Anyone who invests in microfinance is looking for financial return and maximum social impact. This is why ASN Impact Investors collaborates on the ASN Microcredit Fund with Triple Jump, an impact investor and consultant with a wide network of local experts. ‘The market attaches great value to investors like us.’
A woman in rural India who dreamed of having her own home, a farmer in El Salvador who needed seeds for the new season, as well as Rahima Šabić, who started a small bakery in Zenica, Bosnia. All three of them were able to accomplish their goals thanks to a modest loan of perhaps a couple of hundred to a few thousand euros. It might not seem much to us, but for those who cannot turn to a ‘normal’ bank, a microloan can change their lives.
It is precisely that impact of microfinance upon which the ASN Microcredit Fund focuses. For 26 years the fund has been granting loans and investing in microfinance institutions to give more people in more countries access to loans, secure payment and savings products. These enable them to make an income or boost their earnings and improve their financial resilience.
Enormous social impact
The fund’s social impact is enormous. As of the end of September 2022, the fund held investments in 85 MFIs (microfinance institutions) in 40 countries. Together these reached 15.3 million people in Latin America, Asia, Africa and Central Europe. They granted short-term loans averaging 827 euros, with 83 percent of the borrowers being female.
The enormous variety of countries, lenders and target groups in the world of microfinance makes investment in this asset class the preserve of specialists. In this respect, fund manager Sascha Noé is able to build on a solid historical basis. ASN Impact Investors, initially together with Oxfam Novib, was a pioneer of microfinance in the Netherlands in the 1990s.
Triple Jump as a partner in the field
Throughout the years, Triple Jump has acted as a partner in the field for ASN. Director Financial Institutions Jarri Jung: ‘We’ve been involved in microfinance right from the start, have watched it grow together and also influenced each other’s visions. We’re totally in sync when it comes to sustainability and social impact.’
This helps when selecting the best propositions and conducting the extensive due diligence that is part of that process. Only MFIs with a solid track record and both a positive financial and social return are eligible. They need to focus on people and micro-entrepreneurs, and above all, to work sustainably. Noé: ‘In a social sense, what they do needs to contribute to our goal of making people more financially resilient by offering them access to financial products.’
ASN Impact Investors naturally also sets governance and reporting criteria. The Social Performance Management principles drawn up by the MFI sector are important here. These demand a clear strategy of which the results are also monitored. ‘Have ample social goals been set up and are these being followed up properly? These are conditions for inclusion in the fund’ Jung says.
It is also crucial that the MFI takes proper care in its dealings with borrowers: above all, you want to avoid people getting deep into debt. The amount of interest is relative and depends greatly on the level of inflation in a country: because inflation in Ghana is at 20 percent, it has quite a different interest rate than in Central Europe.
Interest rate traffic light tool
Noé: ‘Triple Jump has developed an interest rate traffic light tool for us that takes such circumstances into account. Interest rates can be high but still be fair. Among other things, we examine the costs a microfinance institution incurs, its level of profitability and the circumstances it operates in. For example, a high profitability can be explained if it contributes to building a capital buffer in a difficult context (such as Lebanon). However, if the interest rate is unnecessarily or irresponsibly high, the interest rate traffic light will turn red and the institution is not eligible for an investment.'
Importance of ground work
The operating costs incurred in helping the poorest sections of society to access loans vary widely and also help determine the rate of interest. Jung: ‘It’s much easier to reach a large group of customers in a town or city. All you need to do is visit a market and you’ll find many entrepreneurs. In rural areas you have to travel much longer to find the same number.’ Noé: ‘In Sierra Leone I spent hours riding pillion on a moped to visit customers together with a loan officer.’
Yet this groundwork is essential to getting microloans to where they make the most difference: out into the rural areas. Triple Jump has created a global network of local employees who work from offices in Mexico City, Lima, Nairobi, Tbilisi and Bangkok.
“That makes us unique,” Jung says: “We work with local offices. We think this is important because people speak the language, have local knowledge and networks and are immediately aware of what is happening. This gives us a deeper understanding of what is going on. In addition, our local offices enable us to carry out our work with less CO2 emissions.”
As soon as a microfinance institution meets all the conditions and fits well with the strategy and objectives of the ASN Microkredietfonds, a sustainable relationship is initiated between the investor and the credit institution. Jung: “We closely monitor the progress of our customers, both financially and socially. We assess the financial position on the basis of monthly or quarterly reports, but we also monitor the social indicators, such as how many women are reached, or how large the reach is in rural areas. Both are of crucial importance to the ASN Microkredietfonds. We also keep a close eye on the quality of the loan portfolio. The extent to which loans must be written off, the so-called default rate, is not only a financial but also a social indicator: if the default rate is high, it can be a signal that the borrowing capacity of customers is not correctly estimated.'
Extra impact as a shareholder
The ASN fund aims to enjoy a sustainable relationship with the microcredit funds. The fund not only grants loans to the MFIs but also provides equity – or capital – in its capacity as a shareholder. Noé: ‘On the one hand the advantage is that there’s a greater chance of a better financial return. Yet it’s also good to have a say as a shareholder and contribute to good governance. And I notice that our knowledge, for example on how microloans work in other countries, is highly appreciated. Together with Triple Jump, we possess a lot of knowledge about the sector in general and social impact in particular.’
The additional social impact you can have as a shareholder is just as important though. Jung: ‘‘With additional equity, we help institutions to grow further by expanding the customer base. You could see it as a social leverage on your capital: if an institution can strengthen its own capital, it can also attract and provide more loans. For every million of equity capital we invest, hundreds to thousands of customers can be reached.”
"In acquiring equities we are saying: we support your growth. And it sometimes also helps if ASN puts its name to something, such as if an institution wishes to obtain a banking licence for offering savings products. After all, it’s the very poorest sections of society that most need a secure place for their savings. As a shareholder you can help to facilitate these things."
Chance of a higher return
Direct investment in microfinance institutions increases the chance of a higher return for the fund, but that upside inevitably also involves risks. It’s much easier to predict the returns on the loans that have been granted. Jung: “We can hedge currency risks with loans. Because the cash flows that come from an equity investment are also a lot more difficult to predict than those from a loan, that is a lot more difficult."
Growing role as shareholder
At present, around 14 percent of the fund's capital is invested directly in MFIs. The intention is for this to grow further, and with it the role of ASN Impact Investors as a shareholder in the microcredit sector. Jung: ‘It is a good way to link social and financial returns. We have a specialist team that is only committed to equity investments for the ASN Microcredit Fund. It is a long process before a deal is reached.”
As far as Jung is concerned, the emphasis on social performance is one of the aspects that distinguishes the ASN Microkredietfonds from many other funds. This includes in the market itself: Investors who are interested in a long-term return and who don’t immediately withdraw their money if things aren’t going too well, are highly appreciated. It helps to build a beneficial relationship with the institutions that ultimately put the capital to work. In part thanks to our direct investments, we are of added value to the market.
As the ASN Microcredit Fund continues to grow, it offers opportunities to explore new avenues, says Noé. ‘Together with Triple Jump, we are looking at what other investments we can make for the same target group. Perhaps there are interesting opportunities in solar energy, healthcare or education. When an MFI has reached a certain level of professionalism and size, you see that they are able to develop new products more quickly that meet the needs of their customers.”
Which innovations would help microcredit even further, according to Triple Jump? Jung: 'We continue to look for opportunities to enable MFIs to reduce costs, which is extremely important for the end customer. Take, for example, an entrepreneur in Kenya who can handle a payment via a smartphone instead of traveling to an office an hour away: that saves transport costs and valuable time, which she can now use to further develop her business. At the same time, it also saves the MFI time and costs, which ultimately contributes to lower interest rates and greater reach. Ultimately, what drives us is the ambition to give people with just as much talent, but less fortunate circumstances, the same chance of success.”
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