Will microfinance save us in the era of the coronavirus?
Some 30 years ago, I left the money, glamour, and intensity of Morgan Stanley and Wall Street to go back to the land of my birth, Bangladesh. I went to work for a bank for underserved women which provided very small loans that allowed them to start businesses.
The work at Grameen Bank was equally intense in its own way -- walking miles from village to village to collect the weekly loan payments; negotiating with the husbands when they would stop the women from making loan payments; and spending hours teaching the women to sign their names in the sand with a stick (there was very little scrap paper to spare).
When they mastered writing their name, they could, for the first time, sign for their loan with newfound dignity -- instead of having to use a thumb print. This was a financial transaction -- except that it was happening on sand and paper instead of on computers and Bloomberg terminals.
While, at the outset, it seemed like my lives in New York and Bangladesh were worlds apart, the common thread was that I was witnessing the power of finance in both the places. In New York, I saw the financial markets controlled by educated, affluent men; in Bangladesh, I witnessed the growth of a new type of financial market created and controlled by poor, uneducated women.
These women not only went on to inspire millions of other women across the world to create small businesses themselves through microfinance institutions (MFIs), but they also ensured that the people who believed in them received healthy financial returns.
My two worlds came head to head during the 2008 global financial crisis. While the financial markets around the world melted down, the women micro-borrowers gave microfinance investors healthy returns, just as they had promised.
Over a decade later, history is repeating itself, but this time with a new vigour. We are now bracing for a new crisis in which we need to plan for the safety of our families and employees while again facing the prospect of a global financial and economic meltdown.
Thus, when one of the investors in IIX’s Women’s Livelihood Bond (WLB) sent me a note saying, “The market is crashing but WLB is up by 3.8%, thank you,” I had to smile and thank the women who received loans as a result of the WLB for making it a success even as they go about building their own livelihoods. For IIX, which was born out of the 2008 financial meltdown with a vision to radically transform financial markets for social good, I see this as a glimmer of hope that the lessons of 2008 weren’t all for nothing.
Investing in the era of the coronavirus
I know that the market turbulence has impacted many of the investors in our network, including those who are members of our Impact Partners investment platform or who invested in the Women’s Livelihood Bond. We recently conducted a flash survey of our 1,200 global impact investors on how they are preparing for the market meltdown. The results are nothing short of breathtaking:
21% of investors are completely exposed, with all investments in the public market
42% are using impact investing as a risk mitigation strategy
89% are now looking to invest in non-market-linked enterprises that are serving underserved communities.
So, what have we actually learned from 2008? And why are a majority of our investors looking into impact investing at a time when the markets are in turmoil?
Lessons from the 2008 financial meltdown
During the 2008 financial meltdown, investors with portfolios diversified into microfinance witnessed double-digit growth rates in those investments. Overall, institutions serving poor, underserved customers generally performed better financially than mainstream banks throughout the crisis. A critical reason for this financial upside was that investors benefited from the commitment of the MFI sector to work with the world’s poorest who were excluded from financial markets and therefore less affected by the global meltdown.
Global markets have since evolved, and the reality is that we are now more connected than ever. Should investors look to microfinance again as a safe haven? In order to answer that, we need to understand how microfinance and impact investing are connected and how they are different.
Impact investing: Standing on the shoulders of microfinance
As an impact investing leader and microfinance veteran, I can personally attest to how impact investing has grown on the shoulders of microfinance. It was microfinance that showed us the potential of financial inclusion -- especially for women (Yes, for some of us, Gender Lens Investing has been happening for a long time).
Yet microfinance has fallen out of public favour. As with every other sector, microfinance has had its share of imposters and abuses, which has led to criticism from various camps who question its effectiveness in bringing financial opportunities to the world’s poorest.
Myself having seen first-hand the best and the worst of financial markets and of microfinance, it is time that we acknowledge how impact investing at large is beholden to the legacy of microfinance, and also how impact investing goes beyond microfinance in critical ways and is effectively creating mechanisms to safeguard women’s wellbeing without compromising investor return.
That is why I started IIX over 10 years ago, partly in response to the 2008 financial meltdown and partly to address the challenges in the microfinance industry which led to the SKS Microfinance IPO debacle. We did this by pioneering a new approach to finance and development, now called impact investing, with a strong focus on impact measurement, valuing women’s voices and putting women’s empowerment at the heart of financial inclusion.
In addition, we have looked carefully at every aspect of risk, impact, and financial return and the inter-relations among the three. We have found ways to ensure the creation of deep impact while also enabling a fair financial return and mitigating risk. To do so, we have brought together stakeholders and partners from the public sector, the private sector and civil society.
The lessons of the global financial crisis are especially crucial to remember as we stand here on the precipice of the coronavirus pandemic and another global financial meltdown, so that we can drive forward the next era of change with these hard-won lessons in hand.
A tale of two microfinance legacies
Yet criticisms of microfinance continue unabated. Just last year, a report released by civil society organizations in Cambodia spurred a wave of international coverage alleging that collateral-based microfinance loans in Cambodia have led to reckless lending practices, crushing debt, human rights abuses, forced land sales, and large-scale economic risk.
While I commend advocates who continue to monitor and stay alert to human rights issues, broad-brush claims that discredit the work of many which are positively changing the lives of underserved women risk diminishing hard-won progress in sustainable development.
Firstly, it is crucial to distinguish between MFIs that are socially-motivated small lenders who put client welfare front and centre of lending and collection decisions, and other organizations that make small loans but take decisions purely motivated by financial considerations. Most of the anecdotes of reckless or abusive lending practices can be traced back to this latter group of lenders.
Secondly, it is important to establish the function of collateral in microfinance loans. Without collateral, microfinance loans can potentially trap borrowers in a cycle of small loans. I saw it with my own eyes at Grameen over 30 years ago, where group lending became messy very quickly -- even resulting in women making other women take loans on their behalf so that they could grow their businesses. If we are to avoid these unsavoury behaviours while ensuring that women can grow their businesses, we need to give them the right tools.
With collateral, underserved women are able to access larger loans to improve their income-generating ability and become a channel for women’s empowerment by supporting their autonomy and the improvement of their health, political, social, and economic status.
So how can microfinance carry both these legacies -- one of women’s empowerment, and one of an endless cycle of loans -- and how do we avoid these mistakes moving forward?
Going beyond microfinance
During my time at Grameen Bank, I saw how most traditional microfinance borrowers were women yet very few could graduate beyond the microloan to grow a sizable business.
For example, a woman could access a microloan to purchase an income-generating asset such as a cow, but the microfinance loans available to her would never be sufficient for her to run a larger business, such as a dairy farm.
If microfinance is to be a ladder out of poverty, the entire industry must go beyond offering credit and thinking of women simply as borrowers within the existing financial set up by helping the ones who want to grow their businesses go to the next level.
Impact investing addresses this shortcoming head-on. Rather than a niche subset of finance, impact investing is becoming a movement to change financial markets so that they give value to the most vulnerable in society.
For instance, take Calvert Impact Capital, the first investment firm to work with MFIs to create funds and tap into mainstream capital markets; ResponsAbility, a similar firm supported by Credit Suisse; or Blue Orchard, a leading Swiss investor in emerging and frontier markets.
These companies have long realized the possibility of generating social and environmental benefits alongside financial returns and have naturally become pioneer investors in the shift from traditional microfinance to impact investing.
Pioneering impact investors like Symbiotics, Blue Orchard, and Nuveen continue to lead the sector by investing in innovative financial products like IIX’s WLB Series, embracing the WLB’s approach to women’s wellbeing, risk, return, and diversification.
What this means for the era of the coronavirus
Stepping back, what does this all mean in the era of the coronavirus and our linkages in the market?
The answer lies in the inter-relation of three elements that we have effectively brought together with our investments at IIX -- the risk, return, and impact of each of our investment portfolios.
For each company in which we invest, we need to ask ourselves: What is the impact that the company is making? Simple ESG tracking of a company is a start but is not good enough to withstand economic turmoil.
The company should have deep roots and impact in underserved communities. It needs to be accessible, affordable and equitable to all its consumers.
If it falls short in any of these aspects, the company should have mechanisms to adapt and improve its impact. Deep impact then becomes a risk mitigation for the company. Once the risk and impact are clearly verified, the financial returns will also follow.
As for the investor portfolio as a whole, investing in women, underserved communities and climate action cannot be viewed as “something nice to do with 1% of the portfolio” but as a critical strategy for a larger portion of the portfolio. It is diversification practice at its best.
While fear of the coronavirus affects markets in the financial centres of the world, the investments IIX has made in the underserved in the far-flung corners of the world continue to perform -- enabling women to expand their livelihoods while enabling investors who believed in these women to earn reasonable financial returns.
Coming full circle, the financial markets and these resilient women meet again. Signing a small loan with a thumbprint in Cambodia does not seem that far away from using our thumbprint to unlock our smart phone and check the Bloomberg terminal. The two worlds are more connected than ever.
Durreen Shahnaz is Founder and CEO of IIX.