Socially-Responsible Investment Boom in East Asia?

by Eric Duflos: Monday, February 8, 2010

Well not quite, but we are getting there. Two weeks ago, leading commercial microfinance investors gathered for two days at the Asia Microfinance Investment conference in Singapore. Two trends emerged from the two-day discussions. First, commercial cross-border investment in Asia is still low, but there are signs of growth. Second, commercial investors increasingly care about promoting the double bottom line in their investments.

Using CGAP’s recent market intelligence on cross-border funding for microfinance and MixMarket data, participants discussed the investment gap that we see throughout Asia. Cross border investments from Microfinance Investment vehicles in East Asia represent only 6% of global MIV portfolio, whereas the region hosts 10% of the global microfinance portfolio volume, 15% of the world’s micro-borrowers, and 22% of the global population and 23% of the world’s poor population. This investment gap in East Asia has multiple causes such as the relatively limited number of MFIs that investors consider “investable” can attract investors, relatively high supply of domestic local funding sources such as savings, but also government market intervention. For example in Vietnam, Laos, China, and Thailand state banks still play a dominant role in finance for low income people. Cambodian microfinance, an exception in the region, has attracted international investors thanks to the emergence of solid institutions and government policies designed to attract foreign investment to the sector.

Despite the funding gap, there are signs that commercial investment is stepping up in the region. At about US $ 300 million of outstanding microfinance portfolio in 2008, commercial investment increased by 57% between 2007 and 2008. Blue Orchard expects Asian high wealth individuals’ to invest money into microfinance. Bellwether (India’s first microfinance investment fund) is preparing a fund for East Asia, and there are plans for a Singapore based “Stock Exchange for Social Business”.

Globally, cross-border investment in microfinance increased by 31% between 2007 and 2008. The vast majority of this cross-border investment has come from socially responsible investors and East Asia is no exception. In 2009, some overheated markets and reported cases of clients abuse, such as India or Bosnia, raised important ethical questions and investors have increasingly focused on ensuring that their investments are “responsible.” At the Singapore event, many CEOs of investment funds, foundations and banks emphasized the need to maintain a double bottom line that combines financial and social returns. However, there is still some confusion about how to implement this objective. Some investors think that investing in socially-focused organizations is enough, while others require their partner MFIs to manage their social performance and report on it, for instance to the MixMarket. Several participants have endorsed the CGAP/Accion Consumer Protection Principles (CPPs), but most are now looking to go beyond just adopting the principles and believe that investors need to ensure implementation of the through their investments. CGAP has just issued technical guides for investors to implement the CPPs. Several investors are also talking about how to ensure that their investees have positive impact on the life of their clients. Hopefully these initiatives will mitigate some of the risks of commercialization and ensure that more poor people have access to reliable financial services in the future.

TAGS: asia, CGAP, growth, Investment, microfinance, MIX

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4 Comments

February 8th, 2010 at 11:07 pm, uberVU - social comments ()

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February 10th, 2010 at 7:31 am, investment ()

It is a very interesting article highlighting the use of “double bottom line” linked investments. Cross border investment in developing countries like India, China, Brazil, South east asia and part of africa wants to focus on socially-focused organizations. Such investment options takes care of their goal of double bootom line concept. Its very important for developed countries to invest in developing/poor countries ensuring a positive impact on the life of the people of that country. Always financial gains are not enough. Excellent article.
February 12th, 2010 at 5:38 am, Timo Hogenhout ()

On socially responsible investing in the Lao PDR MF sector.

The Lao PDR is host to a population of some 6.3 million people and because of its size the country will not be of a big influence of the overall picture of MF in East Asia. In the Lao PDR outreach of financial service delivery on a self-sufficient basis is still extremely limited, let alone outreach of good quality services at a reasonable price. Having said that, even on the small scale we are working on in Laos, there is both little scope and little need for direct investment in the microfinance sector as a source of funding.

Little scope because:
1- direct foreign investment in formal MF providers is not allowed
2- “investment” in a main provider of access to financial services, semi-formal community managed loan funds (CMLFs), is not possible, even if in principal foreign investment would be allowed. Only Lao people living in a particular village (the community) can participate, there is no legal personality, there is lack of basic principles of professionalism, transparency and accountability.
3- The main bottleneck for more outreach is not so much monetary investment, but the lack of available, eager, committed, well educated and trained staff, and on top of that the lack of quality training institutions to solve the gap. This, in the context of a rapidly expanding banking, sector absorbing all available staff with even the most minimal form of experience or knowledge, including staff working in MFIs. In my three years here in Lao I have met or communicated with many international development organizations, donors and commercial funders of microfinance services. Money seems to be overwhelmingly available, but solutions, technical assistance or professional training so far are lacking.

There is also little need for investment as a form of funding because the financial sector in the Lao PDR is highly liquid. Even if supply of credit is growing rapidly, mid 2009 the total outstanding loan portfolio only absorbed 62% of the total amount of deposited funds in the banking sector. On top of that, the 23 licensed banks in the Lao PDR have been requested to raise minimum sharecapital from USD 11.5 million to USD 34.5 within 5 years. The supply of credit through state owned banks is indeed present in the Lao PDR, but outreach from the financial sector including the state owned banks is so low, in particular to the lower segment (as generally is the quality of service delivery), that there is enough room for good quality private commercial banks to operate. Room that is currently filled by informal finance (family, money lenders), semi-formal or most of the times is simply not being filled.

I am always a bit unsure about what socially-responsible investment means. What I can say however is that there is a financial institution in the Lao PDR that in my view adds to the sector and I think constitutes an investement in the terms of your blog. ACLEDA Bank Lao Ltd., with Cambodian ACLEDA Bank Plc. as main shareholder and provider of knowledge, experience and technology, has a strategy to gain outreach in the Lao PDR. In order to attain outreach, its needs large numbers of staff, up to a few hundred (400) over the next few years (until 2013), this for a banking sector that on a whole had only 2,600 people employed mid 2008, before ACLEDA’s start. As an exception in the Lao PDR, ACLEDA invests heavily in its staff in the form of training, both in its training center in Cambodia and as a part of systematic way of developing staff internally in ACLEDA Bank Lao Ltd. Senior staff has to train and support the development of more junior staff. Staff are judged on merits rather then seniority, are given explicit and clear responsibility and the room to learn from misstakes. Basic rules, including being on time, being reliable, transparent and accountable are steered on very strictly. Staff are chosen for personal values or characteristics such as reliability, not so much on experience as the credo is that banking can be learned. Trained ACLEDA staff are sought by other banks, offering higher salaries as those banks lack the strategy, facility and ability to develop its own staff and so ACLEDA adds to the sector as a whole. So, I think what I am trying to say is that in my mind the investment ACLEDA Bank makes in its people, instilling (and importing) core values and professionalism are a very welcome and indeed highly needed investment in the financial sector of the Lao PDR. The same would be true for an investment in a good quality financial sector training institute or in improving existing training & education facilities. However, you would not find this in any analysis of an investment gap, as that gap is only measured in monetary terms, or would you? Anyway Eric, here is my contribution. I hope this is helpful?
February 16th, 2010 at 2:58 am, Anne Depaulis ()

Thank you for a very useful overview of Microfinance in East Asia. Regarding China, I wish to emphasize that one should never lose sight of social performance. The famous quote by Deng Xiaoping “to get rich is glorious” has been taken too literally in the last 15 years or so. Making money has become a national obsession, partly understandable because China was starved of everything for so long. Too often, this still socialist country has adopted capitalism at its roughest but Microfinance could be a chance to project a softer image. In China, Microfinance is still in its infancy thus the opportunity to put it on the right tracks now. To that effect, practitioners should get proper training and get their values right. On the investors’ side, communication should be such that investors get involved for the right reasons. There is a lot of wealth among the Chinese (as well as extreme poverty) and local investors should be sought to help bridge the gap.