial companies and not just the banking sector. As so many investors work globally, a coordinated approach will facilitate alignment and expedite action that can then be adapted to specific contexts around the world. Having a central coordinating body will help ensure that the ingredients in the basic recipe (i.e. a response framework) are added and combined in the right order and quantity to optimize the outcome for each market context.

Given the complexity of the investor response to COVID-19, CGAP may prefer to focus its attention on the DFI and donor constituencies, many of whom are CGAP members. Indeed, that is a much-needed role as the DFIs and donors are critical to the response to ensure the survival and resilience of microfinance institutions now and in the long run. But at the same time, it is important to remember that the DFIs are also major shareholders in MIVs, so ongoing alignment among all the investor constituencies will lead to better outcomes for investors, MFIs and their clients.
<h2>The Recipe: Immediate Needs for the Investor Response</h2>
A central coordinating body will be essential to helping the stakeholders focus on the appropriate steps at each stage of the COVID-19 response. The immediate stage focuses on understanding the needs of specific MFIs, especially their liquidity requirements, and potential actions, such as debt moratoriums on loans to clients as well as debt obligations coming due. The medium-term period would require a shift away from liquidity toward a focus on capital adequacy, capital calls, and inevitably, mergers and liquidations. In the longer term, the focus will be on the future state of the microfinance industry, how operating models will evolve and whether investors’ strategies will shift to respond to their renewed perception of risks.

During this immediate phase, the first step is for the coordinating body to delegate responsibilities through a series of working groups. CGAP recently called a meeting of investors and proposed the creation of three technical working groups, each focusing on one or more priority issues. This type of delegated responsibility is the only way we can address the myriad of issues that the microfinance sector is confronted with today. A coordinating body is essential to the effectiveness of such working groups.
<blockquote>Working groups and data collection/analysis are two critical needs.</blockquote>
The second critical need is data. How long can MFIs survive under lockdown? Can additional liquidity extend this period? Data collection and analysis are paramount at this stage and coordination of those efforts is critical to avoid duplication of effort and a reporting burden to the MFIs. A data technical group will ensure that stakeholders know which data is being collected by what party and for what purpose. Also, very important is what data - analyzed or not - will be made public and when. Harmonizing data collection and reducing the reporting burden with a standardized template are important goals, but knowledge sharing among stakeholders may be the first line of action.
<h2>Time is of the Essence</h2>
The inclusive finance sector consists of many different players, requiring an ecosystem response with clear roles and responsibilities. A central coordinating body equipped with the infrastructure to establish clear delegated responsibilities to subgroups will be the only way we can efficiently and collectively step up to the needs of the sector. CGAP has taken the first steps to take on the central coordinating role and many others, including CFI, have stepped up to take on delegated responsibilities. We are slowly but surely moving in the right direction but need to move even faster if we are to avoid distracting, confusing and expensive duplication of effort.

How Should Investors Coordinate When Time is of the Essence?

Test of a Lifetime: COVID-19 and Financial Inclusion

Challenges and Crises

Enabling Environment

Impact Investing

Responsible Investing

Blog Post

<h3>You’ve been working towards financial inclusion for the majority of your career: as a loan officer, through to Accion, and now with Quona. Why is financial inclusion so important to you?</h3>
<strong>MBE</strong>: Financial inclusion resonates with me because it’s a powerful lever for change that works on both micro and macro levels. I grew up living in both “developing” and “developed” contexts, so the notion that innovation and markets have the power to influence people’s daily lives and economic systems became evident to me from an early age.

One of my mentors used to say, “We can't be patient with poverty.” He instilled in me the idea that markets work much more quickly than governments or foundations.

I also fundamentally believe that to address a problem as massive as global poverty, we need to mobilize a resource that’s also plentiful: the world’s capital markets. Financial inclusion is about harnessing the power of these markets and putting them in the hands of everyday individuals and entrepreneurs.
<blockquote>Financial inclusion is about harnessing the power of markets &amp; putting them in the hands of everyday individuals and entrepreneurs.</blockquote>
On the micro-level, financial inclusion is one of the most powerful mechanisms to change peoples’ daily quality of life. Innovations like mobile money have had an incredible impact on the lives of people all over the world. Rather than walking 20 kilometers to pay a bill and taking children out of school to watch the livestock, farmers in Kenya can now pay by entering codes on their cell phones. This has a huge impact on the farmers’ productivity, and it was only made possible within the past 10 years. Democratizing access to financial services to previously underserved populations has shifted the way people can expand their businesses and grow their household income.
<h3>The number of impact-driven investors, many of whom have a much broader focus on impact than Quona does, has increased globally. To what extent you think Quona’s narrow focus on financial inclusion has either accelerated or impeded success, both at a fund level and a company level?</h3>
<strong>MBE</strong>: When we created <a href="https://quona.com/">Quona,</a> we were in an era of industry building, when the “impact investing” moniker had just been developed. It was early, and it involved a lot of well-intentioned people launching funds. It quickly became clear to us that we wanted to be a point of light in this field and have our social and financial performance demonstrate how profit and purpose can be mutually reinforcing.

The decision to focus Quona on fintech specifically within financial inclusion was quite deliberate, informed by over a decade of experience seeing microfinance be successful. Traditional financial services had hit a wall. We needed new approaches that balanced tech-and-touch in a more nuanced way so that we could achieve our goal of radically improving both access and quality of financial services to the underserved.

Coinciding with the early growth of impact investing – and the realization that fintech for financial inclusion should be our focus – were enormous concurrent technological and demographic trends that made it the perfect time to launch a fintech fund. First, you had the proliferation of mobile phones and smartphones in emerging markets, which put the power of a computer in the hands of an underserved person. Second, you had the expansion of internet access and 4G more globally, which allowed social media to take off and enable business models, like software as a service, and other cloud-based models, which dramatically changed the cost structure and what I call the “physics of business.” The third key trend is that the data created by this digital footprint and this massive demographic trend of emerging market consumers using this technology generated a tremendous data base of information to be mined for understanding, underwriting, and communicating with consumers.

All of a sudden, we had the power of analytics that could help reduce the cost of launching and running these business models, and also open new doors about the types of customers that could be acquired and served. These trends converged when we were deciding to launch our fund, and they have been key to our financial success and in our ability to invest in companies that are changing the game of financial services to include populations that were previously underserved at scale.

In terms of the impact that focusing on financially underserved populations has on our investees, there’s a big difference between a great idea, a good business, and a smart investment. As investors, we're looking for the latter – smart investments – which requires ticking some different boxes.

In order to be a good investment, a company obviously needs to have a great business, great unit economics, and a compelling value proposition. But beyond that, a good investment requires the "defensibility" that technology innovation can bring and an enormous addressable market to earn the kind of risk-adjusted returns we're looking for. That's where focusing on inclusion is such a powerful proposition. The types of problems our investees are solving are basic, daily problems.

Consider fintechs doing small business lending in emerging markets. They’ve seen traditional banks and microfinance institutions fail to offer loans to small businesses profitably, because the cost to acquire customers is too expensive, or the cost to underwrite is too difficult. These fintechs focusing on underserved populations are leveraging their tech, information flows, total addressable market and lack of competition to become good businesses and more compelling for investors like us than the fintechs focusing on the top 1 to 10 percent of the population.

On top of having an enormous total addressable market, a good investment also needs to have a certain level of customer-centricity to have long-term success. The quality of services or products -- i.e. how accessible, usable, expensive, etc. -- that a fintech is offering is important to us, both from a returns perspective and from a financial inclusion perspective.
<h3>One of Quona’s driving investment themes is “profit meets purpose.” Are there any tradeoffs there?</h3>
<strong>MBE</strong>: We are lucky to work in a sector where there's a lot of mutual reinforcement. Because we work where addressable markets are so large and critical, that leads us to places that are the most underserved or where quality suffers.

That said, there are tensions. Sometimes there are short-term decisions made that might seem like a company or investee is drifting from its mission in favor of profit. An example is on pricing and which segments a company serves. Most of Quona’s portfolio companies do not exclusively serve low-income segments. Many of them have a mix of customers that are predominantly low or lower income and predominantly underserved, as well as a percentage of middle or high-income customers.

Serving a broad spectrum of customers might mean, in the short term, that some of their resources are focused on folks that are not highly underserved, but that's important for a few reasons. One is, it avoids concentration risk -- if they were focused on a specific segment it would make them vulnerable to competition or price margin erosion. Two, it allows them to provide the full range of services or products, so as their previously underserved customers evolve financially, they have appropriate services to grow with them.
<blockquote>Serving a broad spectrum of customers is important.</blockquote>
There are many benefits -- both social and financial -- of not exclusively focusing on the lowest income segments. In the short term, there's this resource allocation question, you can call it a “tradeoff,” but it’s a multiplicity of factors of companies having to answer business questions like:
<ul>
 	<li>How do I make sure that I have a robust financial performance and ongoing defensibility?</li>
 	<li>How do I make sure I have a cushion to deal with macroeconomic factors and the inevitable dips that happen in emerging markets?</li>
 	<li>How do I make sure I can grow with my customers?</li>
</ul>
None of these questions have a clear answer in terms of what that means for customer breakdown, but it does require consideration. Our firm shies away from setting specific, time-bound outputs, because we’ve seen unintended consequences with targets, like establishing a target of reducing the number of unbanked consumers, only to achieve our goal of millions of dormant bank accounts. We also understand that the businesses our companies run and the markets in which they operate are complex, require nuanced appreciation of multiple factors impact outcomes.
<h3>How should we measure success in financial inclusion?</h3>
<strong>MBE</strong>: I'm a big believer in measuring, so I love what I see in impact investing, where there are greater calls for rigor in measurement, and a desire to build performance monitoring systems as comprehensive as what we have for operational and financial metrics. Measuring and evaluating are a core part of Quona’s DNA. We’re proudly nerdy in that way.
<blockquote>Measuring and evaluating are a core part of Quona’s DNA. We’re proudly nerdy in that way.</blockquote>
The way we think about success is along three dimensions:
<ul>
 	<li><strong>Access</strong>: How do you get more underserved people in the mainstream and provide them access to a suite of financial services?</li>
 	<li><strong>Quality</strong>: Affordability, accessibility, convenience, usage, etc. This is important to us because just focusing on access or targets can lead quality, usage and (ultimately) retention to suffer.</li>
 	<li><strong>Markets</strong>: From increasing capital flows to markets where the capital stack is thin, to making market rates more competitive, to giving small businesses more leverage, what is the indirect impact that our companies are having on their markets?</li>
</ul>

Focusing on the Underserved, Serving the Bottom Line: a Q & A With Monica Brand Engel

Financial Inclusion Week 2019

Social Impact Metrics

Malcolm Gladwell, who popularized the term in his 2002 book, defines a "tipping point" as “the moment of critical mass, the threshold, the boiling point.” It’s the point, said Gladwell, when ideas, messages and behaviors that were once the exclusive province of early adopters suddenly tip and become the norm.

We at <a href="https://sptf.info/">SPTF</a> have been daring to wonder whether the work we’ve been doing for the past 15 years might just have reached that kind of tipping point. Because – suddenly, this summer –some significant developments are providing encouraging signals. In mid-June, the <em>Financial Times</em> launched a new weekly feature called <a href="https://www.ft.com/moral-money">Moral Money</a>. Other than the pleasing alliteration, it might have seemed an odd choice for a name. People who read the <em>Financial Times</em> might not seem the most natural audience for moralism. And yet, all the advertising space in Moral Money for the year was sold out before the first issue hit the streets, and subscriptions have far outpaced the <em>Fiancial Times'</em> projections. This is according to the formidable <a href="https://www.ft.com/gillian-tett">Gillian Tett</a>, chairman of the <em>Financial Times’</em> editorial board, who is driving the Moral Money project. Suffice it to say, the Financial Times has not delegated its ESG coverage to some cub reporter.

Then in late July, the <em>New York Times</em> ran a feature story about Jamie Gamble, a retired corporate lawyer whose firm’s client roster included virtually every major company in the United States—among them Facebook, Google, General Motors, and JP Morgan Chase. To be sure, it’s not unusual for the <em>New York Times</em> to cover the doings of the powerful. Mr. Gamble’s message, however, was quite unusual: he had become convinced that the CEOs of his client companies were not only incentivized but <a href="https://www.nytimes.com/2019/07/29/business/dealbook/corporate-governance-reform-ethics.html"><em>legally obligated</em> to act like sociopaths</a>, that is, people who care, single mindedly, about themselves, or in the corporate case, about shareholders. Once the Cult of the Shareholder took off in the 1980s, it became the CEOs’ obligation to maximize shareholder profit and ignore any other consideration for other stakeholders.

Gamble’s proposal is this: that every company incorporate a set of ethical rules into their bylaws. Those rules might embrace effects on the environment and future generations as well as effects on relationships with employees, local communities, customers, and suppliers. This seemingly innocuous step could have far-reaching consequences. Whatever the rules a given company sets for itself, once they are in place, “Any shareholder could sue the board of directors for violating the ethical rules — just as any shareholder can today sue the board of directors for violating the maximize rule,” he said. Mr. Gamble reports that his ideas so far have received a fair hearing and thoughtful responses from his former colleagues.

Then finally, in mid-August, came perhaps the loudest signal of all. The 181 members of the Business Roundtable, which includes some of the most powerful figures in corporate America, announced that it will henceforth <a href="https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans">commit</a> to balancing the interests of shareholders with those of everybody else. That announcement unleashed a flood of coverage and commentary – it was the <a href="https://www.economist.com/briefing/2019/08/22/big-business-is-beginning-to-accept-broader-social-responsibilities">cover story</a> of <em>The Economist</em> the week after it came out—and reactions ranged from fawning to <a href="https://www.fastcompany.com/90393303/dont-believe-the-business-roundtable-has-changed-until-its-ceos-actions-match-their-words">cynical</a>.

From where we sit, the significance of the Business Roundtable announcement is the fact that it’s a collective statement. That element of collective action is the one that makes all the difference because it tackles the so-called “prisoner’s dilemma” that keeps the world trapped in the short-term, quarterly-profit-driven mentality. While it’s in everyone’s collective interest to take the long view, it is to no single player’s individual advantage to be the one who goes first and suffers a few quarters, or years, looking like an underperformer relative to his benchmark. The <em>only </em>way out of the prisoner’s dilemma was for everyone to hold hands and jump at the same time – exactly what (we hope) this announcement signals.

Now of course comes the hard part. Let’s assume for the sake of the argument that everyone is sincere, that now the Business Roundtable members, Mr. Gamble’s former clients, the Moral Money-reading masters of the universe – that all of them are committed to no longer behaving like sociopaths. Where will they go to find out how, concretely, they should rethink their bylaws? Their operating procedures? Assuming they succeed in embracing and internalizing a radically different worldview, <em>how do they operationalize it</em>?

This is the work SPTF has been doing with colleagues for 15 years now. It took 15 years (12 years to build trust and awareness, 3 years to write) but we do actually have a roadmap, the <a href="https://sptf.info/images/USSPM_EnglishManual_v2.1_2019.pdf">Universal Standards for Responsible Inclusive Finance</a>, that guides companies through the journey of walking the talk.

SPTF was created to be the voice of ethics, responsibility, and impact for what was then called the microfinance industry. At SPTF’s inception in 2005, these were fringe concepts. So we spent much of our time simply talking about the importance of a double bottom line and trying not to position ourselves as the sad-eyed conscience of the industry. Partly that was a strategic (and aesthetic) decision: no one wants to be that person, or listen to that person. But mostly it was practical. Our messages were: Don’t let the perfect be the enemy of the good. Start where you can, and do what you’re able, but <em>get started</em>, and be real.
<blockquote>Start where you can, and do what you’re able, but <em>get started</em>, and be real.</blockquote>
As the trust grew and the messages took hold, social performance management took off. SPTF and our partners and colleagues developed standards for balanced performance management, tools for executing best practice, and a global community of people willing to share their successes and failures. The experiences and the tools have proven relevant to other sectors, and have turned the inclusive finance sector into something of a model for other ESG investment classes.

Our sector is home to literally hundreds of financial service providers who have decided that profit is not their sole purpose. Without fuss or fanfare, these businesses are balancing growth with quality customer service and customer protection, protecting their employees’ rights, measuring the social outcomes of their work, and holding their leadership accountable for social metrics – behaviors laid out in the Universal Standards and encouraged by our global community of practice (see "Balance Social and Financial Performance" – from SPTF's <a href="https://sptf.info/images/sptf-guidance-note-issue-5-guiding-your-board-on-spm-final.pdf">Guidance for Board of Directors</a> – below).

&nbsp;

Suddenly, This Summer

<a href="/bio/deborah-drake">Deborah Drake</a> will be discussing the forthcoming “Governance Guidelines for Innovative Companies Serving the Base of the Pyramid,” a collaboration between FMO and CFI (originally published 2005, revised in 2019). We look forward to receiving input on this draft at/following this event.

13th Annual DFI Corporate Governance Conference

Banks

Financial Service Providers

Fintechs

Governance

Microfinance Institutions

Event

The impact investing world is an exciting place to be. Investors’ hopes of doing good and doing well are alive and well. As impact investing matures, veterans in the field are asking how to focus resources. Should we seek high returns in order to attract mainstream investors, or maintain a clear social bottom line, even if returns fall below the market average? Which direction should our unique blend of development and capitalism take?

Two recent articles attempt to answer this question: one is a <a href="https://ssir.org/articles/entry/almost_everything_you_know_about_impact_investing_is_wrong">longer essay in Stanford Social Innovation Review</a> – by <a href="https://www.poverty-action.org/people/wendy-abt">Wendy Abt</a> – the other an <a href="https://www.ft.com/content/b6c893d4-f48e-11e8-9623-d7f9881e729f">interview with Elizabeth Littlefield in the Financial Times</a>. Both these accomplished women are well positioned to reflect on and shape the future of impact investing.

Abt is the founder of <a href="https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=51828662">WPA, Inc.</a>, an investment advisory firm, and former deputy assistant of USAID. Littlefield was the director of CGAP before becoming president of the Overseas Private Investment Corporation, which has shaped her current role as Senior Counselor of the <a href="https://www.albrightstonebridge.com/team/elizabeth-l-littlefield">Albright Stonebridge Group</a>.

There is a lot to agree on in both articles, but I have some reservations about them as well.
<h2>Abt: Market Returns, Better Measurement, Bigger Players, and a Different Investment Paradigm</h2>
Abt is right that greater clarity is needed regarding impact investing’s key principles and practices.

She contrasts two investing paradigms that come from mainstream investing but are often applied in impact investing. The first is venture capital (and incubators), an approach that prioritizes rapid growth and a clear exit strategy for investors. The problem here is that fast growth and clear exits can be incompatible with attention to social impact. Abt prefers an approach that more closely resembles project finance. While the analogy may not be exactly appropriate, project finance takes a longer-term perspective and considers complementary investments by other players.

She also points out that too many impact investors surrender to concessionary business models before they even join the fight for market returns. They offer a plethora of rationales to justify concessionary returns, arguing, for example, that subsidies are necessary because impact-oriented businesses take a long time to become financially self-sustaining. Many social enterprise business models need to start off with concessionary funding (subsidies) because the timeline for revenue generation is unclear: these are, after all, new operating models tackling social problems that big business has not taken on. Often however, this concessionary capital becomes “permanent” because the goal of moving towards financial sustainability takes a back seat to other priorities. So I agree that impact investors should expect their investees to move towards sustainability and profitability, and that requires clearly negotiated timelines and diligent oversight.

However, Abt makes some assertions that I disagree with.

Abt insists that the purpose of impact investing is to solve major social problems – like income inequality or global warming – by attracting non-concessionary capital into a competitive marketplace. I’m not on board with several parts of that claim. Impact investors should not have to carry the weight of building more competitive markets, and do not have to aim exclusively at non-concessionary capital sources. These are grand aims, but often they are too much to ask of investors wishing to use their own capital in socially positive ways.

As a result of her focus on non-concessionary capital, the only source of below-market capital Abt is willing to entertain is government, on the grounds that if impact investors do not anchor themselves to market returns, they risk serious misallocation of resources. I disagree. In fact, many impact investors, especially foundations, prioritize social return over market returns especially if their money can be used in a catalytic way to create a business with a social good. Why should they not be considered legitimate investors?
<blockquote>Many impact investors prioritize social return over market returns, especially if their money can be used in a catalytic way to create a business with a social good.</blockquote>
Because Abt’s vision is all about major social problems, she defers to the biggest corporations in a way I find a bit troubling. She asserts that only large regional and global companies, not small ventures, can make a difference in the complex sectors most critical to the poor, namely infrastructure, health, agriculture and logistics. She states, “impact investors are noticing the advantages that global and large regional firms have over smaller firms in low-income and fragile countries.” She cites successes of Carlos Slim in Mexico, Aliko Dangote in Nigeria, and Jack Ma in China.

It may be true that behemoths have advantages, but it’s simplistic and unrealistic to apply that thinking wholesale. It sends a message that impact investing is all about co-investing with or exiting to Alibaba or Dangote, who were themselves small disruptors at one time. But do the behemoths value social impact? What should happen in countries where big companies don’t invest? It’s true that the goal of many a small innovator is to sell to a global company – and that proves my point: impact investing is needed precisely for these smaller firms to innovate and test their ideas before large multinationals will give them a second glance.
<h2>Littlefield: Market Returns Not Necessary?</h2>
I put myself more in Littlefield’s camp, agreeing with her assertion that the impact investment sector should accommodate all investors, whether large or small, institutional or individual, philanthropic or commercial. Millennials are demanding investment opportunities, and not all are looking for above market rates of return. The “investment experience” is important along with social and financial returns. Research suggests that the demand for sustainability is <a href="https://www.inc.com/melanie-curtin/73-percent-of-millennials-are-willing-to-spend-more-money-on-this-1-type-of-product.html">firmly entrenched in mainstream millennial attitudes toward money</a>. As these millennials gain seniority in the business world, they won’t hesitate to advocate investment decisions that promote sustainability above traditional market returns, and data-driven decision making will help shape these investment decisions, even if it means their money grows more slowly. Many millennial investors are willing to experiment and refine. Time, of course, is on their side.

Moreover, a below-market return doesn’t mean a loss. Investors who prioritize social returns are also looking for the investee to grow and become profitable. With this in mind, I agree with Littlefield that the universe of impact investors has to be broadened, which is why I appreciate her wider definition of “impact investor” vis a vis Abt. There is no one type of impact investor, so there is no single approach or type of funding that will ensure success.
<blockquote>the universe of impact investors has to be broadened.</blockquote>
Abt’s search for a big business fix is not realistic. Yes, there is a lot to say for economies of scale, access to cheap capital and the big data that big players bring, but can we trust these companies to care for small impact investment projects, especially in cases of global economic headwinds? Will they let them fall by the wayside when they need to make revenue projections for a particular quarter? To succeed, the impact investment sector will need a broad and diverse community of investors. As we move forward, millennials will drive this diversification.

<em>If you’ve read this article, chances are you have a lot on your mind regarding the impact investing and how it affects financial inclusion. We’d like to hear from you! Please write your opinions in the comments below and let the world know what you think.</em>

The Future of Impact Investing: CFI’s Take on Dueling Views

North America

Equity Investing

Across emerging markets, we are in the early stages of a digital financial revolution that promises to upend the status quo while vastly expanding services to people who were previously un- and underserved. As investors, we believe we can play a catalytic role in ensuring that digital innovations have the opportunity to be market tested, refined and ultimately scaled.

This essay considers the role of investors in responding to the opportunities offered by the digital financial services revolution and bringing about financial inclusion. The comments here reflect the view from Quona Capital. Quona manages the Accion Frontier Inclusion Fund, the first global fintech firm for the underserved, and its successor, the Accion Quona Inclusion Fund. We believe that Quona brings a unique perspective with a view across a wide range of countries, business models and investor types – all focused on getting financial inclusion right.

The Role of Investors in Getting Inclusion Right

Getting Inclusion Right

<em>Caveat Venditor: Towards a Conceptual Framework for Buyer Selection in Responsible Microfinance Exits</em> 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). <em>Caveat Venditor</em> 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.

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Caveat Venditor: Towards a Conceptual Framework for Buyer Selection in Responsible Microfinance Exits

Financial Inclusion Equity Council

Responsible Exit

Report

<em>&gt; Posted by Alex Silva, Executive Director, Calmeadow, and Jeffrey Riecke, Senior Communications Specialist, CFI</em>

<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><strong>Investors exit for many reasons </strong></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 <strong>“declare victory and go home”</strong>. Many financial inclusion investors are doing just this.</li>
 	<li>In other cases, an investor’s <strong>strategy might change</strong>. Perhaps an investor decides to focus on a different region or sector.</li>
 	<li>The investor is <strong>thirsty for money</strong>, 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><strong>Markets can become risky</strong>. The enabling environment of particular countries can change. For instance, isolationist policies might spur opposition to foreign-owned businesses.</li>
</ul>
<h3><strong>Exiting responsibly </strong></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><strong>Exiting irresponsibly</strong></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><strong>When investors hold investments too long</strong></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><strong>Impact investing trends</strong></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><strong>Greater industry action</strong></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"><em>The Art of the Responsible Exit in Microfinance Equity Sales</em></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”.

<strong>Have you read?</strong>

<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?

Investors

Agent Banking

<em>&gt; Posted by Hatem Mahbouli, Investment Officer, FMO</em>
<h3><em><img class="alignright wp-image-20339" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/01/thumb_01ad8da11af2400e8149cc6dfd5aa258.jpg" alt="" width="325" height="214" /></em>Social Impact Bonds</h3>
A lot has been said on social or development impact bonds (SIBs), and the instrument evidently has acquired enough vintage to be subjected to an insightful <a href="http://www.brookings.edu/research/reports/2015/07/social-impact-bonds-potential-limitations">review by the Brookings Institute</a> on the promises and limitations of its applications.

To give a short description, SIBs are not bonds (too late to change the name apparently), but sort of a public-private partnership, where investors are only repaid by the donors or government commissioners if and when pre-agreed social outcomes are achieved, transferring the risk of failure from <a href="http://www.socialfinance.org.uk/services/social-impact-bonds/">donors/government (outcome payers) to investors.</a>

SIBs can change perspectives where social issues move from being budget issues to business cases. The proposal is very appealing for impact investors as it offers new opportunities to deploy capital for social impact, with a strong focus on accountability and credible measurement of the achieved impact.
<h3>Applicability to the financial inclusion space</h3>
To date, very few SIBs have been launched in low income countries, despite many parties closely watching deployments elsewhere. Issues range from legal constraints to high transaction costs, but let’s assume for a moment that there is enough will, incentives, and capacity to overcome those limitations and launch a SIB in financial inclusion. What would this look like?

For a SIB to work, it needs to tackle what we call a “SIB friendly” issue or segment. You cannot apply it to any problem. The intervention – to put it very shortly – needs to be limited in time, have a specific scope, and an output (or outcome) that is relatively easy to measure and to value. Of course, for the whole structure to make sense, there needs to be an outcome payer who is willing to buy those outcomes, and an investor willing to take the risk.

Let’s look at the main outcomes donors seem keen on achieving in the financial inclusion space: financial literacy, access to suitable financial services for the poor (including savings), development of payment services and technologies and specific products, penetration in particularly underserved and complicated areas, access to financial services for a specific segment (youth, women, farmers, etc.), and access to finance for a specific purpose (e.g. clean energy), to name a few. Other efforts, like those related to governance and regulation seem trickier to implement in the SIB context, since they tend to be longer term and more difficult to directly correlate with specific outcome metrics.

To go a level deeper, a good spot to start, usually, is to look at existing performance/results-based contracts in the financial inclusion space. In fact, many SIBs result from tweaking a result-based contract to allow investors to step in and finance operations upfront. On this blog, there has been a <a href="http://cfi-blog.org/2014/09/10/pay-for-performance-operationalizing-the-embedded-education-model/">conversation</a> on outcome-based projects related to financial literacy. <a href="http://ieg.worldbank.org/Data/reports/chapters/appe_ifc_poverty.pdf">IFC’s Performance Based Grants Initiative (PBGI)</a> also seems to have disbursed to leasing and micro-lending related projects (we could not get more details at this stage).

For impact investors who are strongly involved in financial inclusion, such as FMO, the easiest way to try out this new instrument is to “plug” it into investments with our partner MFIs. Here we suggest a basic example of what might be a mix of a plain vanilla debt facility and a SIB component:
<ol>
 	<li>The investor discusses a debt facility at 5 percent/p.a. with an MFI in India.</li>
 	<li>The investor and the MFI partner agree with a donor to achieve a specific outcome. For the sake of discussion, let’s consider reaching 10,000 clients in a conflict area.</li>
 	<li>The investor would accept to allocate 50 percent of its loan to this high risk area without an increase in rate, accepting to delay the reward until the impact is achieved.</li>
 	<li>Once the 10,000 clients are reached, the donor pays for the outcome and transfers extra funding to the investor that accepted the transfer of risk upfront. The investor gets compensated for the extra impact it pushed for (“outcome dividend”). The donor only disburses once the results are reached.</li>
</ol>
<img class="aligncenter wp-image-20333" style="border: 0 solid #000000;margin-top: 3px;margin-bottom: 3px" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/01/figure.jpg" alt="" width="616" height="230" />SIBs present an attractive option for service providers that are looking for much coveted industry funding.

In short, it is about raising the bar for social outcomes, through upfront funding, while the donor money will only be dispensed when the outcome is achieved.

SIBs stimulate ideas of outcome-based finance, which will help parties involved be accountable on the actual social impact of their endeavors. For instance, an investor can agree on a set of social outcomes with an MFI and will only renew the facility if those outcomes are reached.

Of course, in theory, a stand-alone SIB should be feasible but we are more confident a pilot is easier to implement when mixed with existing relationships and processes.
<h3>Scalability and sustainability</h3>
Switching focus to the ultimate impact is not sufficient though, and the question of sustainability and scalability of such structures is often raised. However, we do believe that starting to think of the right structures and how to make the first pilots successful is a prerequisite to any long-term sustainability or scalability discussion.

We urge donors and service providers to start interacting more with investors of MFIs, as they might be willing to advance the capital, accept the transfer of risk, and channel more funding toward the strengthening of the sector. We strongly believe that SIB structures – whether standalone or “SIB inspired” – will help align the interests among the investor, the financial institution, the technical advisor, and the outcome payer, resulting in increased efficiency, innovation, greater impact, and no free riding. We are happy to continue the conversations toward such a goal.

<strong>Have you read?</strong>

<a href="http://cfi-blog.org/2015/08/05/an-agile-approach-to-impact-measurement/">An Agile Approach to Impact Investing</a>

<a href="http://cfi-blog.org/2013/03/20/four-challenges-for-impact-investing/">Four Challenges for Impact Investing</a>

<a href="http://cfi-blog.org/2015/03/03/what-impact-investors-could-learn-from-microfinance/">What Impact Investors Could Learn from Microfinance</a>

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Social Impact Bonds and Financial Inclusion

<em>&gt; Posted by Amitabh Brar and Paul DiLeo, Investment Manager and President, Grassroots Capital Management</em>

<strong><a href="http://www.calmeadow.com/investments/africap.html"><img class="alignright wp-image-17586" src="https://centerforfinancialinclusionblog.files.wordpress.com/2015/03/untitled.png" alt="" width="270" height="350" /></a>A rare, behind-the-scenes look</strong>

Performance data on private equity funds is not easy to collect, and privately-held microfinance investment vehicles (MIVs) are no exception. Much less is known about the investment process within these MIVs, and how the three main elements of their governance -- board, investment committee, and fund manager -- interact to create value within these funds. A <a href="http://www.calmeadow.com/investments/africap.html" target="_blank">new Calmeadow study</a> written by <a href="http://www.grassrootscap.com/" target="_blank">Grassroots Capital Management</a><em> </em>shines light on the elusive subject of governance inside a pioneer equity fund, AfriCap. The study, sponsored by a group of AfriCap investors, evaluates strategy setting and resetting, investment decisions, and portfolio management from the standpoint of the prime movers governing the fund: the board and its committees.

<strong>About AfriCap</strong>

After three years of planning, AfriCap was launched in 2001 with $13 million to invest in support of commercial microfinance in Africa. The sponsors were inspired by the accomplishments of Latin America’s Profund, then in its sixth year, and indeed many of AfriCap’s investors had collaborated earlier on Profund. Fund investments were complemented with a $3 million technical assistance (TA) grant facility to strengthen investees’ capacity. AfriCap saw some spectacular early successes. Some of its investees are today well-recognized financial institutions, including Equity Bank (Kenya) and Socremo (Mozambique), among others. These early results led to increased investor interest and in 2007 new investors joined, tripling AfriCap’s capital to $42 million. The TA pool was boosted to $11 million. In addition, the decision was taken to transform the closed-end fund into a permanent investment company, and the manager into an African-owned and run management company with the ability to manage multiple funds

Yet, notwithstanding AfriCap’s early successes, the fund failed to recover investment costs in 12 out of 21 investments, and there were several write-offs. The fund ended up delivering only modest financial returns to its investors, and the results were especially disappointing for new investors who joined at the time of recapitalization. In 2013 the board approved a plan to liquidate the fund and return unused capital to the investors, reversing an earlier decision to run AfriCap as a permanent company.

<strong>Study Findings</strong>

The study found that the keystone to AfriCap’s investment strategy, set by the AfriCap board, was an Africa-based management team led by an African manager. This strategy provided local knowledge and presence that gave the fund a strong edge over other investors, enabling it to invest nearly $40 million in both equity and debt in 21 MFIs, more than any other equity fund investing in microfinance during that era. AfriCap closed investments in different types of institutions (NGOs, Banks, MFIs) spread across Africa. The investment committee operated in a transparent and ethical manner and required the same from investees, setting high standards for the emerging African microfinance industry. With the benefit of AfriCap capital and TA, the African microfinance sector generated solid examples of investable MFIs and led the way for other commercial investments in Africa.

Yet, in a dramatic change of fortune, fund performance faltered after seeing some spectacular early successes. The Grassroots study explores what aspects of the fund’s structure and governance were most influential in such a change of fortune. Was governance conducted appropriately and did the board and its committees, as well as the investors/shareholders, conduct themselves according to the mandate of AfriCap? The study explores these and other questions, collecting information and perspectives through interviews with AfriCap managers, staff, board members and investees, and other, publicly available information.

The study found that sponsors and investors set a very ambitious agenda for AfriCap from the start, and did not maintain a clear focus or prioritize objectives. A cautious approach in the early years was eroded by investor impatience, the success of some early investments, and a shift of focus to recapitalization, undermining investment discipline. The sponsors and the board, overwhelmed by the distance and geographical spread of the investments, were unable to serve the essential function of safeguarding a stable structure and strategy and ensuring effective risk management. While some members of the investor group were eager to increase the investment pace, others were concerned about quality, and management received conflicting signals. A dynamic developed where growth and innovation were encouraged, but focus and discipline were absent. The board failed to restrain shareholder and manager ambitions, and ensure that management capabilities were adequate to the task, even as the challenges of investing in Africa became apparent. Eventually the governance function lost effectiveness and value was lost as the portfolio languished while governance was revived and new management was put in place.

<strong>Lesson learned</strong>

What led to this situation? How did AfriCap’s governance support or undermine its performance? Are there lessons in the AfriCap case study for other investors and boards of other funds? The study found that governance left its fingerprints everywhere on AfriCap’s successes and failures:
<ul>
	<li>Investors recruited an Africa-based team, but failed to support them with Africa-based board members, including independent members;</li>
	<li>The board failed to carefully manage succession and transitions; the fund was undermined by nearly simultaneous transitions of board, investment and technical assistance facility leaders;</li>
	<li>The pace of investments was impressive but the quality less so; the large number of investments made over a vast landscape and many in early stage companies challenged systematic portfolio management by a too-small investment team;</li>
	<li>Difficulties in the critical working relationship between board chair and fund manager were not addressed by the board;</li>
	<li>An extraordinarily open investment process followed by the investment committee served as a model in transparency and ethics but also undermined the committee’s ability to provide consistent guidance, effective oversight, and nurture investment discipline;</li>
	<li>A well-funded technical assistance facility set up to build portfolio companies also served to dilute the focus and accountability of the investment management team.</li>
</ul>
The study concludes by reflecting on AfriCap’s experience to suggest several areas in which industry guidelines on governance (CMEF 2012 Governance Guidelines) might be sharpened and refined.

<strong>Strong Legacy</strong>

Overall, the study found that AfriCap succeeded in demonstrating that microfinance in Africa is investable. Unfortunately for AfriCap’s own investors, it showed both how this could be done and how it could fail. Future investors and managers can take confidence from both the investment and exit track record of AfriCap and build on the lessons learned, both good and bad.

<strong>Have you read?</strong>

<a href="http://cfi-blog.org/2015/01/14/african-microfinances-dynamic-growth-and-the-story-of-africap/">African Microfinance's Dynamic Growth and the Story of AfriCap</a>

<a href="http://cfi-blog.org/2014/08/08/growth-makes-governance-more-critical-in-sub-saharan-africa/" target="_blank">Growth Makes Governance More Critical in Sub-Saharan Africa</a>

<a href="http://cfi-blog.org/2015/03/03/what-impact-investors-could-learn-from-microfinance/">What Impact Investors Could Learn from Microfinance</a>

MIV Governance: The Case of AfriCap

Deborah Drake

Vice President

Alex Silva

Anne  Folan

Daniel Rozas

Danielle Piskadlo

Jeffrey Riecke

Jonathan Whittle

Laura Foose

Leah  Wardle

Monica Brand Engel

Sam Mendelson

India

Consumer Protection

Insurance

Microfinance

Over-indebtedness

Policy, Regulation and Government Initiatives

Risk Management

Transparency

Smita Aggarwal

Karin Malmberg

<em>&gt; Posted by Karin Malmberg, PIIF Manager, PRI</em>

<img class="alignright size-medium wp-image-16990" src="https://centerforfinancialinclusionblog.files.wordpress.com/2015/01/calculator-385506_640.jpg?w=300" alt="" width="300" height="177" />How do institutional investors in inclusive finance ensure that their investee institutions manage their social as well as financial performance? How do these investors contribute to the sustainable growth of the industry? And, perhaps most importantly how do they ensure that end clients are fairly treated and adequately protected?

The <a href="http://2xjmlj8428u1a2k5o34l1m71.wpengine.netdna-cdn.com/wp-content/uploads/PRI_Report-on-Progress_in-Inclusive-Finance_2014.pdf"><em>Report on Progress in Inclusive Finance 2014</em></a> by the Principles for Investors in Inclusive Finance (PIIF) Initiative addresses these questions, analyzing data submitted by inclusive finance investors on their responsible investment practices.

The results are encouraging. Fund managers and other investors investing directly into retail institutions look at responsible finance issues at the selection stage of the investment process. For example, 94 percent measure and include the social performance of retail institutions alongside financial criteria when making investment decisions, and 90 percent include client protection measures in their investment policies.

However, these figures drop when we look at improving performance in these areas. The <a href="http://smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles" target="_blank">Client Protection Principles</a> are universally accepted among investors but fewer encourage implementation by retail institutions. For instance, 63 percent systematically include client protection in covenants in loan agreements or in shareholder agreements. Fewer than half incentivize investee retail institutions to track social performance. Additionally, few investors encourage their investees to take part in collaborative industry initiatives, with the exception of the Smart Campaign.

The path from microcredit to full financial inclusion is another area for improvement. While the majority say that they support the provision of services beyond microcredit, only 50 percent collect data on whether voluntary savings products are provided by investee retail institutions, and 33 percent on whether voluntary insurance products are provided.

The governance of retail institutions was highlighted recently by the Center for Financial Inclusion and The MasterCard Foundation as they launched the <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/abf" target="_blank">Africa Board Fellowship program</a> for board members and CEOs of microfinance institutions. This, too, is an area where investors have a role to play. The PIIF data shows that 85 percent assess the board composition of investee retail institutions at the pre-investment stage, and 73 percent assess board compensation. These figures drop at the post-investment stage however.

For more detail on investors approaches to these areas and others, such as fair treatment and transparency, download the full report <a href="http://2xjmlj8428u1a2k5o34l1m71.wpengine.netdna-cdn.com/wp-content/uploads/PRI_Report-on-Progress_in-Inclusive-Finance_2014.pdf">here</a>.

We invite investors and other stakeholders to use this report and the individual <a href="http://www.unpri.org/areas-of-work/implementation-support/piif/piif-signatories/">Transparency Reports</a> which detail the responses of each participating investor, to learn about what their clients, intermediaries, and peers are doing.

We also encourage more investors to use the <a href="http://www.unpri.org/piif">PIIF</a> and accompanying reporting framework and assessment to evaluate their own practices and demonstrate their progress to the industry.

<em>The <a href="http://www.unpri.org/piif">Principles for Investors in Inclusive Finance (PIIF)</a> </em><em>were developed by investors and provide guidance on how to address these questions. The PIIF were launched in 2011 and currently have 50 signatories including pension funds, insurance companies, development finance institutions, foundations, and fund managers. The PIIF are hosted and managed by the <a href="http://www.unpri.org" target="_blank">Principles for Responsible Investment (PRI) Initiative</a>.</em>

<strong>Have you read?</strong>

<a href="http://cfi-blog.org/2014/06/18/impact-investing-landscape-trends-to-watch/" target="_blank">Impact Investing Landscape: Trends to Watch</a>

<a href="http://cfi-blog.org/2014/02/11/the-business-case-for-investing-in-financial-inclusion/" target="_blank">The Business Case for Investing in Financial Inclusion</a>

<a href="http://cfi-blog.org/2014/02/10/microfinance-equity-investing-different-context-similar-issues/" target="_blank">Microfinance Equity Investing: Different Context, Similar Issues</a>

How Responsible Are Investors in Inclusive Finance?

Mastercard Foundation

The Smart Campaign

Andrew Fixler

India is a global leader in financial inclusion. For over a decade, Accion has worked with and learned from India’s innovators, investors, and policymakers to expand economic opportunity for its people and businesses.

<em>&gt; Posted by Andrew Fixler, Associate, CFI</em>

[getty src="494587819?et=hdu-nUTjSCFRXZbRm87_9w&amp;sig=nsj036-apb3uD6KtOs8JjaBxer44xTeOJqTk3Pw49eA=" width="594" height="402"]

“Cautious optimism” was the overriding sentiment towards the Indian financial inclusion investment space at the fall 2014 <a href="http://www.fiecouncil.com/">Financial Inclusion Equity Council (FIEC)</a> meeting in Zurich. Four years after the Andhra Pradesh crisis, in financial year 2014 the regulated microfinance market in India saw its loan portfolio grow by 35 percent and client outreach increase by 4.7 million individuals, achieving a record 28 million clients. Although, as FIEC member Christian Etzensperger of responsAbility Investments AG <a href="http://fiecouncil.com/wp-content/uploads/2014/11/Etzensperger-India.pdf">noted</a>, this is “catch-up growth” for India, where only 35 percent of the adult population has a bank account. On an institutional level, the remarkable growth of Bandhan Bank, India’s largest microfinance institution, illustrates the successful scaling up of MFIs. While Etzensperger noted the “dynamic revival of the microfinance sector…partly due to the inertia of the Indian banks”, he also alluded to the significant role played by the policies of the newly elected Prime Minister, Narendra Modi, as well as those of the recently appointed Raghuram Rajan, Governor of the Reserve Bank of India. Indian investor <a href="http://www.forbes.com/sites/chriswright/2014/05/16/what-modis-indian-election-win-means-for-investors-good-news/">sentiment</a> in general <a href="http://blogs.wsj.com/indiarealtime/2013/09/05/reality-check-raghuram-rajans-inaugural-speech/">soared</a> on the news of these leaders taking the helm, a trend that clearly resonates in the Indian financial inclusion equity community.

What have these leaders done to inspire confidence in the trajectory of microfinance?

Rajan has taken a markedly different attitude to the client-side risks of microfinance than did the local politicians that fomented the Andhra Pradesh crisis. Rather than sensationalize tragic cases of extreme overindebtedness, Rajan is respectfully conscious of the difficulties inherent in balancing social impact and profit-making: “My sense is that you cannot, in good conscience, make a fortune at the bottom of the pyramid. Make reasonable profits, but if you start making a fortune, it does start raising social anxiety about how the fortune is being made.”

Rajan’s agenda as governor is heavily focused on financial inclusion through financial sector development (in particular, microfinance growth), and he has vocalized the Reserve Bank’s responsibility to spur the development of a financial infrastructure that can serve the bottom of the pyramid. To begin, <a href="http://www.ujjivan.com/content/what-does-appointment-raghuram-rajan-herald-microfinance-sector">Rajan acknowledges</a> a) the microfinance industry’s crucial function in the process of responsible financial inclusion, and b), the significant restraints that faced the industry as he entered his tenure, chief among which included difficulty raising funding, an unclear regulatory environment, and poorly developed management information systems.

As for substantive policy development, among other advancements, the RBI drafted guidelines that make it possible for MFIs to obtain bank licenses, a development that Etzensperger notes will “make it easier for MFIs to achieve strategic growth and institutional development [and] offer the whole range of financial services to the vast low-income segment of India’s population.” Members of FIEC are excited by this policy development, but question how it may translate into action.

Bandhan, the aforementioned MFI recently turned bank, is among the most prominent to take advantage of the new bank licensing policy. As a bank, <a href="http://www.syminvest.com/news/bandhan-indias-newest-bank-takes-shape/2014/8/14/4517">Bandhan will pursue</a> “strategic expansion”, overhauling its operational model, tapping the underserved MSME market, and continuing to serve the rural poor. A flood of resumes from young professionals of high-profile Indian universities is an indication of Bandhan’s growth prospects under its new hybrid model.

Prime Minister Modi likewise recognizes the state’s responsibility to spur financial inclusion. In August 2014 he presided over the launch of the <a href="http://www.microfinancegateway.org/announcement/indian-government-launches-new-financial-inclusion-scheme-jan-dhan-yojana">Pradhan Mantri Jan Dhan Yojana (PMJDY)</a>. PMJDY will allow India’s underbanked to open free accounts which will be accompanied with debit cards, accident insurance coverage of Rs 100,000, and medical insurance coverage of Rs 30,000. After six months, good customers receive access to an overdraft facility of Rs 5,000. The financial inclusion plan is intended to lead to the creation of 75 million new accounts. Though the PMJDY is seeing participation from some of India’s largest banks, such as the State Bank of India and ICICI, <a href="http://articles.economictimes.indiatimes.com/2014-08-20/news/53029186_1_capital-first-7-5-crore-bank-accounts-brahmanand-hegde">it is generating considerable enthusiasm in the microfinance sector as well</a>. The President of the Microfinance Institutions Network (MFIN), Samit Ghosh, noted that MFIN’s constituent MFIs can help realize the program by opening 25 million accounts.

<strong>Have you read?</strong>

<a href="http://cfi-blog.org/2014/07/24/the-implications-of-indias-2014-budget-for-financial-inclusion/" target="_blank">The Implications of India's 2014 Budget for Financial Inclusion</a>

<a href="http://cfi-blog.org/2014/08/01/positive-trends-for-indian-microfinance-an-interview-with-alok-prasad/" target="_blank">Positive Trends for Indian Microfinance: An Interview with Alok Prasad</a>

<a href="http://cfi-blog.org/2014/10/15/new-research-on-barriers-to-basic-savings-accounts-is-a-cautionary-tale-for-indias-financial-inclusion-push/" target="_blank">New Research on Barriers to Basic Savings Accounts Is a Cautionary Tale for India's Financial Inclusion Push</a>

Rajan’s Revolution and Modi’s Microfinance Mojo

Regulators

As the microfinance industry matures, 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) in which they have invested over the years. As they prepare to sell their stakes, what options do development-minded investors have to help ensure responsible behavior by their partner MFI into the future and healthy development of the broader market?

In this paper the Center for Financial Inclusion at Accion (CFI) and the Consultative Group to Assist the Poor (CGAP) seek to spark discussion among the stakeholders working to advance financial inclusion and in particular the investor community that will result in greater clarity around the goal of responsible exits and the policies and practices that would support it.

The Art of the Responsible Exit in Microfinance Equity Sales

CGAP

<i>The </i><a href="http://www.centerforfinancialinclusion.org/programs-a-projects/investing-in-inclusive-finance" target="_blank" rel="noopener"><i>Investing in Inclusive Finance</i></a><i> program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.</i>

When you think about responsible investing, what comes to mind? Finding investment prospects that can deliver social returns? Perhaps diligent monitoring, with an eye to effective governance? How about when you sell an investment? How can investors remain committed to balanced social and financial goals when passing the baton to someone else?

This last question is the focus of a joint project by the Center for Financial Inclusion and CGAP. With several microfinance equity funds approaching maturity, the issue of equity sales is becoming more relevant, and as part of the project, the team has been interviewing many equity investors to understand how they perceive the question of what, exactly, is a responsible exit? A paper detailing the findings of these interviews, <i>The Art of the Responsible Exit in Microfinance Equity Sales</i>, will be released in the coming weeks.

In the course of these interviews, many respondents used the analogy of children growing up. As early-stage or founding investors, they reach a certain point where they have fulfilled their "parental" mission and are no longer best-positioned to provide the MFI what it needs, be it capital, expertise, or market access. From the investor's perspective, the analogy works. But selling an MFI is less an act of entrusting your child's future to his or her own good sense, along with whatever wisdom you've been able to impart – you are handing the MFI over to somebody else.

Indeed, the better analogy might be that of an arranged marriage: you hire a matchmaker (M&amp;A specialist) to help find a suitor (buyer); you meet with the suitor to find out who he is and what he has done in the past (due diligence); maybe if you're a responsible parent (investor), you ask your daughter (MFI management) for her opinion. All along, you are nagged by one important question – is this a suitable match for my daughter?

Unsurprisingly, buyer selection is a major part of social investors' focus during the process and is seen as the most important way to assure continued attention to the double bottom line. However, investors have a few additional options at their disposal to insure that buyers will stick to their promises and will not lead the MFI away from its primary mission. The most common among these is simply selling a minority stake, relying on other like-minded investors to provide continuity of governance. In one case, a seller included one year employment contracts for key MFI management as part of the sale agreement, thus assuring at least temporary continuity in MFI operations. Several investors incorporated specific commitments to the MFI's social mission and to client protection principles in the shareholder agreement, thus binding the buyer to some degree. Yet another investor was seeking to structure a minority stake with veto power over key institutional decisions, as a means of retaining post-sale control.

Each of these is an interesting exercise in insuring at least some level of continuity or control, even if the suitor turns out to be a dud. However, one institution figured out a way to bypass the process altogether. From the start, it was built on an unusual evergreen governance structure that assured that this commercial enterprise would stick to its social mission. Its initial charter insured that no single investor would have a controlling stake, and gave its board – composed of majority independent directors – veto power over any acquisition that would give a single investor a controlling stake. In effect, the structure gives a purchasing investor a share of the company's assets and earnings, while leaving governance largely outside investor hands. And thus far, this MFI has been highly successful. In effect, the institution rendered the arranged marriage – or any marriage – unnecessary, by choosing to remain single and independent.

Which MFI is this, and how exactly does its governance structure function? And what are the other relevant lessons to investors seeking to sell their equity responsibly? Stay tuned for <i>The Art of the Responsible Exit in Microfinance Equity Sales.</i>

<strong>Have you read?</strong>

<a href="http://cfi-blog.org/2013/09/23/a-204-million-leap-for-financial-inclusion/" target="_blank" rel="noopener">A $204 Million Leap for Financial Inclusion</a>

<a href="http://cfi-blog.org/2013/03/29/six-to-dos-now-for-responsible-investors/" target="_blank" rel="noopener">Six To-Dos Now for Responsible Investors</a>

<a href="http://cfi-blog.org/2013/07/23/a-journey-to-understanding-risk-as-a-new-board-director-in-governing-banks-mfi-edition/" target="_blank" rel="noopener">A Journey to Understanding Risk as a New Board Director in "Governing Banks: MFI Edition"</a>

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This study is the second update of the original 2004 CMEF study, Characteristics of Equity Investment in Microfinance and seeks to illustrate the changes in growth, expansion and maturity of the commercial microfinance industry between 2005 and 2008. The study quantifies the explosive organic growth, particularly in Asia, in terms of equity, assets, number of borrowers and depositors in the industry.

This study further highlights structural changes in the industry. First, there is a general trend of mean reversion of leverage. That is, as the industry matures, higher levered regions are deleveraging versus lower levered regions. Second, there is evidence that greater financial intermediation is taking place. Microfinance institutions (MFIs), especially in the African region, are clearly using deposits as a way to fund their loans. Third, using the Herfindahl equation, we were able to see concentration effects, particular in high growth regions such as India and Africa. This has clear impacts on competition and ultimately on the interest rates charged. Fourth, we developed an alternative risk ratio to better illustrate the effectiveness with which MFIs are managing their portfolio risk. We see that although Africa has traditionally had the highest PAR-30 ratios, African MFIs are managing their risk prudently from a historical perspective. Asia fares much worse with this kind of metric. Fifth, we do a simple Dupont breakdown of return on equity (ROE) in order to ascertain the main drivers of profitability between 2005 and 2008. Profit margin determined the greatest percentage of variability in return on equity between MFIs. This dependence has clear implications in terms of what type of investor will succeed in the MFI industry. Finally, we present an update on the ownership structure of characteristic MFIs. We see evidence of acceleration in transformations, an increased willingness of local capital to fund MFIs, and a continued effort by NGOs to divest their original holdings.

The Growth in Commercial Microfinance: 2005-2008

<em>Over-indebtedness and Microfinance: Constructing an Early Warning Index</em>
By Vivien Kappel, Annette Krauss, Laura Lontzek - Published: 2010

This study examines the conditions that can lead to over-indebtedness and crisis in microfinance in order to create an early warning system for such events.  This system constructs a composite index for predicting over-indebtedness crisis in the microfinance industry, using macro-level, microfinance market, firm-level, and household-level indicators.  This index was constructed for 13 countries, some that had already experienced over-indebtedness or repayment crises.  With this sample of countries, the report creates a classification of countries according to current risk.  The paper suggests and provides recommendation for further validation of the index before it is applied to other countries.

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Responsible Investing

Meet the Experts

Deborah Drake

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How Should Investors Coordinate When Time is of the Essence?

Focusing on the Underserved, Serving the Bottom Line: a Q & A With Monica Brand Engel

Suddenly, This Summer

13th Annual DFI Corporate Governance Conference

The Future of Impact Investing: CFI’s Take on Dueling Views

The Role of Investors in Getting Inclusion Right

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

What’s “Responsible” about Impact Investing Exits?

Social Impact Bonds and Financial Inclusion

MIV Governance: The Case of AfriCap

How Responsible Are Investors in Inclusive Finance?

Rajan’s Revolution and Modi’s Microfinance Mojo

The Art of the Responsible Exit in Microfinance Equity Sales

The Art of the Responsible Exit in Microfinance Equity Sales

The Growth in Commercial Microfinance: 2005-2008

Over-indebtedness and Microfinance: Constructing an Early Warning Index