> Posted by Danielle Piskadlo, Director, Investing in Inclusive Finance, CFI
Where were you in 2006? I was living with friends in a “beach house” in San Diego. Since then, I lived in China, went to grad school, shifted careers, married, and had two kids. So much has changed in my life over the past decade. The same cannot be said on the topic of valuing socially-focused financial institutions.
In 2006, Clay O’Brien wrote the first-of-its-kind paper on “Valuing Microfinance Institutions.” This paper surveyed members of the Financial Inclusion Equity Council (FIEC) – which was then called the Council of Microfinance Equity Funds (CMEF) – and concluded that:
- There was not enough transparency in terms of methodologies and benchmark data;
- There was a need for a more robust, standardized valuation methodology; and
- The social value of double-bottom line investments was not accounted for – or was accounted for negatively – in the valuation.
FIEC recently revisited the topic of valuing double-bottom line investments with its valuation working group to better understand how the topic has evolved over the past decade. What was found? Despite changes in the broader industry (new players, adjacent sector investments, etc.), very little has changed in terms of valuing financial inclusion investments. Our findings are compiled in a brief paper, Valuing Microfinance Institutions: Where Are We Now.
To put it in perspective, imagine trying to sell or buy a house with no pricing information on what comparable houses in the neighborhood have recently sold for. No property listing service like MLS showing historical purchase prices. No property apps like Zillow providing a helpful estimate. And no experienced brokers or agents to offer market intelligence. You would have no idea what the fair market value would be for that house.
Now imagine the house is for sale in a volatile market where no other houses have been sold for the past five years and no data is publicly available on prior sales. You would likely struggle to create a pricing model, relying on a lot of assumptions about how much you think the home and the neighborhood will appreciate in the future. Essentially, you’d be coming up with your “best guess” as to what that home might be worth.
For the most part, the above analogy holds true for equity investors in the financial inclusion sector trying to buy or sell a stake of their investments in a financial institution. To address these issues around transparency and comparables, FIEC recently launched a valuation database, allowing members to share valuation data anonymously with each other through a third-party academic institution which collects and analyzes the transactions, providing members with relevant, accurate and timely comparable valuation data.
To take the home analogy one step further, imagine that your home serves a social purpose that you value highly – for instance, it has solar panels on the roof. When you go to sell the house, those solar panels would limit your buyer pool to others who value the solar panels’ energy efficiency just as highly as you do (or at least to buyers who don’t mind the appearance of solar panels on the roof) – but the panels wouldn’t factor into the price they pay for your home.
The debate over whether or not to account for the value of the social aspect of a double-bottom line investment is one that still has no consensus among FIEC members. Even those who support explicitly pricing social impact have no mechanism within traditional financial valuation methodologies to do so.
At least in 2006, socially-focused investors were mostly valuing brick and mortar financial institutions. Valuations of investments in the financial inclusion sector have become even more challenging as investors venture into the land of early stage fintechs. How do you value an early stage business that could be the next Facebook or could go bust tomorrow?
Impact investors need more reliable valuation data and standard valuation methods to make sound investment decisions and to pursue their financial inclusion objectives.
Read more about the topic in the new report and let us know what valuation challenges you are facing in the comments.
Have you read?
Offshore Financial Centers for Financial Inclusion: An Aligned Industry or Oceans Apart?
A Tale of Four IPOs: Is Public Investment in Microfinance Becoming OK Again?
Microfinance Equity Investing: Different Context, Similar Issues
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July 17, 2017 at 5:06 pm
John Gitau
Danielle, if you consider solar panels as serving social purpose( I read aesthetics) while classifying them as vehicles of energy efficiency in the same paragraph, it is then not surprising why social impact is difficult to measure as delivered by formal financial institutions masquerading as social impact deliverers.
Impact investors need to cut to the chase and allow financial institutions to do what they are designed to do: profiteering. With the hefty dividends they will earn if they allow them their freedom, they, impact investors, can get involved in philanthropy or pass on the largesse to philanthropic institutions doing social impact work. They are free to set conditions and standards to these donor institutions. That is easier than having financial institutions bend forward and backwards to fit social impact standards in order to benefit from their conditional investments.
Financial institutions, by their DNA are profiteers and asking them to catwalk in a social impact pageant is wasting their precious time that can be used in generating returns on investment for investors, social or otherwise. No wonder double bottom line has remained a buzz word a decade later, as financial institutions got confused how to walk about in these new high heel shoes. It reminds us of Mrs Edward Craster’s poem that goes:
“The Centipede was happy quit
Until a toad in fun
Said,” Pray, which leg goes after which?”
That worked her mind to such a pitch,
She lay distracted in a ditch.
Considering how to run”
Social impact investors are like the toad, Their requirements are paralyzing financial institutions, wanting them to focus on double bottom line, then have social impact, then have data and standards so that they can attract their money etc. Let us give financial institutions a break.
July 18, 2017 at 11:51 am
S.Kelly
My dear friend! I have missed your poignant turns of phrase and thoughtful responses.
Are you asserting here that institutions will naturally be come more customer-centric and will do social impact naturally if given the financial freedom and growth to be able to do so? That’s an interesting argument, and I’m trying to think of companies where that has been the case. Would love your thoughts.
Hope all is well with you.
July 18, 2017 at 1:02 pm
John Gitau
Thanks Sonja! In Kenya, almost all major banks have turned their CSR efforts into full blown Foundations that do social good work at scale. Leading the pack is Equity Bank Group with their formidable Equity Group Foundation that runs the flagship project ‘Wings to Fly’ educating many children from poor backgrounds. Many have joined Ivy League universities and will likely be future corporate leaders who will understand first hand what social responsibility is. More importantly, Equity has received massive support from Mastercard Foundation to the tune of more than $40m, becoming a good vehicle for donors keen on promoting social value. The other financial giant, Kenya Commercial Bank has its Foundation supporting the apprentice education. Family Bank Foundation is on to financial education. Since no bank want to be left out, they are all looking for social causes to support and that is the best way forward, I suppose. Equally important is that these Foundations are running autonomous of their mother banks.
My point is that impact investors, if so keen to do good for society should establish their own mechanisms or institutions to carry out their kindness, just like banks are doing, instead of setting tough conditions to banks before they invest in them. You know why I think social impact investors are just pretenders to social kindness? They want to make “holy” money. I would rather Foundations such Citi Foundation, Mastercard, Bill Gates who clearly want to do social good at scale and are keen to work with credible deliverers who they fund generously.
The next frontier of best social do gooders will be those who, through advocacy and lobbying, will be brave and forceful enough to push governments to do their work well, as social is not a financial sector obligation but governments’.
July 18, 2017 at 8:08 pm
Clay O'Brien
Danielle, I am very pleased to see your article and thank you for the generous attribution to the research I did back in 2006. I agree with what you say: the “art of valuation” has become more abstract, partly due to the ‘blue sky’ of Fintech but also due to a lack of sources for comparable data after the publications you mentioned unfortunately ceased. Therefore, I am very happy to see that the Council is taking steps to rectify the situation by working on a valuation data base. However, will it be limited to members only? As I am now consulting in the A2F area, and not a member, I would not be able to see it. Clay O’Brien
August 9, 2017 at 9:44 am
Danielle Piskadlo
Thanks for the comments. Clay, you are correct that the current valuation database is only available to Council members. I’ll be sure to let you know if that changes.