Microfinance & Socially Responsible Investing How Do the Two Intersect? Socially Responsible Investing – Here & Abroad Sanjay Sinha, Microcredit Enterprises June 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 Y Material Deprivation (Low Food Consumption/Poor Housing) Low Human Develop. Lack of Voice Acute Vulnerability to Adverse Shocks (Illness, Economic Crisis, Natural Disaster
Our Global Village If there were only 100 people in 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
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 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?
Microfinance - Why is Repayment High? Many Reasons
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 services Increase & diversify incomes Build assets Mitigate risk Plan for the future Make choices Increase food consumption Invest in education & health Invest in housing, water, sanitation
Microfinance - Growth $25 Billion Industry
The Microcredit Enterprises Model Guarantors ($1 million units)
The Microcredit Enterprises Model Lender/Bank Line of Credit 4% - 5% Interest Guarantors ($1 million units)
The Microcredit Enterprises Model Lender/Bank Line of Credit 4% - 5% Interest Microfinance Institution (MFI) 8% - 10% Interest Guarantors ($1 million units)
The Microcredit Enterprises Model Lender/Bank Line of Credit 25% - 35% Interest 4% - 5% Interest Microfinance Institution (MFI) 8% - 10% Interest 25% - 35% Interest Guarantors ($1 million units)
Microfinance - Challenges A Few…..
Microfinance – Self Regulation What Can Be Done?….. Stay
Microfinance – Self Regulation What Has Been Done?…..
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 Closet Have a Roof Over Your Head Bed to Sleep In You 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