Small Money Big Impact

Fighting Poverty with Microfinance

Peter A. Fanconi, Patrick Scheurle

• Publisher: Wiley
• Year: 2017
• Print ISBN:
  9781119338208
• Edition: 1
• eBook ISBN:
  9781119338246
• Topic: Business
• Subtopic: Finance
• Index: Business

Make your money make a difference—and enjoy attractive returns

Small Money, Big Impact explores and explains the globally growing importance of impact investing. Today, the investor's perspective has become as important as the actual social impact. Based on their experience with over 25 million micro borrowers, the authors delve into the mechanics, considerations, data and strategies that make microloans and impact investing an attractive asset class. From the World Bank to the individual investor, impact investing is attracting more and more attention. Impact investing is a global megatrend and is reshaping the way people invest as pension funds, insurance companies, foundations, family offices and private investors jump on board. This book explains for the first time how it works, why it works and what you should know if you're ready to help change the world.

Impact investing has proven over the last 20 years as the first-line offense against crushing poverty. Over two billion people still lack access to basic financial services, which are essential for improving their livelihood. Investors have experienced not only social and environmental impact, but have received attractive, stable and uncorrelated returns for over 15 years. This guide provides the latest insights and methodologies that help you reap the rewards of investing in humanity.

• Explore the global impact investing phenomenon
• Learn how microloans work, and how they make a difference
• Discover why investors are increasingly leaning into impact investing
• Consider the factors that inform impact investing decisions

Part social movement and part financial strategy, impact investing offers the unique opportunity for investors to power tremendous change with a small amount of money— expanding their portfolios as they expand their own global impact. Microfinance allows investors at any level to step in where banks refuse to tread, offering opportunity to those who need it most. Small Money, Big Impact provides the expert guidance you need to optimize the impact on your portfolio and the world.

CHAPTER 1
Introduction

Worldwide, almost 1 billion people have to live on less than $1.9 a day.

World Bank¹

More than half of the world's population lives on an annual income of less than $2500 – the equivalent of about $7 a day. Africa, Latin America and South Asia account for the largest part of the population living below the respective national poverty line.

In the past, the limited offer of financial services has been one of the main pitfalls. There was a lack of financial infrastructure and products tailored to the needs of people and households living on a low income.

1.1 FIGHTING POVERTY

While less than 1.5 per cent of the world's population live on an annual income of over $20,000, more than half of the people around the world have to get by on less than $2500 a year (see Figure 1.1), the equivalent of no more than $7 a day. More than 2.5 billion people live on as little as $4 or less per day.² Such living conditions are officially referred to as poverty. The World Bank uses the term “extreme poverty” in cases falling below the $1.9 a day line – almost 1 billion worldwide are constrained to a life on as little as that.³

FIGURE 1.1 Economic Pyramid

Data Source: Prahalad and Hart (2002); World Bank (2001), adjusted according to World Bank (2016)

The pyramid shows the population distribution according to annual per capita income with respect to purchasing power parity. The majority of the population (4 billion) have to manage on less than $2500 a year, while 75 to 100 million people worldwide can rely on an annual income of more than $20,000.

A look at the poverty levels of individual regions reveals that in many African countries more than 20 per cent of the population is living below the national poverty line. In most African countries, more than 40 per cent of people live below the national poverty line (see Figure 1.2). Latin America presents a similar situation, with Chile making a notable exception with less than 20 per cent of people living in poverty. Extreme poverty dominates in Central Asian states such as Afghanistan, Tajikistan and Kirgizstan. In South Asia and East Europe a staggering 20 to 40 per cent of the population are struggling below the national poverty line.

FIGURE 1.2 Prevalence of Poverty with Respect to Country

Data Source: CIA World Factbook (2008)

Africa and Latin America account for the largest part of the population living below the respective national poverty line, followed by South Asia and Eastern Europe.

Poverty is accountable for an insufficient dietary intake, causes famines and undeniably constitutes a health threat to anyone subjected to it. The poor are prone to illnesses, have restricted access to education, and women in particular are often victims of physical and psychological abuse.

The triggers and problems of poverty are well known. In efforts galvanized by the World Bank, the International Monetary Fund (IMF), the Development Co‐operation Directorate of the Organization for Economic Co‐operation and Development (OECD)⁴, and several non‐governmental organizations (NGOs), the International Community designed development goals built on this knowledge and out of this came the United Nations (UN, UNO) Millennium Development Goals (MDGs) in 2001. The MDGs were a set of eight goals designed to achieve and implement the targets of the United Nations Millennium Declaration by 2015 (see Figure 1.3).⁵

FIGURE 1.3 Millennium Development Goals

Data Source: McCann Erickson/UNDP Brazil

In their Millennium Declaration in 2000, the UN defined eight development goals that were to be implemented by the end of 2015.

The first seven goals committed developing countries to employing financial means in their combat against poverty and corruption and to promote democratization and gender equality at the same time. The eighth goal obliged industrial countries to use their global economic authority in a bid to assist developing countries and achieve equality of all countries worldwide. Improving the situation of those afflicted by poverty, however, goes beyond merely devising goals, but should rather focus on effective measures. This in turn warrants an understanding of the underlying causes of poverty.

The problem is multi‐layered, and people's economic and social situation is influenced by different factors. What has, however, become increasingly evident is that access to capital and financial services is pivotal in fostering economic growth.⁶ And yet, individuals and households with a low income above all rarely have access to capital. Encouraging financial inclusion is therefore of the essence in the fight against poverty.

The implementation of the goals may be considered an overall success. The most important goal – the reduction of extreme poverty by half – has certainly been reached. Beyond this, the supply of drinking water has been improved, and considerable progress was made in conne...

Table of contents

• Cover
• Title Page
• Copyright
• Table of Contents
• Foreword
• Preface
• Acknowledgments
• About the Authors
• Chapter 1: Introduction
• Chapter 2: Microfinance – the Concept
• Chapter 3: The Microfinance Value Chain
• Chapter 4: Micro Entrepreneurs
• Chapter 5: Microfinance Institutions
• Chapter 6: Lending Methodologies
• Chapter 7: Loan Pricing
• Chapter 8: Social Performance Management
• Chapter 9: Beyond the Reach of Microfinance?
• Chapter 10: Investing in Microfinance
• Chapter 11: Real and Financial Economy
• Chapter 12: Discussion of Results and Conclusions
• Appendix A: Example of a Loan Application
• Appendix B: Due Diligence of Socio‐Economic Impact Factors
• List of Abbreviations
• Glossary
• References
• Photo Credits
• Index
• End User License Agreement