Social finance: moving beyond microfinance

Last year's financial crisis caused many people to lose their already tenuous faith in financial institutions and the role they play in supporting the various functions of an economy.

This view of finance in the life of an economy is paradoxical to the one we hold about finance in the lives of low income households.  The microfinance industry, and our work here at FAI, rests on the belief that access to well-designed financial services is critical for the economic and social development of poor families.  Households with access to financial products that are reliable, affordable and suitable are able to effectively meet the other needs of their lives.  Having access to financial products can help households increase their income, pay for healthcare in case of emergencies, and educate their children by allowing them to save for school expenses.  

A growing community of donors and investors believe that financial innovation can have a similar impact in supporting institutions that provide social value.  This year, the Clinton Global Initiative included Financing an Equitable Future as one of its four Action Areas (the others were on Innovation, Human Capital and Infrastructure).  The focus of the finance track was on how to get past the turmoil of the last year and rethink the role of inclusive financial systems within economies.

Much of the discussion revolved around social finance and impact investing - The Global Impact Investing Network (GIIN) was launched at CGI.  GINN’s members include multinational banks such as JP Morgan and Citigroup, donors such as Rockefeller and Gates, and social investment funds such as Acumen and Generation Investment Manager.  The goal is to improve information sharing between a community of investors that make investments – such as water, clean energy or basic healthcare - that provide a financial return but also have a social and environmental impact thereby achieving the triple bottom line.

Balancing the three bottom lines is challenging.  Investors can learn much from the microfinance experience.  As microfinance institutions transform from non-profit to for-profit entities, they often face governance and incentive challenges which present trade-offs between their financial and social objectives.  How fast should an institution grow and who should fund the growth?  Is it acceptable for current clients to pay a premium to allow the institution to serve more clients?  How much profit is too much?  Does the level of permissible profit depend on the nature of the investors?   We are bound to hear the same questions whenever poor households are the customers and the product they are paying for is seen as a right.  

The microfinance industry is seen as a success mainly because of its scale.  However, recent impact studies indicate that achieving scale is not the same as achieving impact for all.  Understanding the nature of demand and parsing the distributional impact of interventions on distinct groups is important.  We’ll surely be seeing much more action here.