Social Capital Markets 09: Beyond MFI
For the SoCap community, the success of microfinance is a well known story: over the course of nearly 40 years, what started as a bright idea by a Bangladeshi economist has become a global industry that improves millions of lives per year and provides a range of profitable investment opportunities for socially minded investors.
The question on the collective SoCap mind is “What’s next?” Might there be other opportunities at the Base of the Pyramid for providing non-financial goods and services that could also offer returns for investors? Can the vast platform built by microfinance be leveraged to provide these services to marginalized communities? If so, which services should be prioritized, and how long will it take for them to reach scale?
With the afternoon sun brightening the room and a light ocean breeze passing through the open windows, the participants in last Wednesday afternoon’s “Beyond MFI” panel turned their attention to these burning questions. April Rinne of Water.org moderated the lively discussion between Steve Hardgrave of Gray Matters Capital, Gil Crawford of Microvest, Gary White of Water.org, and Patricia Safo of JCS.
Steve kicked off the panel by explaining how Gray Ghost began to invest in independent private schools scattered throughout the slums of Mexico. Many poor families already pay fees to send their children to these schools, which they consider better than government-run schools. With additional investment, school proprietors can invest in improving classrooms, supplies, and teaching staff, thus attracting more students and improving the quality of education for the poor.
Patricia advocated for MFIs themselves to play an increased role in development; in Ghana, she believes that MFIs can identify promising sectors of the economy, pressure the government to regulate those sectors, provide loans for SMEs to operate within them, and target companies that can produce goods locally to create vertical supply chains within the country.
Water is another area in which the microfinance model can be leveraged; by providing loans to build toilets and connect to water utilities, MFIs can improve the health and productivity of communities while making a healthy return. Despite this compelling opportunity, Gary said that most MFIs have been slow to embrace this new line of business for fear that it might fail. However, with $1M in grant capital as the catalyst, Water.org was able to raise an additional $4M from the capital markets for MFI partners to make loans for access to water.
Rather than focus on one issue, Microvest has bifurcated their portfolio, continuing with classic MFI investing on one side and investing in other new BoP initiatives on the other. Along with Stu Hart, Gil conducted research on potential investments, but found that many promising BoP initiatives were still 7-15 years behind microfinance in terms of scale and returns.
In my opinion, new BoP initiatives will require significant investment if they are ever to catch up to microfinance. We cannot forget that the microfinance sector was built on the back of millions of dollars in donated capital.
I agree with Gary that philanthropic capital is necessary to allow for the incubation of new initiatives beyond microfinance, and that this capital must have the flexibility to allow for the trial and error that is inherent in launching new businesses in difficult markets (which Gary argues that much donated capital still does not allow for). These donations can catalyze what may later become investment opportunities at the Base of the Pyramid, but will donors be willing to invest philanthropic dollars that will provide impact investors a return later down the line? With all the rush towards impact investing, are there still donors out there willing to provide seed capital that expects no return?
If the social capital markets are serious about “social” returns, the market will need to provide significant philanthropic capital to provide new ventures the runway capital (hence the takeoff photo at the head of this post) they need to get to scale. While there may be certain sectors and projects that can be funded through investment capital from the start, and the lessons learned from microfinance may indeed speed up the trajectory to scale for BoP ventures, there are many ventures with potential for major social impact and profit, such as VisionSpring, that will never get off the ground without significant donated capital to play the critical R&D role.
The Base of the Pyramid has been largely ignored by the private sector because it not conducive to large scale and profitability within a reasonable time frame for most investors. If, as a sector, we can view nonprofit BoP ventures as seeding markets for the private sector – and provide sufficient donated capital to allow them to grow to scale – the social capital markets have the potential to revolutionize the quality of life for billions of people.