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

Impact Investing

Responsible Investing

Social Impact Metrics

Blog Post

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.

&nbsp;

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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

<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

Consumer Protection

Insurance

Microfinance

Transparency

<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

India

Banks

Over-indebtedness

Policy, Regulation and Government Initiatives

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>

&nbsp;

Alex Qian

Investment Officer

John Fischer

Chief Investment Officer

Radhika Shroff

Deputy Chief Investment Officer

Vikas Raj

Managing Director, Accion Venture Lab 

Adelina Dasso

Maria Camila Gomez	Silva

Michael Schlein

Nancy Widjaja

Rachel Morpeth

Chile

Colombia

Kenya

Mexico

Agricultural and Rural Finance

Alternative Data

Digital Financial Services

Entrepreneurs of MSMEs

Financial Inclusion Strategy

Microfinance Institutions

MSME/SME Finance

Smallholder Farmers

Social Performance

Article

The majority of Kenyans have mobile money accounts; their activity demonstrates digital financial services’ potential. Accion helps Kenyan innovators harness emerging technologies to create new financial services.

<p class="p1"><em>By Simon Brunner in the <a href="https://www.credit-suisse.com/corporate/en/responsibility/dialogue/bulletin.html?WT.i_short-url=%2Fbulletin&amp;WT.i_target-url=%2Fcorporate%2Fen%2Fresponsibility%2Fdialogue%2Fbulletin.html">Credit Suisse Bulletin</a></em></p>
<p class="p1">“Show me your credit rating and I’ll tell you who you are,” is the unwritten rule of the economic mainstream: If a global company, a small village shop, a home buyer or even an entire country wants to borrow money, they must first provide proof of their assets and income. But how can a farmer in rural Kenya provide reliable financial information when such information depends in large part on his harvest?</p>
<p class="p1">Apollo Agriculture, a start-up founded in Nairobi in 2016, wants to solve this problem with the help of remote sensing technology and data science. Apollo uses machine learning models to build credit profiles for their customers, using alternative data sources. This includes inferences from satellite imagery of customers’ fields, as well as self-reported and behavioral data gathered during the customer enrollment process. Apollo then provides approved customers with a package of farm inputs, advice, and insurance, on credit that is customized to the size of their farms. This means that farmers in the Kenyan city of Nakuru, for example, can access the quality seed and fertilizer they need to increase their yields and are protected in case of drought.</p>
<p class="p1">Co-founder and CEO Eli Pollak has ambitious plans: “Our business is helping small-scale farmers make more money on their farms. We see fantastic opportunities to help farmers expand and achieve higher returns, including higher profitability crops, more crop diversification, irrigation, and access to markets.”</p>

<h2 class="p2"><span class="s1">Accion Venture Lab </span></h2>
<p class="p2">As part of its Financial Inclusion Initiative, Credit Suisse supports Venture Lab, the seed-stage investment arm of Accion, an NGO and pioneer in the area of financial inclusion. Venture Lab provides startup capital and support to innovative start-ups that facilitate, improve, and reduce the cost of access to financial services for people living in poverty. Apollo Agriculture is part of <a href="https://www.accion.org/how-we-work/invest/accion-venture-lab/">Accion’s <span class="s2">portfolio. </span></a></p>

<h2 class="p1">Improving realities</h2>
<p class="p1"><em>A conversation with Laura Hemrika, the Global Head of <a href="https://www.credit-suisse.com/corporate/en/responsibility/economy-society/focus-themes/financial-inclusion.html?WT.i_short-url=%2Ffinancialinclusion&amp;WT.i_target-url=%2Fcorporate%2Fen%2Fresponsibility%2Feconomy-society%2Ffocus-themes%2Ffinancial-inclusion.html">Corporate Citizenship &amp; Foundations at Credit Suisse</a></em></p>

<h4 class="p1">Q: Laura Hemrika, what does Credit Suisse seek to achieve through its Corporate Citizenship activities?</h4>
<p class="p2">A: Through our work, we seek to contribute to a more inclusive future where all people can both access the resources and develop the financial, entrepreneurial, and other skills they need to thrive in the economy and society. We focus on the topics of financial inclusion, financial education, and future skills, and partner with NGOs and social enterprises transforming the realities of thousands of people worldwide.</p>

<h4 class="p1">Q: Why did Credit Suisse choose to support Accion’s Venture Lab?</h4>
<p class="p2">A: Venture Lab has a very successful approach to identifying innovative new financial inclusion business models and helping them reach scale. Thanks to their smaller size, presence on the ground close to investees, and international team with deep experience in building financial inclusion and tech businesses, they are better placed to do so than we are, and are a great complement to our strengths. They provide early-stage investment capital — which can be difficult to obtain, especially for start-ups in emerging markets — and work closely with entrepreneurs to help build their companies. These companies are the future of financial inclusion, merging big data, new technology, and new models to deliver financial services to new customer segments, especially low-income people in developing countries.</p>

<h4 class="p5">Q: What support does Credit Suisse provide to help partners achieve sustained growth and impact?</h4>
<p class="p1">A: Our partners need not only capital but also expertise to grow and achieve a greater social impact. We, therefore, complement our grant funding with the knowledge and expertise of our employees through a number of employee engagement programs. Whenever valuable, we also try to connect our partners to other Credit Suisse resources, such as our clients and business colleagues, or to our other partners. Together we can achieve an even bigger impact.</p>
<em class="markup--em markup--p-em">A version of this post appeared previously in the </em><a href="https://www.credit-suisse.com/corporate/en/responsibility/dialogue/bulletin.html?WT.i_short-url=%2Fbulletin&amp;WT.i_target-url=%2Fcorporate%2Fen%2Fresponsibility%2Fdialogue%2Fbulletin.html"><em class="markup--em markup--p-em">Credit Suisse Bulletin</em></a><em class="markup--em markup--p-em">.</em>

Loans with the help of satellite images

Apollo Agriculture

Credit Suisse

Institutional Funder

Accion Venture Lab

Most of Mexico’s people lack access to a formal bank account. Accion has worked in Mexico for decades to create a thriving and competitive financial sector that embraces innovation and protects its clients.

Latin America has come a long way since <a href="https://www.accion.org/about/history/">Accion began its work</a> there in the 1960s. In the past 50 years, the microfinance industry has become well-established and financial inclusion has expanded. But there’s still more to be done, and we’ve been looking for innovative digital channels and platforms to continue bringing useful financial tools to the underserved. <a href="https://www.civico.com/">CÍVICO</a>, based in Bogota with operations in Mexico City and Santiago de Chile, is a digital platform enabling access to an extensive set of services to help solve the daily needs of its users and provide citywide news and information. CÍVICO maps cities by crowdsourcing location data and connects consumers to local small businesses through its platform. Through partnerships with payment companies, banks, and brands, CÍVICO is building a digital ecosystem for both merchants and users.

CÍVICO’s inclusive platform connects small businesses and individuals to their cities and to each other. CÍVICO creates “missions” for users to find specific services within their cities and upload information on the business offering these services, including shop name, type of business, contact information, and business hours. This information enables people to find everything they need right in their neighborhoods — including minimarkets, barber shops, pharmacies, green spaces, music shows, and more. To date, they’ve mapped more than 600,000 merchants and engaged over 4 million active users.

<img class="alignleft wp-image-18082" src="https://content.accion.org/wp-content/uploads/2019/04/civicoimage3-1024x768.jpeg" alt="Produce stand" width="500" height="375" />Merchants registered on CÍVICO’s platform see more foot traffic to their stores from CIVICO´s active users, especially from local offers that users can claim and use on the platform. CÍVICO partnerships are designed to add value to small business. One example of the services they offer is CÍVICO Pay, an online and offline payment platform that uses very low-cost mobile point of sale (mPOS) devices. This helps reduce the need to transact exclusively with cash and therefore expands the potential customer base. Other offerings include CÍVICO Store, which displays all active merchants on the platform, and CÍVICO Academy, which supports merchants in using CÍVICO’s platform and provides them educational tutorials on digital marketing to help develop their business strategies.

In addition to investing funds in CÍVICO, we’re also providing advisory services to enable the company to reach more clients throughout Colombia, Mexico, and Chile. The advisory services will use our global expertise to support CÍVICO’s financial services strategy, strengthen their value proposition, and develop financial products. With this support from Accion, CÍVICO plans to leverage its wealth of data to offer financial services through its platform that fit merchants’ specific needs, while obtaining insights from users’ data to better understand city-wide needs.

Across the globe, we are seeing more and more that digital transactions are key for turning data into actionable insights. CÍVICO’s deep understanding of its merchants and user base, combined with its unique digital platform, represents the opportunity for CÍVICO to become a demonstration model for digital financial service providers, both in Latin America and elsewhere. We are excited to <a href="https://www.accion.org/accion-invests-in-civico-to-accelerate-access-to-innovative-financial-services-in-latin-america/">partner with CÍVICO</a> to bring financial services to underserved businesses and help communities thrive.

How one platform connects cities and boosts small businesses

Civico

Impact Investor

Accion Global Advisory Solutions

Accion Global Investments

At Accion, we’re focused on making sure technology transforms financial services in a way that works for everyone. So I was excited to join the conversation at <a href="http://www.e-mfp.eu/european-microfinance-week-2018/information">European Microfinance Week</a> on financial inclusion through technology from the investor perspective.

During the panel, I discussed Accion’s pioneering role investing in early- and growth-stage inclusive fintech companies, as well as how we’ve used our learnings from that work to help our microfinance partners integrate digital approaches. Through strategic digitization, microfinance institutions and banks can improve operational efficiencies, serve more customers with little to no formal credit histories, and increase their impact. We’re transferring successful models that we’ve helped develop in innovative markets and experimenting with bringing them to other parts of the world.
<h2><strong>Convergence of fintech and traditional finance</strong></h2>
One of our industry’s biggest issues in the provision of financial services is the cost of delivery — and the human intensity and limits of brick and mortar only models. Technology can help us solve this by reducing paperwork, human-driven analysis, and barriers to expansion. While earlier stage companies are often best poised to leverage technology because of their streamlined decision-making, entrepreneurial flexibility, lack of bureaucracy, and ability to experiment, microfinance institutions and banks can leverage technology to better serve clients. By reducing operating costs, they can pass savings along to clients in the form on lower interest rates on loans, especially for an institution’s highest quality customers. In market economies, this will happen as competition adopts similar efficiencies and institutions compete for clients. Technology can also improve customer experience by allowing institutions to expand their reach and capacity.

We’ve seen what traditional financial service providers around the world are capable of when they embrace digitization. Our long-time partner, <a href="https://www.bancosol.com.bo/">BancoSol</a> in Bolivia — which serves more than 650,000 savers, over 260,000 borrowers, and close to 190,000 microinsurance clients — is one of the largest microfinance institutions in the world.  The bank has maintained some of the lowest operating costs in the industry by digitizing its operations an effort that took a great deal of cultural change. <a href="https://www.accionmfb.com/">Accion Microfinance Bank Nigeria</a> took advantage of the country’s high mobile penetration and created a product that allows its clients to conduct essential banking services from their phones, driving increased access and usability.

While the potential for financial service providers to leverage technology is massive, there are still challenges. The cultural shift for traditional microfinance institutions from brick-and-mortar to digital isn’t always a smooth or comfortable change. The loan officer-client relationship that was successful for institutions in the past is still imperative for the future, and technology should be used strategically and selectively to automate processes, enable institutions to go deeper in the credit spectrum, and better serve clients.
<h2><strong>New platforms for financial services </strong></h2>
In addition to the digitization of traditional institutions, we’re also leveraging our knowledge to help build financial services platforms — business models that are driven by strategic partnerships between banks and underserved micro, small and medium-sized enterprises (MSMEs) to drive financial inclusion through technology and distribution networks. <a href="https://subk.co.in/">Sub-K</a>, a tech-enabled agent network in India, partners with multiple banks to bring financial services to rural villages across the country. They do this by equipping local entrepreneurs with handheld banking devices — in essence, turning mom-and-pop shops into mini bank branches. Sub-K serves over 2 million customers through its platform, bringing financial services to people where they live and work in remote rural India.

Platforms like Sub-K, which are already heavily invested in technology, face unique challenges. They must create an incredibly robust database to underwrite credit properly and maintain low levels of risk. Since their business models are often unproven, it can also be difficult for these companies to build a scalable network and find banks that are willing to partner with them.
<h2><strong>Investing in inclusive innovation</strong></h2>
Accion plays a unique role in the investing space, acting as both an investor and a nonprofit, where our mission to create a financially inclusive world always comes first. We know we won’t reach the 3 billion financially underserved people alone. So we invest in scalable and commercially sustainable business models to help prove their viability. Often, we go where others will not and help companies build demonstration models, ultimately catalyzing private investment and capital markets for investment.

We’ve seen this strategy work across our portfolio. Three years ago in India, we invested in the small startup <a href="http://www.ayefin.com/">Aye Finance</a> because of its industry-cluster approach to serving small businesses in Delhi and its vision of a data-driven approach to better serve entire industries of clients. The company has flourished in the past few years, and its latest investment round was led by CapitalG, an investment arm of Google.

Also in India, we’ve seen the growth of <a href="https://www.northernarc.com/">Northern Arc</a>, formerly IFMR Capital. Northern Arc has catalyzed over USD 7 billion in funding to companies that provide financing for affordable housing, MSMEs, agriculture, and commercial vehicles. By demonstrating the viability of their borrowers’ underlying client base, they’re opening up a brand new source of funding from commercial investors. Today the company is backed by Eight Roads Capital, an early backer of Alibaba, and Standard Chartered Private Equity. We’re excited to see companies like Aye and Northern Arc generating broader interest through their innovative approaches to financial inclusion.

By continuing to catalyze interest in disruptive business models, leveraging technology-driven platforms, and making sure traditional institutions can unlock the potential of digital transformation, we believe we can make a definitive difference in the world. We can cultivate a financial ecosystem that brings accessible and useful financial services to the people who need them most.

The investor perspective on driving financial inclusion through technology

Accion Microfinance Bank

Aye Finance

BancoSol

Northern Arc

Sub-K

Like many people across the United States, later this week I’ll sit down with my family for Thanksgiving. It’s my favorite holiday — it allows us to express our gratitude for the things we rely on and the people who sustain us.

[caption id="attachment_16295" align="alignleft" width="600"]<img class="wp-image-16295 size-full" src="https://content.accion.org/wp-content/uploads/2018/11/2018-11-19-Thnksgiving.jpg" alt="Michael Schlein sits across from a client of Aye Finance as the client uses a sewing machine." width="600" height="389" /> Meeting with clients of Aye Finance in India[/caption]

And it’s in that spirit that I want to thank the people and institutions who believed in and supported Accion over the last year. Throughout the year, we continued to focus on ensuring that everyone has useful financial tools that make a tangible difference in their lives — and throughout the year, your unflagging generosity helped parents pay their children’s tuition, entrepreneurs hire more employees, and families protect their homes and livelihoods.

Just look at some of the things you helped us accomplish this year. Because of your support, we:
<ul>
 	<li>Can help more rural families and businesses across India get the financial tools they need to build better lives. With more than half of India’s rural adults cut off from any formal financial services, we’re helping our new partner, <a href="https://www.accion.org/instead-sending-people-bank-sub-k-brings-banking-people">Sub-K</a>, use technology and build its agent network to provide small businesses with the credit they need, no matter where they are.</li>
 	<li>Protected more than 43 million people across 39 countries as the <a href="https://www.smartcampaign.org/">Smart Campaign</a> continued to set higher standards for the microfinance sector and create an industry that clients can trust.</li>
 	<li>Ensured that more people living in informal settlements across South Africa could use internet-connected devices to protect their homes and families from fire. By helping us support <a href="https://www.accion.org/insurtech-fire-protection-south-africa">Lumkani’s</a> growth, we’re giving the world’s most vulnerable people the tools they need to rebuild and recover.</li>
 	<li>Helped <a href="https://www.accion.org/changing-climate-technology-provides-agricultural-insurance-farmers">Pula</a> harness satellite technology to provide smallholder farmers with insurance, better seed, fertilizer, and credit. Two-thirds of the world’s working poor make their living in agriculture, so anything we can do to provide them with high-quality financial services can make an incredible difference.</li>
</ul>
This is just a small sample of the many ways we made a big difference this last year. The work you support matters so much: from eliminating hunger to promoting good health and gender equality, we must first create a financially inclusive world.

To everyone who supported our work and partnered with us over the course of the last year, thank you. We simply could not do this work without you.

As we look ahead to how <a href="https://www.accion.org/three-fintech-trends-that-will-reshape-social-impact-in-2019/">new technologies</a> and broader changes in customer expectations and social enterprise will change our work in 2019 and beyond, we’ll continue to rely on your support. Technology is fundamentally transforming the financial sector, and it will take constant work, research, and innovation to help make sure that this transformation results in products and services that benefit underserved people and improves their financial health. Together, we can build a safer, more prosperous, and inclusive world, one in which families and businesses everywhere can realize their economic potential.

Again, thank you and happy holidays.

How you’ve helped us make a real difference

Lumkani

Pula

Social Good

<p class="graf graf--p">We, Accion Venture Lab, are by definition an impact investor. Our overarching goal is to invest in and provide support to seed-stage innovative fintech startups that increase access to, improve the quality of, or reduce the cost of financial services for underserved customer segments at scale. Grounded by this intention, our first and foremost step in screening for a prospective investment is to diligently assess the company’s potential in creating such impact. If our impact considerations are satisfied, we then move to carefully assessing the returns potential of the business. We only proceed with full-on due diligence if we see a strong promise of both impact and returns. Finding companies that we think can generate both is not a walk in the park, but we have yet to find ourselves in a situation where we need to consider trading one for the other.</p>
<p class="graf graf--p">We were therefore intrigued by Mara Bolis and Chris West’s take on the state of impact investing, <a class="markup--anchor markup--p-anchor" href="https://ssir.org/articles/entry/marginalized_returns" target="_blank" rel="noopener noreferrer">“Marginalized Returns”</a>, on SSIR that impact investing has been inundated by a false narrative that there is no tradeoff between social impact and financial returns. Our experience so far has given us a more nuanced perspective on this. We have seen that both social impact and financial gains can indeed go hand in hand. Last year we made two successful exits from <a class="markup--anchor markup--p-anchor" href="http://varthana.com/" target="_blank" rel="noopener noreferrer">Varthana</a> and <a class="markup--anchor markup--p-anchor" href="https://clip.mx/" target="_blank" rel="noopener noreferrer">Clip</a>, startups that not only scored on our financial impact goals but also delivered “market-rate” returns.</p>
<p class="graf graf--p">We share Bolis and West’s sentiment that while impact investing offers a spectrum of financial and social returns, too many impact investors have predefined expectations of financial return that are both too high and too short term. However, we believe that the question should not be whether setting certain financial returns target means that social returns need to be sacrificed.</p>
<p class="graf graf--p">Here are a couple of our thoughts:</p>

<h3 class="graf graf--p"><strong class="markup--strong markup--p-strong">Impact investing is not one big monolith of an asset class</strong></h3>
<p class="graf graf--p">It’s worthwhile to note that impact investing is a nuanced space instead of a one-dimensional initiative. Stage, geography, sector, and other factors play a key role in determining potential impact and financial returns. The earlier the stage you invest, the riskier it is, and the longer the expected returns would be. Some sectors, such as education, are inherently more complex. Investing in a startup in South Sudan would present different economics than investing in one in Mexico. We commend Omidyar Network’s thoughtful <a class="markup--anchor markup--p-anchor" href="https://ssir.org/articles/entry/across_the_returns_continuum" target="_blank" rel="noopener noreferrer">Returns Continuum</a> framework that helps the breakaway the conversation from impact-returns tradeoffs.</p>
<p class="graf graf--p">We see a need for the industry to move away from a single umbrella to define impact investing and to develop and agree to a better framework to define the multi-dimensional nature of the space.</p>

<h3 class="graf graf--p"><strong class="markup--strong markup--p-strong">Impact investing is still at a nascent stage — and so is the way we evaluate its performance</strong></h3>
<p class="graf graf--p">Being relatively nascent, impact funds have been raised based on GPs’ own narratives rather than vintage performance. Our northern star so far has been “market returns”, while many actually still struggle to define what that means or how that is applicable to them. How do we think about what is actually an “acceptable” rate of return for different types of investments — and how do allow for room for a figure to percolate up and down? How does the market hold funds accountable while there is there is little benchmark information?</p>
<p class="graf graf--p">The notion of a “subsidy”, a factor that also determines the rate of returns, is also a nuanced one. Our beyond capital support for our portfolio, ranging from bespoke strategic projects on developing a credit risk process to fundraising advice and strategic communications support, could be categorized as a “subsidy” — although for us it’s a way for us to enhance a company’s chance of success and generate returns.</p>
<p class="graf graf--p">We agree with Wharton Social Impact Initiative’s <a class="markup--anchor markup--p-anchor" href="https://socialimpact.wharton.upenn.edu/wsii-news-thoughts/impact-investing-seduced-thats-one-hypothesis/" target="_blank" rel="noopener noreferrer">Nick Ashburn and Katherine Klein</a> that there isn’t yet enough rigorous research to refuse or to refute Bolis and West’s hypothesis. Today, there is still not much public data available on impact funds’ portfolio-level performance, and we are fully behind the assertion that there needs to be a greater transparency in reporting social and financial returns.</p>

<h3 class="graf graf--p"><strong class="markup--strong markup--p-strong">Shifting the perception: Acknowledging that the underserved can be a profitable customer segment and that technology enables new business models to better serve them</strong></h3>
In our effort to provide better access to financial services for underserved segments, we try to move away as much as possible from the timeworn perception that they are a destitute population in need of a helping hand. Instead, we see them as an empowered population with needs, wants, preferences, and drive to improve their wellbeing. These customers represent real market opportunity waiting to be tapped. We hold this view against the companies we invest in. A company’s keen understanding of their target customers and how they come up with innovative solutions to serve these customers’ needs and solve their persisting pain points in a way that is significantly better and attainable is what is most appealing for us. Unilever made a big breakthrough in emerging markets by <a class="markup--anchor markup--p-anchor" href="https://hbr.org/2016/12/how-unilever-reaches-rural-consumers-in-emerging-markets" target="_blank" rel="noopener noreferrer">offering low-cost, single-use sachets</a> of consumer goods such as shampoos and deodorants that were previously too expensive for the rural populations.

We see a similar wave of innovations going on within financial services, and they are particularly driven by the advancements of technology and connectivity. Across the world, fintech startups and other financial services actors are taking advantage of the rapid adoption of mobile phone, digitization, the increased capacity of computing power, and so on, to come up with solutions that enable them to offer savings, credit, payments, and insurance to previously excluded customer segments in a way that existing players weren’t able to. In Kenya, <a class="markup--anchor markup--p-anchor" href="https://apolloagriculture.com/#home" target="_blank" rel="noopener noreferrer">Apollo Agriculture</a> uses remote sensing technology, data science, and mobile money to more efficiently and affordably finance the fertilizer and seeds that smallholder farmers need to increase crop yields. In Mexico, <a class="markup--anchor markup--p-anchor" href="https://konfio.mx/" target="_blank" rel="noopener noreferrer">Konfio</a>’s entirely digital platform allows for low-cost customer acquisition and rapid credit assessment which enables the company to offer lower rates for micro and small business loans compared to traditional brick and mortar lenders.

Coming up with an offering with a strong value proposition that is affordable for underserved customers while making the economics work well for the company is not an easy feat. But this ability is what differentiates game-changing innovators from the rest of the pack, and for scalable impact to be achieved. Over the three years of us making active investments, we have reviewed over 1,300 potential deals and have only invested in 31.
<h3 class="graf graf--p"><strong class="markup--strong markup--p-strong">Broadening the definition of impact</strong></h3>
<p class="graf graf--p">We question the definition of a “social enterprise” and the notion that only companies with such label are able to generate social impact. Many of our companies probably don’t see themselves as a social enterprise, but we invest in them because we believe in the inherent value of their offering for underserved segments. We also view impact achievement as beyond solely impacting end-customers’ well-being. How a company’s innovation can help us learn, raise a broader awareness, or influence other stakeholders is meaningful to further drive the sector.</p>
<p class="graf graf--p">Instead of the ever-percolating question of whether there is a tradeoff between impact and returns, we strongly believe that such binary view is not helpful for the industry. Rather, we’d like to engage actors in the space on thinking further of how we can create an industry-level spectrum of both impact and returns achievement — while being mindful of the wide variety of initiatives in the space.</p>

The many shades of impact and returns

Konfio

Responsible Investing

Meet the Experts

Alex Qian

John Fischer

Radhika Shroff

Vikas Raj

Filter

Filter

Loans with the help of satellite images

How one platform connects cities and boosts small businesses

The investor perspective on driving financial inclusion through technology

How you’ve helped us make a real difference

The many shades of impact and returns

From the Center for Financial Inclusion

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