The most important characteristic of time deposit savers is that they are highly rate sensitive and will switch institutions based on marginal interest rate differences. Social investors are different from other investors in that they seek both financial and social returns. Social investors are not a separate class of investors. In fact, almost all As a result, most funds specializing in socially responsible investing SRI are found in tradable securities, directed by asset allocation strategies remarkably similar to conventional investors.
Comparing the holdings of major SRI and non-SRI mutual fund companies, for example, could find the two sharing 80 percent of the same stocks. Shareholder activists hold the next largest share of funds. These investors buy shares in companies they do not like with the explicit purpose of changing business practices found to be offensive.
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This is done through meetings with managers, via proxy resolutions at annual general meetings companies, or through publicity campaigns. These social investment strategies overarch asset allocation strategies and investment selection strategies that are same as those used by conventional investors. Together they limit involvement in MFI-like investments to a fairly tightly defined set of conditions: 1 when investor demand is great; 2 when it is legally possible; 3 when return potential is attractive and achievable; and 4 when asset allocation strategies permit.
While these conditions are fairly restrictive, social investors have something their conventional counterparts do not: a natural predisposition to consider MFI-like investments.
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In fact, a survey in of social investment professionals estimated a strong interest in microfinance or equivalent investments in developing countries. It is critical to note that despite interest, asset allocation strategies of social investors in both developed and developing countries have permitted very few MFIs investments.
Microfinance Investment Funds Leveraging Private Capital for Economic Growth and Poverty Reduction
Among developed country social investors, part of the reason is that their asset allocation strategies permit very few investments in developing countries. In fact, only about 0. Social investors face many barriers to tapping demand for investment in MFIs. First, as noted, while demand appears to be significant, few social investment firms have the resources to develop a specialty instrument for microfinance.
Second, even though there is demand, it is not clear to many social investors that they could recommend an emerging market small business investment to all but high net worth individuals. Third, few, if any of the specialty funds available to social investors offer near commercial terms, which are required by the great majority of social investors. Summary — The Able and Willing Asset allocation strategies and regulation combine to dramatically limit the universe of possible private sector investments in MFIs, even before the quality of the asset is discussed.
Transaction costs and the difficulty of understanding an MFI investment also limit the availability of funding. Any MFI investors must be highly risk tolerant, particularly patient, able to absorb high transaction costs and free of regulatory concerns. Internationally, that would be high net worth individuals who are also socially responsible investors with an interest in both emerging market and community investments.
Socially responsible institutional investors may also have an interest, but as with conventional investors, they fear unknown risks, high transaction costs and concerns about remaining in compliance with their fiduciary responsibilities. Note that community development finance institutions CDFIs are financial institutions dedicated to the development of local economies.
They come in a variety of forms and can include credit unions, non-profit loan funds, business development institutions with financing activities, or organizations offering low-income housing investment instruments. Some sort of guarantee will, however, attract institutional investors, social or otherwise, but only if transaction costs are tolerable compared to other competing investments. Otherwise, MFI investments are likely to come from social investor charitable fund allocations, from funds they can afford to lose entirely, from funding that only needs to generate low rates of return, or when guarantees or subsidies are in place to offset risk or ensure a certain level of returns.
In developing country markets, there is good immediate and long-term promise to stimulate local investments. Local investors do not face the added risks inherent in international investment and have a clearer idea of local economic risks. MFIs may also offer a relatively more attractive risk-reward profile than other competing local investment opportunities. Certainly, local high net worth investors should be interested once informed of appropriate opportunities.
Some institutional investors could be attracted if guarantee programs are in place for low transaction cost and widely available instruments, such as bond issues.
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Key to access will be addressing information gaps about microfinance. Understanding their habits and decision-making is important not only because they are significant MFI funders, but also because their funding decisions interact with and influence the appeal of microfinance for private sector investors. Almost 80 percent of the funds operate internationally from developed country markets. Many funds are affiliated to various degrees with established development organizations, mostly NGOs. Of these, several are affiliated with a sponsor organization e. Moreover, it is difficult to estimate the number of funds because the line between an investment fund and an organization giving grants or the occasional loan can be blurry.
See the MIX Market for a fairly complete listing of the funds. Many funds are owned and managed as part of an MFI network support organization. They operate with varying degrees of independence and formality — from totally independent subsidiaries to a department within an organization. Some funds offer capital at near market rates, but the majority are below market.
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In most cases, interest rates or expected returns in the case of equity, are not only below market rates but they often do not, in the case of hard currency lending, account for potential currency devaluation or foreign exchange risk. Not surprising, while there is a small trend toward attracting private capital, most funds are not, and do not seek to be profitable.
As a result, very few funds can cover full operating and financing costs through investment income. Such funds certainly could not operate as commercial entities if they were paying full risk adjusted rates of return to investors. This requirement has led to the majority of funds to be invested in larger, regulated, urban-based MFIs.
In fact, the concentration of funds is considerable. Just less than 85 percent of private equity and 83 percent of public equity is found in the same, large MFIs. Approximately 37 percent of all private fund debt finance is invested in larger MFIs, but a startling 88 percent of public debt and 64 percent of guarantee funding is found in the same institutions. ProCredit banks, which represent 3 percent of funding recipients, receive 34 percent of all funding by volume, and 60 percent of all private and public equity combined.
Smaller and unregulated institutions as a result receive a much smaller share of funding on a per institution basis. Table Five shows in more detail the concentration of debt funding.
Regulated MFIs receive on average twice the debt from private sources and 26 times more funding on average from public sources than non-regulated and cooperative MFIs. The geographic distribution of funding is equally concentrated. Three Eastern European ProCredit banks alone, for example, have received 4 percent of all private funding and 13 percent of all public funding. Banco Solidario Ecuador and Confianza Peru received one third of all funding. Investments come in various forms — from technical assistance, to no- or low-cost loans, to direct equity contributions.
Most, if not all, the grant and investment capital from development institutions comes from taxpayer revenue or bonds issued on the strength of sovereign guarantees. As with non-commercial social investment funds, the cost to MFIs of capital from development institutions varies from free grants to loans at near commercial terms.
Microfinance Investment Funds: Leveraging Private Capital for Economic - Google книги
Most MFIs attempt to operate in 1as commercial manner possible, though strategy, policy, and incentives structures can inhibit such a goal. While the volume of investments from non-profit organizations is much less than that from other non-commercial investors, these non-profits have mobilized a considerable amount of private charitable funds for MFIs worldwide. In addition, they provide significant technical assistance. Their funding is distributed mostly on a grant basis, though many — as noted — have lending and equity investment programs.
Some, such as the Ford Foundation and the MacArthur Foundation, have program-related investment loans which offer low- or no-cost loans for highly innovative opportunities. Some are run directly by government departments, others channel funds through national development banks, foundations, trust funds, or non-profits organizations.
There is no global estimate of apex fund assets, though they have been a significant player in the financing of microfinance. Often driven by government priorities, capital allocation criteria vary greatly, though political influences are usually present. It is also common that investment allocations are based on political jurisdictions.
Rates are often heavily subsidized and the terms are generous. Some apex institutions, such as the Palle Karma Sahayak Foundation of Bangladesh PKSF , which has lent money at below market interest rates, have been praised for their support of the microfinance sector. This is not to say that non-commercial funders do not make good investment decisions.
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Many do. But because return is seldom the primary concern, non- commercial capital allocations are considerably different from those of commercial capital. There are eight notable implications of non-commercial capital allocation patterns. Non-commercial capital can go where private financing finds it difficult or expensive to go.
Non-commercial capital has, in fact, largely funded the development of microfinance. It still supplies the sector with a significant amount of risk capital and will remain a vital source, particularly if it is employed with the explicit goal of assisting in the transition to private capital.