NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Friday, June 1, 2012

Financial innovation got a bad rep in the financial crisis. But inside the well-barricaded Federal Reserve Bank in downtown San Francisco last month, the financial engineers were at it again.

Teams of financial statistical whiz kids pitched complex new bonds, loan-guarantees, and hybrid structures of debt and equity. Their target? It wasn’t mortgages. It was women’s economic empowerment. It was energy efficiency improvements and ranchland conservation. It was small businesses in Africa.

The Occupy movement has tarred Wall Street with a broad brush, while economists like Yale’s Robert Shiller have tried to rescue finance from the consequences of its excesses. At the Fed, the MBA students competing in the second International Impact Investing Challenge were part of a new crop of financial engineers taking a different tack: tweaking risk and reward to directly tap at least a small part of the $60 trillion private capital markets for positive, measurable social impact.

The contest winners, who come from Stanford, have a plan to bring electricity to remote Indonesian islands — and 5 to 7 percent returns to investors — by financing local micro-grids through special-purpose vehicles owned jointly with community co-ops. The runners-up, from the Kellogg School of Management at Northwestern, aimed to help slum dwellers in Mumbai get higher-paying jobs, financing job-training by offering private investors 7 percent of graduates’ paychecks for two years.