The Sharks of Microfinance and the Future of Impact Investing

Wednesday, October 2, 2013

In the 1990s, people assumed that the altruistic intentions inherent in microfinancing would be enough to prevent exploitation once introduced into mainstream markets. Perhaps impact investing is a similar enough financial innovation that we can learn from some of the growing pains of microfinancing to help prevent history from repeating itself.

Microfinance is a form of financial service for individuals and businesses lacking access to traditional banking and institutional credit. It differs from impact investing in that it focuses on opening capital to typically disadvantaged populations, whereas impact investing is more concerned with results-based outcomes that either improve society or the environment while still garnering economic returns. Also, occasionally impact investing is connected with donations and public dollars to account for various financial risks, or if there is government involvement (e.g., social impact bonds).

Regardless, both impact investing and microfinance are market-based solutions designed to address economic gaps within society. However, the notion of profiting from the poor is still a contentious debate at the cornerstone of these modern financial innovations, and impact investing is no exception with its primary target being emerging markets.

One way of possibly addressing this issue would be to embed third-party oversight into the very infrastructure of governance, such as regulation and accountability structures. This way, if any donations or public dollars are topping off an impact investment, we can be sure those dollars are being used appropriately, or if a company is leveraging an impact investment as a part of their social responsibility envelope, the public will be informed whether the investment is actually making a positive difference in the community.

If proponents for impact investing are serious about the introduction of new social and environmental markets, they need to equip these markets with the necessary tools to stand a fighting chance. Otherwise, once impact investing becomes commonplace, and more and more players enter the market, financial outcomes will again dominate, as witnessed in some cases of microfinancing, only with impact investing, it will be at the expense of social and environmental gains.

Source: Huffington Post (link opens in a new window)

impact investing, microfinance