Impact Investing: Challenges and Opportunities

This story originally appeared in Beyond Profit on December 3, 2010. Click here to subscribe.

Earlier this week, a report by J.P. Morgan and the Rockefeller Foundation declared impact investment a new asset class—a remarkable development in the lifecycle of this industry. What does it mean for social enterprise?

On November 29, J.P. Morgan and the Rockefeller Foundation released a report that will likely serve as a turning point in the development of impact investing. The report, which assesses expected and realized returns of more than 1,000 impact investments, estimates that the industry presents an investment opportunity between US$400bn and US$1 trillion with profit potential between US$183bn and US$667bn. Importantly, the report declares impact investment an asset class which provides a strong indicator to investors who may have shied away from social investing in the past to reconsider this emerging investment category.

The declaration of impact investment as an asset class functions as an on-ramp for investors eager to find the “next microfinance.” A recent article in Forbes estimates that microfinance comprises 50% of the total impact investing market. Within the social enterprise sector, microfinance (not withstanding the current crisis in India) has demonstrated to many investors the role capital can play in a for-profit investment and what that investment can achieve in financial and social returns.

Read more here.

What's Policy Got to do with Social Enterprise?

Here's my latest (December 6, 2010) for the Wall Street Journal.

Many social entrepreneurs and social investors tend to avoid inviting the government to their table because it often means a slow, fat-fingered solution, rather than a targeted, nimble infusion of resources.

However, government policy can also serve as a growth catalyst and a broad-based enabler, and, as such, cannot be overlooked as an important partner in the development of social enterprise as a sector.

What does a marriage between social enterprise and government look like?

Read the rest of the article here.

Indian Microfinance: Confusing Scale with Impact

Here's my latest (Nov 26, 2010) for GOOD Magazine.

Rumors of the death of microfinance in India have been greatly exaggerated. Here's what's really happening.

Until recently, microfinance was the darling of poverty alleviation. A foolproof way to pull people out of $2-a-day poverty. But, now, the microfinance sector in India is in crisis, so much so, The New York Times announced last week that “Indian Microcredit Faces Collapse from Defaults.” Is this another sub-prime fiasco? What happened to take us from “putting poverty in a museum” to putting the kibosh on the whole model?

Well, we got a little ahead of ourselves for several reasons. But, before we go there, here’s a brief recap on what’s happening in Indian microfinance: Last month, the government of the state of Andhra Pradesh, India’s most saturated microfinance market, ordered microfinance institutions to stop lending, and told borrowers to stop repaying. A spate of suicides by men and women who were microfinance borrowers alarmed many, and the government felt that microlenders were to blame. Were they?

In AP, two dueling parties provide a financial service to the poor. It gets a little complicated, but in essence, there are two ways to get a microloan, from the government or from a microfinance institution. Through banks, the government lends to groups of 11 to 20 women in so-called self-help groups or SHGs. The government has a mandate to disperse $22 billion to SHGs by 2014. The other option is a commercial, for-profit microfinance lender. They are shooting to use profits to scale up and reach even more borrowers. To get commercial microfinance money you become a member of a "joint-liability group" for a loan supported by group collateral. Some choose the SHG, others the standard microfinance institutions, and some take advantage of both, receiving multiple loans from multiple sources.

The government is vexed by the fact that borrowers often take loans from MFIs, sometimes double-dipping when they already have a loan through an SHG. To top it off, borrowers seem to repay MFI loans faster. The government believes they do so because MFIs are coercive. The sad truth is that some of them may be. But MFIs arguably also provide a better service, by delivering timely loans, and offering convenient, scheduled repayment plans at the borrower’s doorstep each week.

While, it’s possible that a desperate borrower might end his life due to coercion, he might also do so because of family pressure, lack of opportunity, a bad harvest, or massive debt. It’s difficult to know the cause without further investigation. In fact, an impartial investigation into the allegations is necessary, and would probably best be carried out by some entity other than the state government, which is, unfortunately, biased. But, the government didn’t wait. It shut down the MFIs, and now they are on the brink of financial collapse which is bad for borrowers, MFIs, and the Indian government.

The accusation of suicides due to MFI pressure is a serious matter. How did we come to this?

The core of the issue in India comes from the confusion between growth and impact. At some point in time, we stopped equating progress with poverty alleviation, and started measuring progress based on numbers of poor people reached. At a time when metrics are highly valued, counting the number of borrowers is much easier than evaluating the borrowers themselves to determine actual poverty alleviation.

If we measure progress by numbers of people reached, success depends on horizontal growth. For the last five years in India, commercial MFIs have been in a race to grow. MFIs in other countries can grow organically because many are allowed to take deposits. However, Indian regulation currently prohibits that, so commercial Indian MFIs require upfront capital from external sources. That capital enables them to disperse loans. More loans means more interest payments. More interest means more profit. More profit means more investors. More investors means more capital. More capital means more loans. More loans means more borrowers reached (i.e, “progress”). And so the cycle goes.

Five or ten years ago, when we thought that financial inclusion was the end game, a new borrower meant that you could check the box as having accomplished something. We’re older and wiser now. We know that microcredit, alone, is not enough to pull someone out of poverty. We should never have expected it to.

Think back to your first experience with financial inclusion. Did your first credit card make you a millionaire? Did you start a business with it? Probably not. It probably enabled you to buy something you needed, or gave you a cushion in an emergency—or maybe got you into debt you didn't need. It does the same thing for the poor, just in smaller increments.

Merely offering credit to more people doesn’t lead to poverty alleviation. It is a service that the poor should have access to, just like the rest of us. But, it is not a game-changer; it is one tool in the poverty alleviation toolbox.

Microcredit is only impactful if we create a deep connection to a borrower by offering a suite of services: microinsurance, financial literacy, business development training, etc. Some MFIs are already offering these services, and doing it well (see BASIX, for one great example), accepting that they may not grow as fast. The sooner MFIs evolve beyond the growth mantra and commit to making a real impact, the sooner we’ll be on the right track.

Lindsay Clinton is the editor of Beyond Profit and an Associate Vice President at Intellecap, a social development advisory firm in India.

Where will Social Enterprise be in 20 Years?

Check out a recent interview I did with Columbia's School of International and Public Affairs in conjunction with their Social Enterprise Bootcamp! Read here!

Forget the American Dream, Collaborative Consumption is a Better Path for Developing Countries

My latest post for Good Magazine.

The United States was founded on the idea of idea of individual liberty, individual ownership, and individual needs. Unfortunately, this is a costly way for a country to develop, especially if every citizen aspires to express his freedom and individuality by owning a car or a house or a hammer.

Nearly 250 years into the evolution of our ethos of individuality, some Americans are starting to recognize that the primacy of individual ownership is not always economically sustainable. A movement has begun that places value on providing access to products and services, rather than ownership. Do we all really need to own a car? Or can we share a ZipCar that can be rented by the hour and used as needed? Consider the space we use. Do we all need to live in a house? Or can we seek out co-housing situations, where families share communal spaces like kitchens and yards, but have private sleeping quarters. Consider items that are used by all, but infrequently: Could the residents of each floor of an apartment building share tools like hammers and brooms instead of buying their own?

The move toward access, rather than ownership is documented and promoted in three recently released books, The Age of Access, The Mesh, and What's Mine Is Yours. (See GOOD's infographic on this.) This trend has applications far beyond liberal American households and communities.

The concept of communal living and shared resources has long been a feature of Eastern society. Households are characterized by their joint family nature. Food is shared, and often served from one bowl. In poorer areas, multiple families share water taps, groups of women access microfinance together, strangers share taxis and rickshaws. However, the collective nature of Eastern society is less a political statement than an imperative to stretch sparse resources.

As the East develops, and the size of the middle class grows, there is a push toward individual ownership. With increased incomes, the incidence of joint families reduces, and sharing resources is less of a financial necessity. However, if the East starts to choose individual ownership more readily over communal access, emerging economies will likely struggle to manage these patterns of consumption, particularly with regard to pollution and waste.

From an economic development perspective, Western practitioners are guilty of seeking solutions for the poor that are based on these American values. It’s only natural; this ideal is integral to the West’s notion of progress. Solutions to a lack of access to clean water, sanitation, healthcare, and education often cater to the provision of individual ownership: a faucet in every kitchen, a toilet in every home. However, this paradigm is wasteful, and thus, may not be ideal or sustainable for developing world countries.

The indicators we use to gauge wealth creation and poverty alleviation often involve measuring whether each person or family owns a TV or a phone, or has a toilet. These indicators may be an imperfect way of evaluating progress, and more importantly, they place value on a framework of development that may not be in a developing country’s best interest.

While instinct pushes us to value ownership, it may actually be better to approach complex issues by instead offering access. Rather than providing every household financing for a solar battery charger, a better option might be a communal charging station in each village. Rather than pushing for every citizen to own a mobile device, perhaps merely having access to a phone number will suffice for a group of people that can share a single phone.

Development experts and social entrepreneurs from the West are sometimes tempted to provide solutions that we enjoy for ourselves. However, as our eyes open to the waste and excess that are byproducts of Western development, we must seek new paradigms instead of grafting traditional ideals onto others.

Image: (CC) by Flickr user tibchris.

Is India Really a Hotbed for Social Enterprise?

I'm writing a few posts a month for Good Magazine. Here's the first!

If you know anything at all about social enterprise, you are probably familiar with the fact that many of the case studies cited as successful are Indian in origin. Case in point: Aravind Eyecare, Jaipur Rugs, Barefoot College, d.Light. It makes you wonder: Is India better at producing social entrepreneurs than other countries? Is there something in the water? And if India really has cornered the social enterprise market, how did they do it?

First, let’s look at what we know. India is massive. It’s bursting at the seams with people, and because one out of every six people on the planet is an Indian, we are statistically more likely to stumble upon Indians anywhere—and some of those people are bound to be social entrepreneurs, right? Of course, a big pile of people does not explain why social enterprises often thrive in India, and the policy environment certainly doesn’t help: There are no freebies for social enterprise, no special legal structures (like the L3C here in the United States or the CiC in the U.K.), and few policies that help enterprises get funding. In fact, some might say that Indian social enterprises have succeeded in spite of policy, not because of it.

What about funding? Most Indian social entrepreneurs would tell you that they have just as much trouble as the next guy. There are only a handful of “social” or “social/commercial” funds in India, and while there is a frenzy of interest in India from foreign investors, many of them ride on the coattails of domestic funds, investing only after a trusted Indian social investor has made the first move.

So, what makes India different?

India has had a long, rich love affair with nonprofit organizations. A recent survey commissioned by the Indian government found that there is one non-governmental organization for every 400 people—which means there are about 3.3 million NGOs. Regardless of how great each NGO's impact is, the sheer number of them is symbolic of a culture that favors trying to help those in need. However, many have seen that these NGOs are not always accountable, transparent, or sustainable. Stemming from this tryst with NGOs is a graduation to sustainable social enterprise.

Second, with over 40 percent of people on the subcontinent living on less than U.S. $1.25 a day, there is plenty of need for social enterprise. With such a large population in need, there’s plenty of opportunity to test things out. Because of a lack of regulation and oversight, it is possible to get in there, run pilots, and figure out what works.

Third, the currency of language cannot be underestimated. One of India’s national languages is English, and many people, rich and poor, speak it. Even if social entrepreneurs in Romania or Ecuador or Côte d’Ivoire have great ideas, they may be held back in their ability to spread those ideas, enter international business competitions, or get funding from English-speaking Western countries.

Fourth, never underestimate the power of the Indian family. Indian families are tight, complex webs of people who you know and love, and people who you don’t know, but who you call “cousin” and “uncle” even if they have absolutely no relation to you. These networks—close and extended—translate into resources for social entrepreneurs. They are the building blocks of most start-up businesses, and these enable enterprises that would not otherwise have a chance, to get off the ground.

Lastly, and perhaps most important, there is a certain ethos in India which makes it possible for social enterprise to thrive. You can’t manufacture this attitude; it is something that only comes from living and working in India. This attitude, a mix of confidence, perseverance, and “can’t-touch-this,” known as jugaad, is an Indian way of getting things done using any means, against the odds. This ethos gets social entrepreneurs, once they put their minds to something, to figure out how to make broken systems work, to close gaps in service delivery, and to change the status quo.

So, combine a whole bunch of people who have an unstoppable attitude, an incredible combination of personal resources, a population in need, and a propensity towards helping others…and what do you get? A hotbed for social enterprise. What do you think? Are you drinking the KoolAid?

Image (CC) by Flickr user Meanest Indian

India Journal: Employership vs Entrepreneurship

(Left) A future employer?

Read below for my latest article for the Wall Street Journal.

With more than half a billion people under the age of 25, India is sitting atop a potential powerhouse of intellectual and physical energy. But, India’s demographic dividend is only a ‘potential’ positive unless India’s social entrepreneurs become actors in this transition.

A look at the numbers released in the recently published India Labour Report 2009 reveals that the population will grow to 1.4 billion by 2026, and 83% of this increase will be in the 15-59 age group—a huge lump of productive labor. Much has been said about India’s need to educate its youth in order to capitalize on this demographic window of opportunity. And, there is no denying the importance of education. But, there is also a dire need for job creation and job training. By 2025, India will house a whopping 25% of the world’s total workforce, with the projected number of new entrants into the workforce each year at 12.8 million. Where are these jobs going to come from?

The India Labour Report cites the need for a smooth legal and regulatory ecosystem, as well as employability frameworks and employment ecosystems in order to create a more enabling environment for job creation. I would argue that we also need to encourage social entrepreneurs to take on the challenge—by becoming employers themselves.

Social entrepreneurs are known for the creativity and innovation they bring to bear on the gaps in development. Whether tackling water or education, energy or sanitation, social entrepreneurs develop inventive ways to bring new solutions to social challenges. But, in all this creativity, they may be missing one of the larger issues at hand: “employership,” or, the generation of jobs where none existed before.

Lest you confuse employership with entrepreneurship, allow me to elaborate. ‘Entrepreneurship’ is a loaded word. There is pressure to launch a game-changing idea—or nothing at all. It asks for confidence and considerable chutzpah. It takes passion and an affinity for risk. To be an entrepreneur is to take the weight of the world on one’s shoulders in order to create something that no one has ever done before. It’s not something taken lightly, nor is it something many Indian families encourage.

Now, consider “employership.” The task of creating 100 jobs is challenging, but beautifully concrete. The framework is Problem/Solution, rather than Blue-Sky thinking. It requires flipping the idea of a target market on its head: it’s not about the consumer (yet); in the initial stages, it is about determining who to employ.

Several social entrepreneurs have founded companies that use already existing business models, but employ a specific segment of the labor pool. Dhruv Lakra started a courier company, Mirakle Couriers , which employs deaf adults, a group that receives concessions on Mumbai train transport. Revathi Roy is the Managing Director of ForShe , an all-women-driven taxi service, preferred by many women traveling alone. Vivek Agrawal is the CEO of Kanak Resources Management, a company that employs ragpickers—who have plenty of experience—to assist in municipal waste collection. In the case of all three enterprises, very few, if any, of the current employees were previously employed. But, each company’s labor pool also happens to offer a competitive advantage.

Perhaps we should encourage India’s budding social entrepreneurs to be less creative. Less innovative. Because employership does not require a game-changing idea, or a system-fix—just basic businesses that create jobs, raise standards of living, and create a virtuous cycle of advancement. If 1,000 people in each of 20 states built businesses that employed just 50 people, we’d see 1 million new jobs created—a decent dent in the projected 12.8 million demand. And, no doubt, by creating employment some of the problems social entrepreneurs are trying so desperately to solve may go away without direct intervention.

India has the chance to use its coming demographic transition as a catapult into the future, building its economy, its workforce, and its global brand। But, a working-age population won’t provide value on its own. By challenging India’s social entrepreneurs to become part of the solution, India will reap the benefits of this new wave of human capital.