Gift to Tufts will aid world’s smallest firms
Friday, November 4, 2005
The founder of eBay and his wife have donated $100 million to Tufts University, the school’s largest gift ever, but also one with a unique twist: All the money will be invested in microfinance, which involves tiny loans as low as $40, designed to help poor people in the developing world start small businesses, such as selling hand-woven cloth or goat’s milk.
Pierre and Pam Omidyar intend the gift to generate healthy returns for their alma mater and in so doing to demonstrate to other investors that microfinance deserves a hefty infusion of private capital, not just charitable and government dollars. Tufts and the Omidyars believe that the gift is the largest private allocation of capital to microfinance by any individual or family.
Tufts president Lawrence S. Bacow said in an interview that the Omidyars hope by their gift to ’’do well by doing good” and to show the way for others to do the same.
The Omidyars, Bacow said, are looking ’’to generate capital to empower people to lift themselves out of poverty throughout the world, while at the same time generating investment returns to support the university’s key priorities.”
Tufts wants to achieve, over time, the same 9 percent rate of return that it seeks with its $880 million endowment, said Sally Dungan, the university’s chief investment officer.
Half of the fund’s earnings will be reinvested in microfinance. The other half will fund university priorities, including support for faculty, financial aid, a new debt-forgiveness fund for graduates going into public service careers, and financial aid for economically disadvantaged students to attend summer school.
Pierre Omidyar has been called one of the most innovative philanthropists, for his belief that for-profit businesses can provide substantial social benefit. He considers eBay, the Internet auction site, to be an example, because millions of strangers trust one another with each transaction, and 750,000 people make their living selling wares on the site, according to Michelle Goguen, spokeswoman for the Omidyar Network.
The Omidyar Network is the couple’s hybrid philanthropy and investment group.
The Omidyars could not be reached for comment on the donation, because Pam gave birth this week to their third child.
Pierre Omidyar, who graduated from Tufts in 1988, is also a university trustee. Pam Omidyar graduated in 1989.
There is not enough nonprofit capital in the world to maximize the potential of microfinance to help people, Goguen said. The United Nations Capital Development Fund says that 400 million to 500 million households might benefit from microfinance, while only 30 million are reported to have had access to it since 2002.
Yet microfinance — which, in addition to loans, includes financial services such as insurance or savings accounts — is considered to have strong potential for profit. Interest rates are relatively high, often 25 percent to 30 percent, though much lower than what money lenders would otherwise charge poor borrowers, according to Michael Swack, dean of the School of Community Economic Development at Southern New Hampshire University and a specialist in microfinance. Borrowers’ default rate is extremely low, according to studies.
Research has documented the success of microfinance in helping poor communities. One study cited by the United Nations shows that clients in Bolivia doubled their income in two years. A World Bank study in Bangladesh found that 48 percent of the poorest households with access to microloans rose above the poverty line.
Tufts, home to the prestigious Fletcher School for international affairs and the new University College of Citizenship and Public Service, prides itself on internationalism and commitment to playing a positive role in the world. However, officials said they will fail if the Omidyar-Tufts Microfinance Fund is not profitable.
’’This is not a socially responsible investment,” Dungan said. ’’We hope to lift many millions of people out of poverty, but at the end of the day, this has to earn a commercially viable rate of return.”
As an economist, Bacow said, he found this partnership particularly appealing. He compared microfinance with other investments once considered innovative, like venture capital or emerging market funds.
’’It took pioneering investors to document and establish the kind of returns that are possible,” he said. ’’It is our hope the same thing will happen here.”
Because microfinance is relatively uncharted territory for investors, it lacks the assurances of other investments, like rating agencies and standards for microfinance banks on reporting data, such as loan delinquency rates.
Dungan said the microfinance fund would be aimed at some of the poorest people all over the world, living on $1 a day or less.
Because the loans are generally only a few months in duration, the $100 million can be reinvested numerous times a year, so Tufts expects to make $1 billion in loans. Microloans average $600, but are often far lower, as low as $40, Tufts officials said.
Dungan and the university’s investment staff will manage the fund and report to a board that will oversee the investments. The board is made up of Pierre Omidyar, Bacow, and three others.
Dungan said the university will explore several ways to manage the money, including working with investment managers who have expertise in microfinance. The poor people who receive loans will not interact directly with Tufts; instead, they will apply for their loans through microfinance banks in their countries. Either indirectly or directly, Tufts will provide those banks with capital to make the loans.
Sheldon Steinbach, general counsel of the American Council on Education, said he had heard of no other major university gift like this in three decades of following higher education.