When philanthropy meets profitmaking
Elaine Moore, Financial Times, February 17, 2007
For many people, philanthropy and profit-making are mutually exclusive. But a new wave of socially-minded financial projects, attracting charities and wealthy investors alike, are blurring the lines.
This new concept is "microfinance", an idea pioneered by a Bangladeshi professor, Muhammad Yunus, who set up Grameen Bank in 1976 with the aim of providing loans to young entrepreneurs traditionally shunned by financial institutions. The bank lent money to some of the poorest individuals in the country and its success was recognised recently when Yunus was awarded the 2006 Nobel Peace prize.
Microfinancing, or microcredit, seeks to lift people out of poverty by injecting cash at the most local level possible. The money must be spent on business start ups, which might mean purchasing agricultural animals, tools or leasing out shop premises. The interest rates charged by microfinance institutions is high and small groups guarantee each others' loans, helping ensure default rates are low.
The success of organisations like Grameen Bank, which is now entirely self-financing and lends around US$800m (£411.5m) a year, is attracting large banks and venture capitalists who see the chance for sound, low risk investment, as well as the chance to flex their altruistic muscles. In 2005, Grameen Bank's returns on equity were an impressive 21 per cent.
Now private investors are being offered the chance to put their money to similar good use. Returns are variable, but investors can normally expect to see returns similar to what they would have achieved had they put their money in the bank. According to the global information exchange for the microfinance industry the world's top microfinance institutions have an average rate of return of about 2.5 per cent of total assets.
Money is lent by organisations to individuals or small groups in countries with very low GDP per head, such as India, Bangladesh, or sub-Saharan Africa. The organisations finance themselves by borrowing money or having share capital from large institutions who are looking for returns over 7 per cent on their loans. Citigroup, ABN Amro and HSBC all have microfinance portfolios. India's largest bank, ICICI, has increased it's loan portfolio by $315m in the past four years.
For the most part, microfinancing centres around local women's self-help groups. The default rate is very low, with a repayment rate of 97 per cent. Grameen Bank's rate of loan repayment is an exceptional 99 per cent. The women who borrow money guarantee each other's loans and are given training in basic business as well as help in calculating interest rates and repayment dates.
But, for private investors, accessing microfinance is not yet that easy. The MIX Market, attached to the World Bank (www.mixmarket.org), provides information on 859 microfinance organisations and has a list of 74 funds to invest in, all based in the US. Funds that are open to investors pass on the money to banks who lend to local organisations.
One of the largest is Accion (www.accion.org), a US company that runs equity and loan funds. The Accion Global Bridge Fund, set up in 2005, allows investors to loan to microfinancers across the globe. The minimum investment possible is $2,000 for 18 months, which accrues up to 1.625 per cent annual interest, paid semi-annually.
Another organisation providing access for retail investors is The Calvert Foundation (www.calvertfoundation.org), which has a range of funds such as the Oikocredit World Partnership investment. The minimum investment of $1,000 provides returns of up to 2 per cent.
Jean-Philippe De Schrevel, founder and managing director of Blue Orchard, which has $350m managed in different funds financing microfinance projects, says investment in this area can replace charity. He says investors in Blue Orchard, which is registered in Luxembourg, can count on returns of London Interbank Offered Rate (Libor) plus 1 or 2 per cent. "More and more retail investors are becoming interested," he says. "And that's because this is a really concrete way to help entrepreneurs in the world's poorest countries, while still making a profit."
Truestone, an asset allocation company that offers an advisory service to clients who want to invest in social investment business opportunities, is piloting a new scheme to help investors allocate a proportion of their investments into microfinance lending. Paul Szkiler, chairman, says microfinance has been extremely successful. He says: "We risk profile the social investments available and are looking for ones that are capital guaranteed such as Pro Mujer, based in Latin America, which lends between $50 and $600 to women in Bolivia, Nicaragua, Peru and Mexico. So far they have lent $11m and returns have been between 1 and 12 per cent. There is a feel good factor to this sort of investment. I have no doubts that the sector will continue to move more into the mainstream."
New funds are appearing all the time, though many are aimed at extremely wealthy investors such as the Gray Ghost II fund in the US. It hopes to gain large returns on equity investment, but with the caveat of long investment lock in times and large minimum investments.
"The industry has grown so fast that the original funders are no longer able to fund the growth of the industry," says managing partner David Fitzherbert. It is difficult to gauge the exact size of the industry but he estimates it will quadruple in the next ten years.
"To elicit that sort of colossal growth you need to bring in private sector investors so you have to show competitive risk adjusted returns," he says. "But equity investments in this field are still only for high net worth investors who can take a long term view of the sector."