Every society has its entrepreneurs, but it’s hard to make ideas work without money. And in the developing world, financing for individuals can be particularly hard to come by.

But the growing array of micro-credit or microfinance institutions (MFIs) are providing the answer, and their backers say small-scale lending money to budding-business owners is a key to lifting communities out of poverty.

Many of the thousands of MFIs in Asia, Africa, Latin America and other developing regions, are making the transition from NGO to commercial bank.

For financial rather than philanthropic reasons, pension funds and other mainstream investment institutions are now starting to put their money into the sector; for their part, investment providers are moving to make the asset class more accessible for them.

Through its microfinance programme, Netherlands-based Triodos Bank runs three funds which invest in small, independent banks in the developing world - Triodos-Doen, Hivos-Triodos and Triodos Fair Share Fund.

At the moment, however, they are only suitable for retail investors. But a Sicav II fund, which European pension funds could use, should be up and running by the end of the year, says Marilou van Golstein Brouwers, managing director of Triodos Investment Management.

ABP, the €200bn Dutch civil servants’ pension fund, raised its investment in microfinance recently, and now has a $20m (€14.8m)n holding in the Dexia Micro Credit Fund. The Luxembourg-based Sicav is managed by BlueOrchard, a microfinance investment manager based in Geneva.

The Dexia fund invests its $200m of assets in MFIs in 25 developing countries in Latin America, Asia and Eastern Europe, financing 60 institutions which serve more than a million small-scale entrepreneurs.

But investing in the sector directly is yet not feasible for pension funds, says Davis Golding, executive vice president and chief investment officer at ShoreCap Management, the manager for ShoreCap International, which invests in local financial institutions that lend to micro and small businesses in developing economies. “I don’t think having pension funds investing directly into microfinance institutions is practical at this juncture as the requirements for capital are relatively small,” he says. “They could invest through investment funds providing the amounts are small.”

Golding sits on the board of Bhartiya Samruddhi Finance, the flagship company of India’s BASIX Group, one of the local institutions that ShoreCap invests in.

BASIX, which describes itself as a new-generation livelihood promotion institution, was set up eleven years ago and now works with more than 190,000 poor households in 44 districts and eight states in India. As well as providing financial services to its clients, it also gives technical assistance, it says

“Microfinance in India is a huge business and certainly has helped people gain access to credit who otherwise would have no access to financing,” says Golding. Juerg Kohler, head of sales at responsAbility Social Investment Services in Zurich, says several Swiss pension fund already invest in the responsAbility Global Microfinance Fund.

This is an FCP II fund which was established as an unincorporated, open-ended investment fund under Luxembourg law, in Luxembourg, by Credit Suisse Microfinance Fund Management Company, in association with Credit Suisse Asset Management International Holding.

Kohler says pension funds have been showing an increased interest in SRI, including microfinance. Though generally structured as debt, he says some pension funds list their microfinance holdings as alternative investments.

Loans are not the only service MFIs offer, Van Golstein Brouwers points out. They also provide access to savings and the ability for people to transfer money in a safe way. Some offer insurance as well.

But there are concerns that not all institutions trading under the microfinance banner have the same philanthropic side to their business. As microfinance grows, Van Golstein Brouwers acknowledges the danger that some providers could lose sight of their social goals. “So the way these institutions are managed and governed is important,” she says. “Many of them have management and directors who follow the double bottom-line principle that they want both financial and social results. The commercial banks will tend to go for the easy solution, but it’s all called microfinance, so as an investor you have to dig a bit deeper,” she says.

In Kenya, for example, there are around 250 MFIs, but because there have been so many different ways to establish an MFI, some of their activities have been questionable and raised concerns about microfinance credibity in the country, according to the Paris Microfinance Network.

But in the wake of the country’s Microfinance Act 2006, the Central Bank of Kenya is now in the process of preparing a set of prudential regulations, taking into consideration, the bank says, “the unique features and characteristics of microfinance, as distinct from commercial banking”.

MFIs need both debt and equity investment, but it is debt that is the more accessible side for pension funds.

So far, only three MFIs have stockmarket listings - Banco Compartamos in Mexico, Equity Bank in Kenya and Bank Rakyat Indonesia (BRI), so the equity of most institutions may be too illiquid to interest big players such as pension funds, says van Golstein Brouwers.

As a purely financial investment, one attraction of microfinance is the way it can complement other classes of holding. “The asset class is characterised by high fees and transaction cost relative to the annual returns generated, but returns do show a very low correlation to other asset classes,” says Kohler. The responsAbility Global Microfinance Fund is expected to generate annualised returns for 2007 of 5.29% in US dollar terms, 2.57% in Swiss francs and 3.70% in euros, he says.

The Triodos fund returns between 4% and 6% a year, says Van Golstein Brouwers, though she adds that risk the asset class represents is harder to quantify.

“In the last few years, there haven’t been any defaults, but that doesn’t mean it couldn’t happen,” she says. Making a careful selection of the institutions to invest in should reduce the risk an investor faces, but there are a number of factors that could push the risk level higher, she adds.

“There is country risk, and there is always the risk that governments will put interest-rate ceilings on loan provision,” she says. Hit by a capping of interest rates, MFIs would not be able to cover their costs, she warns.

 

MFI case study: Acleda Bank

 

Acleda Bank in Cambodia is a good example of a microfinance institution changing from an NGO into a formal, regulated bank which offers savings, deposits and other services, says Marilou van Golstein Brouwers of Triodos.

Over the years, deposits have increased as a percentage of total assets, steadily rising to 55% in 2006, from 27% in 2003. “This is typical for many MFIs — increasingly the source of their funding is local,” she says.

Acleda Bank says its mission is, “to provide micro, small and medium entrepreneurs with the wherewithal to manage their financial resources efficiently and by doing so to improve the quality of their lives”.

Originally founded in 1993 as a national NGO for micro and small enterprises’ development and credit, it is now licensed as a commercial bank. At the end of March this year, Acleda Bank had 163 branch offices in 24 provinces or towns.

It is 51% owned by Cambodian interests, including its staff, with the remaining 49% in the hands of the IFC (part of the World Bank), DEG (part of the KfW), FMO (the Netherlands Development Finance Company), and Stichting Triodos Doen together with Triodos Custody as
custodian of Triodos Fair Share Fund.

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