Microfinance & Socially Responsible Investing

How Do the Two Intersect?

Socially Responsible Investing – Here & AbroadSanjay Sinha, Microcredit EnterprisesJune 26, 2009

Agenda

• World of Poverty

• What is Microfinance

• SRI as a Funding Model for Microfinance

• Microcredit Enterprises Business Model

• Concluding Remarks

Multidimensional Face of Poverty

P O V E R T YP O V E R T Y

Material Deprivation(Low Food Consumption/Poor Housing)

Low Human Develop.

Acute Vulnerability to Adverse Shocks(Illness, Economic Crisis, Natural Disaster

Lack of Voice

Our Global Village

If there were only 100 peoplein the entire world…

Our Village has Neighborhoods

• One neighborhood has 61 Asians

• Another has 13 Africans

• 12 Europeans are in towns

• 8 Hispanics live in a barrio

• 5 Americans in the suburbs

63 of Us Have Jobs; 37 Do Not

33 People in our Village Live in Poor Housing

18 Villagers Do Not Have Safe, Clean Water in their Homes

10 People Earn 54% of the Village’s Total Income

70 of Us are Hungry Every Day Some of Us are Not

One Year in Our Village

• 3,000 people died at the World Trade Center in New York (2001)

• 300,000 people died from a tsunami in the Indian Ocean (2004)

• 11 million children died from starvation (every year)

World Population

6.7 Billion

Access to Financial Services by Annual Income

>$20

<$20,000

<$1,500

<$730

<$360

4 Billion People With Little to No

Access

Full Access- 100 Million

Some Access -1.7 Billion

Maybe Banked

Unbanked

Destitute

Microfinance - Introduction

Evolution of the Market

With $27 and 42 Families

Financing Options - Microfinance• Charitable contribution: The individual donates to a non-profit

microfinance organization and then claims a tax deduction, which reduces the net cost of the donation.

• Socially Responsible Investment (SRI): An investment, usually in the form of a loan, is made in a fund or other investment vehicle which, in turn, makes loans to overseas microfinance institutions. Typically, the loan has a term of three years and includes a fixed interest rate that is almost always below the rate on standard marketplace investments.

• Guarantee Risk Pool Model : A pledge of collateral assets and/or a personal guarantee secures a line of credit which, in turn, is used to make loans to overseas microfinance institutions. In the event of an overseas financial loss, for at least an 18 month period a Guarantor has promised to bear the tax-deductible loss on an equitable, pro rata basis with all other Guarantors. Guarantors maintain complete control of their assets, and therefore receive all investment returns from their portfolios.

Microfinance - Growth

Who are the Funders?

$11.6 Billion

53% Donors

47% Investors

63% Debt

Microfinance

Microfinance - Why is Repayment High?

Many Reasons

Dynamic Lending

Social Standing

Progressive Lending

Frequent Repaymt.

Peer Monitoring

Group Lending

High Repayment

Microfinance – Number of Borrowers

How Many Are Borrowing?

Microfinance – Growth Phase

How Many More Can Borrow?

3.5 – 4 Billion People

What is the Relationship between Poverty and Microfinance?

Access to financial servicesAccess to financial services Access to financial servicesAccess to financial services

Increase & diversify incomesIncrease & diversify incomes Build assetsBuild assets Increase & diversify incomesIncrease & diversify incomes Build assetsBuild assets

Mitigate riskMitigate risk Plan for the futurePlan for the future Make choicesMake choices

Mitigate riskMitigate risk Plan for the futurePlan for the future Make choicesMake choices

Increase food consumptionIncrease food consumption Invest in education & healthInvest in education & health Invest in housing, water, sanitationInvest in housing, water, sanitation

Increase food consumptionIncrease food consumption Invest in education & healthInvest in education & health Invest in housing, water, sanitationInvest in housing, water, sanitation

Microfinance - Growth

$25 Billion Industry

The Microcredit Guarantor Enterprises Model

The Microcredit Enterprises Model

Guarantors($1 million units)

The Microcredit Enterprises Model

Lender/Bank

Line of Credit

Guarantors($1 million units)

4% - 5% Interest

The Microcredit Enterprises Model

Microfinance

Institution (MFI)

Lender/Bank

Line of Credit

Guarantors($1 million units)

4% - 5% Interest

8% - 10% Interest

The Microcredit Enterprises Model

Microfinance

Institution (MFI)

Lender/Bank

Line of Credit

Guarantors($1 million units)

4% - 5% Interest

8% - 10% Interest

25% - 35% Interest

25% - 35% Interest

The Microcredit Enterprises Impact

514,000 Reached

45 Loans/25 MFIs

89% Female

38 Guarantors

15 Countries

$25 Million Loans

MCE

Microfinance - Challenges

A Few…..

Inflation

Transparency

Exchange Rate

Liquidity

Microfinance

Microfinance – Self Regulation

What Can Be Done?…..

Best Practices

Funding Diversity

Close to Customer

Financial Discipline Self Regulation

Stay

Microfinance – Self Regulation

What Has Been Done?…..

Non-Abusive Collection Method

Restructure Loans

25 Industry Leaders Avoid Reckless Lending

Transparent Pricing

4/08 Pocantico

Microfinance - Silver Lining

• Relatively Reliable Business– Could continue to attract socially responsible

investors looking to diversify

• Credit Crunch Could Slow Down the Pace of Growth Allowing MFIs to Focus On:– Back to the Basics– Borrower Protection– Transparency– Governance

Microfinance - Summary

“Character Not Collateral”

• It Has Made a Difference• It is not the Answer to Solving Poverty• Attempts at Self Regulation and Transparency

Should Maintain Strong Industry Metrics– Minimize Predatory Lending – Provide More Funding of Second and Third

Tier MFIs

If You Keep Your Food in a Refrigerator

Your Clothes in a ClosetHave a Roof Over Your Head

Bed to Sleep InYou are richer than 75% of the

world’s population.You are richer than 75% of the world’s population.

There is an Opportunity Cost

What Can You Do?

• Become a Guarantor

• Donate to the Permanent Fund to Alleviate Extreme Poverty

• Invest in an Interest-Bearing Note

• Educate Your Community

For Your Attention…….