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.
You can earn a profit from a type of banking that just won a Nobel Prize. A fringe idea three decades ago, microfinance has become a recognized way to pull people out of poverty. In October, one of the movement's founders, Muhammad Yunus, and his Grameen Bank won the Nobel Peace Prize. Ethical investors can play a role, too. By making loan money available to poor entrepreneurs, they can earn a modest return. Recently, the Monitor's Laurent Belsie talked over the investment possibilities with Scott Budde, managing director of social and community investing at TIAA-CREF, and Roy Jacobowitz, senior vice president of Acción International. Here are edited excerpts of their conversation.
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.
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.
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.
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.
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.
Jacobowitz: Very wealthy people who are able to take significant financial risk.
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.
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.
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.
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.