Microfinance has grown in the past 30 years as a tool to alleviate poverty. According to the State of the Microcredit Summit Campaign Report 2012[1], 175 million people in poverty benefit from a microloan. Amid the many positive appraisals, however, there is criticism. Last year, Sheikh Hasina, the prime minister of Bangladesh, accused the Grameen Bank of exploitation, claiming their interest rates were too high. While a study done byMicrofinance Transparency[2] revealed the accusations were unfounded, there are other incidents that highlight the risk of mission drift, meaning a focus on financial gains at the expense of the social impact of microfinance. In the autumn of 2010, media picked up on a number of suicides in the Indian state of Andhra Pradesh by borrowers who could not repay loans due to high interest rates and were subsequently exposed to aggressive debt-collection practices. One problem identified was that some borrowers used the money from the loan for consumption rather than investment and signed new loan agreements from other microfinance suppliers to finance their interest payments. It is important for microfinance to go hand in hand with education and training, as well as for control mechanisms such as peer pressure to be in place to avoid abuse of the system. Also some years before that, a number of microfinance institutions (MFIs), including the famous example of Compartamos in Mexico, were criticised over their plans to list on the stock market, asking whether it was appropriate for an MFI to do so and arguing that the objective of getting the highest return for shareholders may cause further mission drift.

In order to prevent this mission drift and ensure microfinance achieves the positive aim it was intended for –to give those in poverty access to financial services and contribute to the alleviation of poverty – a number of initiatives have been announced in recent years. One is the Paris Appeal for responsible microfinance, launched in May last year as part of the Convergences 2015 Forum, which gathered about 3,000 participants in the microfinance sector in Paris. As players in the social and impact investment industry are concerned with similar questions of mission drift[3], the experiences from the microfinance sector can be informative.

EVPA talked to Jean-Luc Perron, managing director at the Grameen Crédit Agricole Microfinance Foundation, which was set up in 2008 by Crédit Agricole and Prof Muhammad Yunus, 2006 Nobel Peace Prize winner and founder of the Grameen Bank. The foundation supports both MFIs and social entrepreneurs in developing countries. To date they have approved investment for 30 MFIs and four social entrepreneurs with a total of €31.5m. They have been involved actively in a number of initiatives for responsible microfinance, particularly the Paris Appeal.

Can you give us a short description of the initial objective of microfinance?

Jean-Luc Perron: Microfinance aims to bring financial services to people who usually have no access to the formal banking system –the very poor – and thus contribute to the alleviation of poverty. Certainly not all poor people can be entrepreneurs, but they have skills and talents like everybody else. By giving them the opportunity to develop a small business, you give them the possibility to improve their life, give their children access to education and so on. Microfinance is very efficient in small trades in urban areas – handicraft or other modest manufacturing. From the very beginning, microfinance gave a high priority to women, so it is a good way to promote women in societies where they are often treated unequally. In fact, around 70% of beneficiaries of microfinance worldwide are women.

There has certainly been a lot of praise for microfinance as a tool for alleviating poverty. However, there has also been criticism about high interest rates and aggressive debt collection methods.

Perron: Microcredit is not cheap. The average amount is from less than $100 in the slums of Manila to $4,000 in eastern Europe or Latin America. However, to issue a loan of say $200 for six months will have the same administration costs as a loan of $2,000 over two years, although the gross margin will differ a lot. Because the only source of income for MFIs is interest rates, they are generally very high – the average figure worldwide is 27%. This might seem high compared with interest rates at a bank, but you must keep in mind that these people do not have access to financial institutions. The alternative to MFIs is thus a money lender. They do not advertise the interest rate at the door, but it is estimated they charge in the range of 200% to 300%. On aggressive debt collection, negative headlines mainly concerned incidents in one place – Andhra Pradesh. This state has about 8% of India’s population but 33% of the country’s microfinance activities. There is thus a high concentration there and microfinance has developed at a very fast pace – maybe too fast. This has led to overindebtedness for many people and unfortunately, from time to time, to very aggressive debt collection practices. There have certainly been other incidents like this. If you forget the social dimension of microfinance, it will lead to a mission drift. Nonetheless, these negative stories should not distract from the fact that microfinance in many places, including India, is carried out in a very responsible and fair way.

What can be done to mitigate the risk of mission drift?

Perron: On the one hand, it is the responsibility of the industry, and on the other, it requires certain regulations. Some MFIs are regulated – in fact most are – but depending on the country, these regulations are not always strict enough. Furthermore, there can be some flaws in the regulation or a lack of skilled people supervising MFIs effectively. However, there is a lot happening in this area. Following the incidents in Andhra Pradesh, a new regulatory framework will be put in place in India in this year. This includes, for example, the registration of so-called “non-banking financial companies/MFIs” as well as the introduction of a cap of 26% on interest rates. Similar examples of regulation exist in other places. However, it is also the responsibility of the industry itself and there have been a number of initiatives on this level. For instance, CGAP[4] has set up a social performance taskforce to develop standards and good practices for social performance management and reporting. One outcome of this was the social performance indicators (SPI) designed by the French non-government organisation CERISE to assess the performance of MFIs[5]. Grameen Crédit Agricole Foundation has decided from inception to integrate this tool into its due diligence and review process. A further initiative is the Smart Campaign, which aims to inform and protect the clients of microfinance[6]. Furthermore, in May last year a number of players from the microfinance sector initiated the Paris Appeal.

Tell us a bit more about the Paris Appeal. Why is there the need for another initiative?

Perron: It is a political appeal to demonstrate that, provided it is faithful to its true inspiration, microfinance can be – and indeed is – a very effective tool to alleviate poverty and to give people access to financial services. The purpose of the appeal is not to impose a further layer of regulation or standards on MFIs. Rather, the appeal would like to highlight what has been done so far and encourage a concerted effort to implement changes and, if necessary, complement them.

What then can the venture philanthropy and impact investing sector learn from the experiences of microfinance?

Perron: On a positive note, we can learn that it is possible to develop a sustainable business model with a social impact – in the case of microfinance to make financial services accessible to the poor. On a negative note, though, we have seen that behind the same word, people can mean a very different animal.  This can lead to mission drift. It is thus important to make sure the double bottom line – that is societal and financial return – is maintained. As seen in the case of microfinance, this requires both regulation, such as introducing a cap on interest rates, which will prevent exploitation of the target group, as well as the effort of the industry itself to demonstrate good practice, to promote and inform. That is why Grameen Crédit Agricole Foundation is promoting and implementing the social business concept defined by Prof Yunus. A social business is neither a charitable non-profit, nor is it a normal profit-making business. Unlike a typical non-profit, a social business has a clear revenue model, is not dependent on donations or subsidies, expects to generate an operating surplus and intends to repay its investors. But the social impact is not a side-effect of the business ­– it is the core mission of the company. Furthermore, investors in a social business have no expectations of personal gain. They explicitly commit to reinvest any surplus they might receive beyond their original investment. The reinvestment can be in the original social business or in another. This selfless aspect is similar to the approach that venture philanthropists take and distinguishes it from other apparently similar concepts such as inclusive business or bottom-of-the-pyramid business. It is intended to safeguard the social mission of a social business and shield its management team from any potential shareholder pressure to erode social impact objectives in favour of profit-maximising objectives. From this standpoint, venture philanthropy or impact investing have something to learn from the history of microfinance.

Background: The Grameen Crédit Agricole Microfinance Foundation

The foundation set up in 2008 is a unique partnership between Crédit Agricole, a leading French bank, and Grameen Trust, a non-government organisation established by Prof Yunus to promote the Grameen model of microfinance. Its aim is to fight poverty by supporting MFIs and social entrepreneurs in developing countries. It was granted €50m by Crédit Agricole to carry out its mandate. To date the foundation has approved the support of 45 MFIs and five social entrepreneurs in 19 developing countries with a total of €32m.

Geographically, the foundation targets mainly sub-Saharan, Middle Eastern and south-east Asian countries, which account for 80% of its operations. The main target groups are so-called tier 2 and tier 3 MFIs, typically those with 10,000 to 100,000 active borrowers. These are relatively small and young institutions with difficulties accessing resources from domestic markets and foreign investment funds. Priority is given to MFIs working in rural and agricultural areas and with women. The foundation supports MFIs through loans, guarantees, equity stakes and technical assistance.

In addition, the foundation invests directly in the form of debt and private equity in social businesses that address the need of the poor for access to nutrition, water, energy, education and other facilities. The foundation is currently structuring an investment fund to increase and improve the support of such social businesses.

The Grameen Crédit Agricole Foundation further contributes to the reflections and initiatives currently underway to promote greater transparency regarding the interest rates practiced, better information for clients and standardised measurement of social performance. It participates in various initiatives that pursue the same objectives, including the European Microfinance Platform (e-mfp), the Convergences 2015 Forum and MicroFinance Transparency.

For further information please visit http://www.grameen-credit-agricole.org/.

[1] “State of the Microcredit Summit Campaign Report 2012, downloadable athttp://www.microcreditsummit.org/
[2] http://www.mftransparency.org/
[3] A report by CAF Venturesome, published in February 2011, raises for example the following questions: “Will investors choose speed of growth, rather than depth of impact? Will early failures be used as reasons to maintain the status quo? Will poor thinking and clumsy execution make our sector one of ‘feel good’ rather than ‘do good’? Will hype triumph over reality?”; The Impact Investor’s Handbook – Lessons from the World of Microfinance, CAF Venturesome: Market Insight Series, February 2011
[4] CGAP, the Consultative Group to Assist the Poor, is an independent policy and research centre supported by more than 30 development agencies and private foundations that share a common mission to alleviate poverty, including the World Bank. Further information on http://www.cgap.org/p/site/c/
[5] http://www.sptf.info/sp-standards
[6] http://www.smartcampaign.org/

The iCats programme is a unique capacity-building tool developed by LGT VP. EVPA members can learn more about the programme during the site visit taking place on 28 February in Zurich. If you are interested in attending the event, email Julia Meuter.
Please note site visits are for EVPA members only and places are limited.

How Two of Ireland’s Largest Foundations Found Common Ground and Built a Portfolio of Nearly €60m Without Compromising the Features That Makes Them Distinct

Tony Proscio, Duke Stanford School of Public Policy, Centre for Strategic Philanthropy and Civil Society, December 2010

This report analyses the collaboration between two of the largest foundations in the Republic of Ireland, showing how they have worked together in the support of common grantees, despite their different approaches to grantmaking and slightly differing goals. The Atlantic Philanthropies, Ireland’s largest private grantmaker at €47m a year, and the One Foundation, which gives between €8m and €9m in annual grants, have invested some €60m in their common grantees between 2004 and 2010, while pursuing their own interests and programmes. The two foundations have combined forces to achieve a greater impact on the lives of children and youth, as well as for Ireland’s growing immigrant population.

Their joint portfolio includes six grantees as part of the programmes for children and youth, including Barnardos, Headstrong and the Children’s Rights Alliance. Another five grantees cover the field of immigrants’ needs and rights, including the Irish Refugee Council, the Integration Centre of Ireland and the Migrant Rights Centre. As the report shows, partnership has proven to be powerful and effective, providing grantees with different skills and ways of conceiving solutions. The cooperation becomes even more significant taking into account the strikingly different approaches in the foundations’ operating styles and philosophies.

The One Foundation, EVPA member and host of the 2012 Annual Conference in Dublin, is the first venture philanthropy funder in Ireland. It pursues a high-engagement approach focusing on developing a strategy and a business plan through hands-on support and creating well-run, performance-driven organisations. Being aligned with all VP principles, the One Foundation relies on performance benchmarks and timelines, calling for growth in operational and management processes and usually taking a seat on the grantee’s board. Staff from the One Foundation regularly meet the heads of the grantees, scrutinising growth and analysing unmet targets.

Atlantic Philanthropies, on the other hand, usually stays at arm’s length from grantees’ organisational decision-making and focuses on the interests and strategies of particular programmes, including testing and demonstrating service models and supporting advocacy campaigns.
The difference in operational style often led to disagreements in terms of collaboration and common goals, especially in projects concerning children and youth. While Atlantic Philanthropies aimed to improve the public system, focusing on government policy and funding, the One Foundation’s main goal was to build stronger organisations that could create new services and lobby for better public policy. This led to disagreements during the cooperation process, sometimes overloading the grantees with work in order to satisfy both foundations. In the second area of joint efforts, involving the needs and rights of immigrants, discord was mostly overcome – the two foundations worked to formalise and strengthen the legal rights of immigrants and agreed to support strong advocacy organisations and look for near-term solutions.

The report concludes that the relative informality of the arrangements and the ad hoc partnership led to many difficulties and disagreements in operational and strategic decisions. Nonetheless, through several critical features the foundations have in common, such as geographical position, shared charitable purposes and personal connections, it was possible to align goals and create a collaboration that could be defined by most as “an unnatural act”.

For funders considering collaborating, the report lists six rules derived from the comments of staff members and grantees:

• The goals of collaborating institutions should be similar. The more the goals intersect the greater the potential for a close and consistent partnership;
• Commitment to the partnership needs to come from both top executives and front-line workers during the collaboration. Everyone in the foundation has to see the value-added elements that the cooperation brings to the institution;
• Shared intellectual capital is more important than shared finance. The real engine of the partnership is peer-to-peer interaction;
• Peers from both foundations should create distinctions in roles, interest and responsibilities;
• Collaborations depend on trust as much as on formal agreements. Respectful and supportive conversations are at the basis of every relationship;
• There will always be discord but foundations need to be prepared to overcome disagreements and work jointly on common opportunities and goals.

At a time when collaboration still seems to be a critical issue for many foundations, Atlantic Philanthropies and the One Foundation prove how endorsement from two independent, demanding institutions lends credibility and improvement to grantees. Both foundations and grantees agreed that differences in work and objectives could be complementary and bring more creativity and better results to the supported organisations. As Deirdre Mortell, co-founder of the One Foundation and EVPA board member, puts it: “We add value in different ways according to our strengths, trusting the other organisation to add value on their particular focus: the One Foundation on building high-performance organisations that can do service growth, systems change or advocacy, and Atlantic Philanthropies on programme selection, programme technical supports and evaluation, as well as advocacy methodologies in the Human Rights Programme”.

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• Regulation, legal structures and tax structures should encourage or at least not create barriers to social investing;
• The lending infrastructure needs to expanded. The few national and local intermediaries in the UK need the capacity to lend money in such a way as to cut the risk of it taking a long time to reach the target organisation;
• If social investment is to grow into a “market”, there needs to be a constantly growing pool of investors. This requires “dedicated capital raisers” who talk to investors to understand their needs, provide data on social investment products and then pitch for investment;
• “Investment ready” charities and social enterprises need to be built. Social investment will not be appropriate for all charities or social enterprises. However, those that do qualify should receive support – training for a finance director, consulting work to restructure the business model, and so on – to make them investment ready;
• Organisations need a strong revenue stream to take on social investment. Government is one of the main sources of revenue to the social sector, but the government is cutting back, and as contract sizes grow, fewer appear to be going to charities and social enterprises;
• Government should make contracts more accessible to charities and social enterprises;
• There needs to be greater consensus on how to assess and report on the “social return” created by investments.

For a more detailed summary, visit New Philanthropy Capital’s Blog.

The organisation works to break the cycle of poverty by investing in ambitious charities and social enterprises that fight economic disadvantage. The efficacy of the venture philanthropy approach has been proved as supported organisations have increased their income by an average of 23% a year, and the number of people they help has increased by an average of 30% a year.

Below is a five-minute video showing Impetus and its work with its supported portfolio organisations and the power of venture philanthropy to transform charities and lives throughout the UK.

Impetus Trust in Action from Impetus Trust on Vimeo.

Our thoughts are with his family.

We are grateful for the pro bono support of our newest member, Egon Zehnder International, in our search for a new managing director. After our current managing director, Beate Trück, announced she will be leaving EVPA, we are now looking for her successor. For any further information or to make an application, contact Alessandra Anolli at Egon Zehnder International.

For full details of the application process, eligibility criteria and an overview of the Awards Programme please click here.

The deadline for applications is Thursday 16th February 2012.

Social Entrepreneurs Ireland believes that Ireland needs new, big ideas to address social and environmental challenges. They believe that social entrepreneurs provide such high impact innovations. For this reason SEI directly supports high potential social entrepreneurs to enable them to maximise their impact. Find out more about Social Entrepreneurs Ireland’s work at www.socialentrepreneurs.ie

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An in-depth analysis of investor perspectives and over 2,200 transactions
After the research report titled Impact Investments: An Emerging Asset Class published in 2010, the Global Impact Investing Network (GIIN) and J.P. Morgan partnered on an expanded survey, capturing data on over 2,200 private transactions and interviewing 52 impact investing organizations. The survey was conducted in two parts and examined investor perceptions of the industry as well as the performance of their investments.

The investor perception survey showed that the majority (52) of them are optimistic about the potential growth of the impact investing market describing it to be “in its infancy and growing”. They plan to invest a total of USD 3.8 bn in the following year, out of which impact investments still constitute a small percentage. However, investors believe that impact investments will play an increasing role in their portfolios: 10% of total investments for HNWI and 5% for institutional investors in the next ten years.

Nonetheless, as the industry is in an early stage of development, it still has to face many challenges: investors rank as the most critical challenge the lack of “track record of successful investments” as well as illiquidity and uncertainty of financial return.  The reason why investors, despite those risks, display a cautious optimism could be due to recent positive market developments, such as increasing government support – for example the launch of investment funds and the seeding of intermediaries to catalyse private investment – and the improvement of infrastructure to facilitate impact measurement and market transparency.

The second part of the survey focused on the philosophy and the performance of the investments, analysing the approach investors take to making investments with a dual purpose, meaning financial return and achieving social and/or environmental impact. The main outcomes show that 62% of impact investors would be ready to sacrifice financial return for greater impact.  60% think a trade-off between financial societal return is not necessary. The analysis of the return expectations showed variations, depending on the different nature of each investment. In general, the surveyed impact investors have relatively aggressive return expectations: an average of 19% for equity impact investments. It is interesting to see that for-profits often have more competitive return expectations that non-profits who are usually expect concessionary returns. Results show that most of the investments are being made with hard currency, and mainly in the form of debt and equity. Regional distribution shows market activity in both developed and emerging markets.

Regarding geographic focus, the respondents focus much of their investment on the United States (51%) in money terms, and only 1% in Western Europe. In terms of sector focus, the top sectors for the impact investors in the study are microfinance (37%) and housing (21%) in money terms.  Only 5% of respondents focus on health and education. This geographic and sector focus contrasts sharply with the findings from EVPA’s recent survey. For European Venture Philanthropy organisations a majority (65%) of the investments are made in Europe, and the top social sectors are health (27%) and education (21%).

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