The Role of Private and Socially Motivated Investors in Microfinance Institutions

1. Presented by Benjamin Blum Rationale and Role of private/socially motivated Investors in world wide funding of Microfinance Institutions

2. Industry Participants • Social Performance • Transaction Costs • The Role of Donors • Microfinance Investment Vehicles Rationale and Role of Private/Socially Motivated Investors in MFIs Contents

3. Rationale and Role of Private/Socially Motivated Investors in MFIs • Industry Participants Types of MFI - degree of commercialization Source: Meehan (2004)

4. Rationale and Role of Private/Socially Motivated Investors in MFIs • Industry Participants MFI Industry and flow of investments Source: Goodman (2004), CGAP (2008), Latortue et al. (2006)

5. Dramatic Increase of institutional investors • Drivers of the Hype • Most is funneled to tier 1 MFIs • International Banks (commitment categories): • No involvement • Corporate social responsibility • Dual strategy (dual returns  ideal match) • Dual strategy in separate business unit • Normal business with social impact • Normal commercial business (FN + SP) Rationale and Role of Private/Socially Motivated Investors in MFIs • Industry Participants Role of institutional Investors Source: ING (2008)

6. Scholars have build a framework for measuring and assess impact and outreach • (Yaron(1994), Schreiner(2002), Zeller, Lapenu and Greely(2003), and Hishigsuren(2007) • Specialized Rating Agencies • (MicroRate, Planet Rating, M-Cril) • Social Performance Task Force (SPTF) • Established in 2005 (by CGAP, Ford Foundation, Argidius Foundation Rationale and Role of Private/Socially Motivated Investors in MFIs • Social Performance social Performance Source: Engels (2010)

7. Difficulties • Wide range of relevant categories • Scarce data availability • Social performance measurement is NOT social impact measurement Zeller, Lapenu & Greely (2003) • (SP) measures outreach of programs • (SIM) measures change in welfare and quality of life Rationale and Role of Private/Socially Motivated Investors in MFIs • Social Performance Measuring social performance Source: Engels (2010)

8. Remember! The smaller the farmer – the higher the TC! • MFIs serving the hardest-to-reach segments • Have the greatest social impact • Have the highest Transaction Costs • Lowest profitability !! • Need for social investment Rationale and Role of Private/Socially Motivated Investors in MFIs • Transaction Costs Transaction costs (TC) Source: Knowledge@Warton (2005)

9. Moving away from Subsidizing Transaction costs • Grants: • for institutional capacity building • to cover operating shortfalls • for loan capital or equity • Guarantees for commercial banks • Technical assistance, etc. Rationale and Role of Private/Socially Motivated Investors in MFIs • Donors Donors provide Source: Ledgerwood (1998)

10. Coordination among them and • Creation of consistent strategy based on: • Market segmentation • Comparative advantage of each • Focus on (internal) capacity building • Induce formal financial market linkages • Involve in policy dialogue • Advise Finance Ministries • Disseminate best practices among MFIs !!! Rationale and Role of Private/Socially Motivated Investors in MFIs • Donors The role of the donors Source: Ledgerwood (1998) Yanovitch and Macray (1996)

11. Ex. ‘ResponsAbility’ Social Investment Fund • Credit Swiss • Aiming Socially Responsible Investors (SRI) • Minimum subscription – US$ 1,000 • Return 1 year - 3.07% • Financial support for poor entrepreneurially talented people in developing nations • environmental and governance criteria and social considerations Rationale and Role of Private/Socially Motivated Investors in MFIs • ResponsAbility MIcrofinance investment vehicles Source: www.responsability.com

12. Rationale and Role of Private/Socially Motivated Investors in MFIs • The end The strongest incentive to repay is usually not group pressure, but rather the borrowers’ desire to keep access to a highly valued service, one whose future availability they can count on as long as they keep their end ofthebargain. Source: Rosenberg (2010)

13. First Rating Agencies in 1996 (today 13) • To provide investors with information • to compare the performance of MFI • To improve efficiency of MFI • Guidelines: • Sustainability • Liability management • Portfolio quality • Efficiency Rationale and Role of Private/Socially Motivated Investors in MFIs • Financial Performance Financial Performance Source: CGAP (2003), Engels (2010)

14. Rationale and Role of Private/Socially Motivated Investors in MFIs • Social Performance MIX’s Social Performance indicators Source: SPTF (2011)

15. On Breadth and depth of outreach • Member-based orgs (cooperatives) in Peru and solidarity group based (NGO-MFIs) lending in Bangladesh perform best₁ • MFIs in rural areas, that target women + using poverty targeting indicators may have higher poverty outreach₁ • MFI plus providers (offering also nonfinancial services) • (1) NGOs • (2) unregulated by banking authorities • (3) entities mainly using village bank methodologies  Reach out to poorer and higher number of women borrowers₂ Rationale and Role of Private/Socially Motivated Investors in MFIs • Social Performance Studies on social performance Source: ₁Zeller & Johannsen (2006), ₂Lensink and Mearslans (2009)