Can you invest in a Nobel Prize-winning idea?

For ethical investors, companies involved in microfinance can offer competetive returns as well as social appeal.

Each month the Monitor's Laurent Belsie sits down with guests to discuss the outlook for ethical investing. See the video.

What does a Nobel Peace Prize do for microfinance?

Jacobowitz: I think it's going to have an enormous impact in terms of raising the visibility and public understanding of what microfinance is.... I guess you don't get any more legitimate than a Nobel Peace Prize.

TIAA-CREF is a relative newcomer to microfinance. What's the attraction?

Budde: There are about 3.2 million people who use TIAA-CREF for retirement savings. And we know that a very high percentage of them are really very actively involved in social issues. Microfinance presents a combination of some very competitive returns in some new types of investment opportunities along with very broad social appeal.

How does it work?

Jacobowitz: How it works is very simple. It is the process of making loans and other financial products available to poor entrepreneurs and the members of poor households. And as a financial process, it's almost no different than providing any other financial product.

Get all the Monitor's headlines by e-mail. Subscribe for free.

E-mail this story Write a letter to the Editor Printer-friendly version del.icio.us [ What is this? ] digg [ What is this? ]

Do the poor really pay up?

Budde: There have been lots of examinations of microfinance by a wide range of institutions, including Big Four auditing firms. We invest in a company, for example, called ProCredit Holding. That company uses full international accounting standards. Auditors have been all over the world looking at those rates [of repayments] and have shown that, in fact, the loss rates on those loans are significantly better than loss rates in developed countries.

Jacobowitz: People will hear the claim 97 or 98 percent repayment. That's factual.

The idea was gaining traction even before the peace prize to Grameen Bank.

Jacobowitz: For Acción, in the '70s, we used to throw a party when our affiliates achieved 1,000 borrowers. In the '80s, we threw a party when they reached 10,000 borrowers. Today, our network of 33 institutions in 23 countries worldwide is serving over 2 million active borrowers. The movement, interestingly, has gone from understanding that the poor are creditworthy to the [idea that] institutions that serve them can be investment-worthy.

How can investors get involved?

Jacobowitz: Everyone can participate - with an investment as small as $2,000 over 18 months in a fund like the Acción Global Bridge Fund, which provides a social rate of return, maximally, of about 2.5 percent today, [all the way up] to institutional investors, like TIAA-CREF. In the middle, for qualified investors, there are private placements in an organization like Acción Investments.

Qualified investors?

Jacobowitz: Very wealthy people who are able to take significant financial risk.

Is the return higher for them than for smaller investors?

Jacobowitz: The original business plan for Acción Investments had projected an internal rate of return of about 5.9 percent - and, actually, in its first three years of operations [it] has generated a return of closer to 10 percent internally.

TIAA-CREF investors don't participate directly in your microfinance program.

Budde: That's right. Our investment program in microfinance, which we've established as being $100 million, is part of a much, much larger fund ... called TIAA Traditional.

Why not let people invest in, say, a Bangladesh loan program?

Budde: We've opted to do it within a much larger fund, where investors can get that very broad diversification, which certainly helps to lower risk.

How much of their portfolio should investors commit to this?

Jacobowitz: I don't think it's a financial decision. I think it's a social-benefit decision people are making, and then they figure a number that's appropriate.... The other way that ethical and socially responsible investors can think of it is: Those who have created a family trust or a family foundation are required to use 5 percent of a moving average of their underlying assets in the foundation, and they can do what's called a program-related investment, where they can actually make an investment in a social activity. That's another way that investors can think about a way of coming into microfinance, doing some good, and also being responsible for themselves.

Do you think we'll see more ways to invest in this area?

Budde: Absolutely. We already are seeing a much wider range of investment opportunities of different types of equity, of different types of debt investments. The microfinance institutions themselves are certainly expanding into a wider range of financial services beyond just lending - to look at small micro-insurance programs, for example.

• Watch the entire conversation online at csmonitor.com/ethicalinvesting.

For more information: Council of Microfinance Equity Funds (cmef.com), Acción International (accion.org), Calvert Community Investments (calvertfoundation.org), TIAA-CREF (tiaa-cref.org).