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>Posted by Kirsten Hansen
Risk. This four-letter word was prominent in the major headlines last week,
as legislators met with the CEO of JP Morgan to discuss the company’s 2 billion dollar losses. Why had JP Morgan taken such enormous risk? Why had JP Morgan’s risk management strategies failed to prevent the risky trades?
In times of financial crisis, risk is an easy scapegoat. The financial institution took on too much credit risk. Interest rates on the company’s liabilities rose unexpectedly. If risk were fundamentally bad, the obviously solution would be eliminating all risks. But, as outlined in a recent Harvard Business Review article, for every financial institution there are always risks that a company actually chooses to take on in order to generate returns, and which are well encapsulated in the idiom, “Nothing ventured, nothing gained.” Since such strategic risks can’t be eliminated but are an essential part of the pursuit of returns, such risks must be carefully managed to maximize potential gains and minimize potential losses. Read the rest of this entry »
>By Danielle Donza
My mother is a risk expert. Even now, when she walks into a room, she sees the choke-able object on the floor, the sharp corner of the coffee table, and the window open just enough for a baby to fall out. Sometimes I think she sits around all day dreaming up every risk her children could possibly face, no matter how absurd, and figuring out how she can prevent it. Some would call this paranoia, but some might call it risk management.
Whether it’s childrearing or MFI oversight, risk management is tricky business. It requires identifying plausible risk scenarios, deciding which risks are actually worth focusing on, understanding what you can do to mitigate them, and finding a balance so growth and development aren’t (too) negatively affected. And, for MFIs, it requires reaching consensus among board directors and management on an acceptable level of risk, and then complying with regulations, especially if taking deposits. Mom had a hard enough time getting Dad to agree, and comply.
In the Center’s recently released “Microfinance – A Risky Business ,” David Lascelles, senior fellow and joint founder of the Center for the Study of Financial Innovation, shares his insights about risk in a lively and provocative manner. He discusses some of the most important risks that boards should consider and highlights the importance of managing risk at all times, not just during crisis. In fact, effective board oversight of risk should help to anticipate and avert crises. Read the rest of this entry »
> Posted by Lauren Burnhill, Managing Director, One Planet Ventures
If social change is hard to achieve, raising funds for innovative programs that target social change is twice as difficult, but things are looking up! Recently, the White House Office of Social Innovation announced a proposed change in the rules governing program related investments (PRIs) made by foundations.
Every microfinance, social impact or environmental group that has tried to mobilize foundation resources for innovative concepts, pilots or ventures knows how difficult it is to access PRI funding. For fear of endangering their tax status, most foundations have exclusively focused on making grants to non-profit organizations.
In other words, under existing regulations, foundations believe themselves limited to making grants or supporting studies and research related to social enterprise and the impact investment industry. Yet when we look at obstacles to catalyzing private investment, there is a strong need to find actors that can change the risk profile associated with funding these activities, in order to facilitate the entry of new private investors. Foundations seem like a logical candidate to play this role, but until now, they have not felt empowered to do so. Read the rest of this entry »
> Posted by Henry Jackelen, Jackelen Associates
This post is part of the Center for Financial Inclusion’s Expert Exchange: Building A Movement Toward Financial Inclusion by 2020, cultivating conversation around the goal of reaching full financial inclusion by 2020. For further questions about this series, write to , Fellow, Center for Financial Inclusion at Accion.
We’ve always known that microcredit is not a panacea.
During the heady days of the microcredit revolution in the 1980s and 90s, I was part of a veritable village of practitioners. It was a remarkable group of driven, passionate, and often iconoclastic individuals. We lived in our own Utopia, defining and inventing the concept of social enterprise. But even then we knew that our microcredit efforts weren’t perfect.
When I first visited Bangladesh in 1983, my role was to review the Grameen and BRAC programs as part of developing a new World Bank program (which proposed what became known as the Palli Karma Shayak Foundation or PKSF, a successful Apex for MFIs). Read the rest of this entry »
> Posted by Center Staff
Yesterday, Micheal Schlein, President and CEO, and Diana Taylor, Chairman of the Board, of Accion, released an op-ed piece on Forbes.com describing the launch of the Venture Lab. This exciting new initiative works to provide seed capital and support to innovative startups in financial inclusion.
The piece begins:
Over the last several years, the world has woken up to the enormous market potential of serving 2-3 billion people at the base of the economic pyramid. A growing cadre of investors recognizes that we can create new ways to meet the needs of this huge population in a sustainable, business-like way. A new wave of socially responsible funds, institutional investors, microfinance investment vehicles, banks and even conventional venture and private equity funds collectively have raised billions to invest in social enterprises. Read the rest of this entry »
> Posted by Danielle Donza
For publically traded retail banks, valuations are at historic lows. In the microfinance industry, 2011 also saw the continued compression of valuation multiples from 2009 highs, according to the recently released Global Microfinance Equity Valuation Survey, Volume Growth and Valuation Contraction. CGAP and J.P. Morgan, with support from the Council of Microfinance Equity Funds (CMEF), publish this report annually to address the scarcity of valuation data available in the public domain.
Including valuation data for both MFI private equity (PE) transactions as well as Lower Income Finance Institutions (LIFIs), which are publically listed companies providing financial services to lower-income clients, but not necessarily having a stated social mission, this report aims to provide benchmarks for the valuation of both private and publicly listed microfinance equity, promote market transparency and identify industry trends.
This year the survey finds a “wider trend where LIFI and microfinance valuations in the public and private markets are beginning to converge toward those of traditional financial institutions in emerging markets, and are probably closer to their true value.” Read the rest of this entry »
> Posted by Julie Shea
Large scale commercialization of microfinance institutions (MFIs) has led to an increased focus on profitability and with that a growing fear of “mission drift.” In an industry facing increased demands for both social and financial performance, how can investors in microfinance funds ensure that both of these “bottom lines” are appropriately balanced? One way is to create incentive structures that measure and compensate fund managers and the managers of the microfinance institutions (MFIs) in which they invest in accordance with the stated mission of the fund.
Paul DiLeo of Grassroots Capital Management, in his recently published paper, Re-Positioning Microfinance with Impact Investors: Codes of Conduct and “Social First” MFIs, argues that investors should do a better job of articulating their fund’s priorities. Rather than promoting a single, standard model, DiLeo promotes a framework, developed by the Monitor Institute, that more clearly positions funds along a spectrum from “Social First” to “Financial First”. In adopting this framework, investors are encouraged to provide transparency and to attract likeminded investors that support the mission of the MFI. Read the rest of this entry »
> Posted by Damian von Stauffenberg, Founder, MicroRate
This post is part of the Center for Financial Inclusion’s Expert Exchange: Building A Movement Toward Financial Inclusion by 2020, cultivating conversation around the goal of reaching full financial inclusion by 2020. For further questions about this series, write to , Fellow, Center for Financial Inclusion at ACCION International.
Why is it that microfinance has grown at such an explosive pace while other development initiatives, which originally looked just as promising, have languished? What’s different about microfinance?
In development, we too often see efforts that look good, but that lack life. Let me offer an analogy in which a tree symbolizes a development project. In this example, a development agency could decide to simply build the tree. To do so, it finds some leaves and pastes them on branches. It then pastes these branches onto a stump, and finally it drills holes for some roots into the stump. If it is skillfully done an impressive tree will result that can be inaugurated, photographed and featured in the agency’s newsletter.
The problem is of course that this tree, though beautiful to behold, is not alive. We have created something that will not grow. To the contrary, eventually it will disappear. All of us have seen such “trees” in the world of development. Read the rest of this entry »
> Posted by Anne Ackermann, Marika Canonica, Emaan Mahmood, and Laura Spicehandler, Credit Suisse Virtual Volunteers
In an earlier blog post, we explored the major challenges the United States and United Kingdom are facing with regards to impact investing, including investing in microfinance in developing countries. In this post, we look at the current state of impact investing in Luxembourg, Switzerland, and the Netherlands, in an attempt to understand how tax and legal frameworks are promoting impact investing in these countries.
Switzerland
Switzerland has been a leader in creating and managing some of the first and largest microfinance investment vehicles (MIVs), with more than 20 MIVs either managed or advised in Switzerland. As of December 2007, 1.5 billion Swiss Francs (approximately USD $1.65 billion), 25 percent of all international private microfinance investments worldwide, were managed in Switzerland. The MIVs present in Switzerland are generally funds and are regulated by the Swiss Financial Market Supervisory Authority (FINMA). FINMA has authority over banks, insurances companies, stock exchanges, securities firms and collective investment schemes. Read the rest of this entry »
> Posted by Anne Ackermann, Marika Canonica, Emaan Mahmood, and Laura Spicehandler, Credit Suisse Virtual Volunteers
Why are investors in some countries so much more involved in “impact investing” – including microfinance – than their counterparts in other countries? Investing in microfinance in developing and emerging markets has gained more traction in certain continental European countries, for example, than it has in the United States and United Kingdom.
Last year the CFI undertook a project in partnership with a group of “Virtual Volunteers” from Credit Suisse to examine how legal and tax frameworks in various countries influence investors’ willingness to invest in microfinance. The Credit Suisse Volunteers examined the policy and regulatory frameworks surrounding impact investing, particularly in microfinance, in five countries: Luxembourg, the Netherlands, Switzerland, the United States, and the United Kingdom. Volunteers also conducted interviews with a variety of actors from impact investing in each country.
This describes some features of the framework for impact investing in the U.S. and U.K. A subsequent post will examine the European countries – Luxembourg, Switzerland, and the Netherlands – in an effort to illustrate the differences. Read the rest of this entry »
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