Financial Inclusion in Emerging and Frontier Markets

Landscape Review

July 2018

This material is not to be construed as investment advice or an offer for a particular security. For important disclosure information please refer to the last page of this presentation. Table of Contents*

Pages

Introduction 2

The Fundamentals of Financial Inclusion 5

Private Capital & the Market Opportunity 17

Assessing Impact in Financial Inclusion 23

The Investment Landscape 32

Appendix 40

*Fiduciary Trust Company International, headquartered in New York, (and subsidiaries doing business as Fiduciary Trust International) and FTCI (Cayman) Ltd. are part of the Franklin Templeton family of companies. Such references pertain only to the body of this presentation and not to the “back page” disclosure. Please refer to the last page of this presentation for important disclosure information regarding this entire presentation.

Copyright © 2020 Fiduciary Trust International. All Rights Reserved. Introduction Introduction

Overview

This landscape review is designed to provide a comprehensive understanding of the role client capital can play in effecting change within a given impact issue area. The reviews are structured to cover the following major topics:

The Fundamentals of the Issue Area • The Landscape Review explores the underlying dynamics of the impact issue area, explaining the scope of the challenge and its importance to human or environmental welfare.

The Role of Private Capital • Impact investing is not a panacea. Rather it is often most effective as a complement to traditional philanthropy. The Landscape Reviews identify what, if any, market failures are relevant to the issue area and the role private capital can play in addressing them.

Outline a Framework for Impact • The Landscape Reviews are intended to serve as a frame of reference as investors assess the impact potential of a particular investment opportunity.

Identify the Opportunity Set • The Landscape Reviews provide perspective on the range of investment strategies within a particular issue area.

3 Introduction

Overview

Landscape reviews are prepared using information collected from a variety of sources.

Academic and Industry Research • We consult both publicly-available and privately-sourced research to inform its views.

Opinions of Experts • We consult with its network of fund managers, investors, consultants, and other issue area specialists.

Outline a Framework for Impact • The Landscape Reviews are intended to serve as a frame of reference as investors assess the impact potential of a particular investment opportunity.

Investment Manager Interviews • While in-depth due diligence on a particular investment manager is beyond the scope of a Landscape Review, We interview investment managers that are actively engaged in the issue area to learn more about their strategies and benefit from their perspective.

4 The Fundamentals of Financial Inclusion The Fundamentals of Financial Inclusion

Microcredit & the Origins of Financial Inclusion

Financial inclusion is, today, one of the most popular investment themes among impact investors, in part because it has a long track record dating back to the emergence of the modern microfinance movement in the 1970s. At the time, developed market donors and investors were drawn to the idea that access to credit could provide a pathway out of poverty for the world’s poor. Microcredit also had appeal as a market-based alternative to aid-driven development interventions that were sometimes criticized for being paternalistic and ineffective.1

Microcredit: The Original Theory of Change

The modern microcredit movement has featured a variety of models, but one of the core theories of change was that the small allotments of credit from responsible microfinance institutions would: - Offer the global poor an alternative to the onerous terms of local money-lenders; - Provide the resources the poor need to invest in income- generating activities and increase their earnings potential; and, - Ultimately generate a variety of positive impacts stemming from improved incomes and living standards.2

6 The Fundamentals of Financial Inclusion

Doubts Emerge about the Impact of Microcredit

The excitement over microcredit may have reached its peak in 2006 when Muhummad Yunus, the founder of Grameen Bank in Bangladesh, was awarded the Nobel Peace Prize. But just a few years later, the results of a series of randomized control trials (RCTs), designed to more precisely measure the impacts of microcredit, undermined the movement’s sometimes lofty rhetoric. Taken together, the RCTs found minimal evidence that microcredit programs systematically increase household income. Published in the mid-to-late 2000s, the studies prompted the development community to rethink the role financial services play in the lives of the poor.

“The Miracle of Microfinance? Evidence from a Randomized Evaluation,” Banerjee, Duflo, Glennester, and Kinnan In 2009, economists Banerjee, Duflo, Glennester, and Kinna published what became one of the more frequently cited randomized control trials that raised doubts about the extent of microcredit’s impact on poverty alleviation. However, as Banerjee and Duflo later lamented in their book Poor Economics, the media and microfinance leaders overlooked some of the important lessons their work revealed about the way the poor use financial services.3

The Study The Results The Implications • In 2005, the authors partnered • The authors found that • Banerjee and Duflo conclude in with Spandana, a fast-growing microfinance did indeed Poor Economics that microcredit Indian MFI, to study the effects of accomplish its basic goal. works and “…has earned its introducing microfinance to a new Households that had existing rightful place as one of the key market. businesses made new instruments in the fight against investments or started additional poverty.” (emphasis in original). • Spandana was expanding into the businesses after receiving a loan. city of Hyderabad and identified • But they also believe the results 104 neighborhoods in which it was • However, their data did not reflect the natural limits on the prepared to open a branch. indicate a “radical transformation.” potential of tiny microenterprises New business creation rates only to lift families out of poverty. • The authors then randomly increased from 5% to 7%; selected 52 sites for branch • Further, the stringency of MFI business profits increased, but openings (the treatment group) lending and repayment policies only for the largest 15%; and there and 52 sites that would be left may reduce flexibility and was no effect on average untouched (the control group). The disincentivize risk-taking, rather consumption, a proxy for sites were surveyed at 15-18 than free borrowers to pursue new household welfare. months and again at roughly 36 ventures.5 months. • Further, there were so signs of any changes in education, health, or women’s empowerment.4

7 The Fundamentals of Financial Inclusion

Beyond Microcredit & The Shift to Financial Inclusion

Over the past 10 years, the field has shifted away from an emphasis on microcredit and towards the broader notion of financial inclusion. Whereas modern microcredit programs were conceived as tools in the fight against poverty, financial inclusion is regarded as a development objective in its own right. Enhancing access to basic financial services can yield significant quality of life improvements for low-income households, fuel the growth of promising small businesses, and enhance the quality of a country’s financial system.

Financial Inclusion Defined:

Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transaction, payments, savings, credit and insurance – delivered in a responsible and sustainable way. 6 (emphasis added)

The Primary Objectives of Financial Inclusion in Developing Countries:

Meeting the financial needs of underserved and low-income individuals and households

Meeting the financial needs of micro, small, and medium enterprises (MSMEs)

Capturing the broader economic benefits of an inclusive financial system

8 The Fundamentals of Financial Inclusion

Financial Inclusion: Individuals & Households

To understand the relevance of financial services to the lives of the global poor, impact investors need only examine their own personal balance sheets. The student loans, 401(k) accounts, credit cards, and life insurance policies one might find are representative of four product categories designed to help meet a set of four fundamental needs common to all households, rich and poor alike.7

Universal Needs… …the Tools and Products to Meet Them

Consumption Smoothing - Auto Loan - Small Business Loan The need to manage inconsistent - Overdraft Facility - Home Mortgage cash flow and make intertemporal Credit - Credit Card Balance - Equipment Leasing consumption trade-offs - Student Loan - Revolving Line of Credit

Asset Building - Savings & Checking Acct. - Health Savings Acct. The need for financial security, to - 401(k) Retirement Acct. - Certificates of Deposit accumulate assets for use as Savings - Brokerage Account collateral, and to invest in the future. - Savings Bonds

Risk Management - Life Insurance - Umbrella Insurance The need to protect against the risk of - Health Insurance - Homeowner’s Insurance devastating loss Insurance - Disability Insurance - Commercial Insurance - Auto Insurance

Ability to Transact - Wire transfers - Credit Cards The need to send and receive money - ACH Payments - Debit Cards efficiently and at low cost Payments - Mobile Deposit - Paypal - Checks - Square

9 The Fundamentals of Financial Inclusion

Same Needs, More Acute

The financial needs of the poor may not differ in character from those of other households, but they typically are more severe. Income volatility and heightened exposure to risk are two characteristics of global poverty that can exacerbate the financial needs of the poor. The costs associated with informal financial services, to which the poor typically turn when affordable formal services are unavailable, can also add to the burden.

Unpredictable Income: The first of the UN Sustainable Development Goals is to end poverty, which is defined internationally at a threshold per capita income of $1.90 a day (Purchasing Power Parity - PPP).8 However, such daily income figures sometimes distract from the reality that those living on $1, $2, or even $10 a day rarely earn those sums consistently. In a 2016 study of 270 smallholder farming families in Mozambique, Tanzania, and Pakistan, monthly household income volatility ranged from 84% to as much as 213%.9 Without knowing when the next cash inflow will come, or how much it will be, these and other households must manage their money carefully if they are to meet their short-term or long-term needs.

The Risks of Poverty A flat tire or a stolen wallet might cause aggravation to those living in the developed world, but rarely would they constitute a financial disaster. By contrast, poor and low-income households are especially vulnerable to these types of unexpected expenses, as well as to more serious disruptions like injury, illness, or business failures. These events have the potential to wipe out savings, force a household to incur debt, sell assets, or simply leave their needs unmet.

The Costs of Informality Without access to high-quality financial services from formal financial institutions, poor and low-income households and businesses meet their financial needs in the informal sector, the part of the economy that is unregistered with the government. Social networks comprised of friends, families, local merchants, and money lenders may, at times, become financial service providers. One of the oldest forms of informal finance is the Rotating Savings and Credit Association (ROSCA), in which a group of participants periodically contribute to a savings pool that is disbursed to each participant on a rotating basis. Though informal sources of financial support have benefits, convenience among them, they can come with significant financial and non- financial costs. Reliability, privacy, transparency, and security are among the principal concerns.10

10 The Fundamentals of Financial Inclusion

Case Study: Portfolios the Poor11

Portfolios of the Poor Financial Diary of Mohan & Mainum – Uttar Pradesh, India

In 2009, researchers Daryl Collins, Jonathan Murdoch, Stuart Rutherford, and Orlanda Ruthven published a ground-breaking study on the financial lives of poor and low-income households in South Africa, Bangladesh, and India. The 250 households participating in the study recorded their financial activities over the course of a year, providing insight into the challenges of living on “$2 a day.”

One of the diaries featured in Portfolios of the Poor is that of Mohan and his wife Mohan & Mainum's Balance Sheet Mainum, who lived with their son in Uttar Pradesh, India. Their experience highlights the precariousness of a life in poverty and the significant level of Start * Turnover End financial activity often required to stay afloat. Assets $44 $103 $31 MFI Savings $2 $8 $1 Mohan was a tailor who earned just under $55 a month. Early in the authors’ year-long research, Mainum became ill and was unable to work. To pay for her Customer Credit $42 $95 $30 care, the couple borrowed from friends, family, a money-lender, and took out loans from the Microfinance Institution (MFI) of which Mainum was a member. Liabilities $54 $596 $124 They also bought products on credit and went into arrears on their rent. Over the MFI Loan $19 $214 $6 course of the survey year, the couple’s balance sheet saw total turnover of $700, Informal Loans $3 $129 $74 which is actually lower than the $1,000 of annual turnover typical of most households in the study. Rent arrears $29 $223 $37 Shop & Services Credit $3 $31 $7 Prior to Mainum’s illness, Mohan’s income had been high and steady enough to cover their MFI loan repayment schedule, even when they took out loans for Net Worth ($11) $700 ($92) consumption, rather than productive purposes. Mainum’s health problems “changed everything,” sending the family’s net worth from negative $11 to * Turnover is a measure of account activity. It is the absolute value of the sum of cash flows that moved in or out of an account during the survey year. negative $92 by the end of the year.

11 The Fundamentals of Financial Inclusion

The Challenges of Serving the Poor

Despite the need for basic financial services, the financial services industry has historically faced a series of real, and perceived, barriers to serving the global poor. Business models and products designed for middle- and upper-income customers are difficult to scale-down profitably and are often ill-suited to the needs of the poor. Banks and other institutions struggle to overcome informational asymmetries, small transaction sizes, and other complicating dynamics of many developing financial markets.

Informational asymmetry is among the most significant challenges of providing financial services to the global poor. Financial institutions typically use credit histories or collateral to assess and price the risk of serving their customers. Low- Credit income customers rarely have either, which makes traditional underwriting methods hard to implement.

Small transaction sizes present a challenge for financial institutions facing a number of fixed costs, such as compliance expenses, information management systems, and other “back office” infrastructure. Serving the global poor requires business models that can profit from small, frequent transactions rather than larger, infrequent ones.

Savings “Push” products can be a hard sell. Products like health insurance, which offers an uncertain benefit at a certain cost, are difficult to sell to consumers protective of their limited wealth. Consumer education is often needed to “push” insurance and other products whose benefits may not be immediately obvious.12

Inadequate infrastructure presents a meaningful obstacle for the distribution of financial products and services in developing countries. These challenges are particularly acute in rural areas, which may be difficult to reach or lack access Insurance to electricity. Travelling to a bank branch in an urban center may not be feasible for customers in these markets.

Cultural sensitivity & trust are critical elements to the success of any financial service. Not only must products be designed to meet the needs of low-income customers, but the distribution method must also take local customs into account. Microfinance providers, for instance, must pay close attention to household gender dynamics in local markets.

Payments Quality and affordability are often competing objectives. Customers may prefer flexible financial products, but they typically must pay more to get them. Designing products that satisfy a low-income customer’s needs without imposing an undue financial burden is a difficult task.

12 The Fundamentals of Financial Inclusion

The Challenges of Serving the Poor

Even though the modern microfinance industry has been active for decades, the challenges of serving the poor have kept financial inclusion at the top of the global development agenda. The number of “unbanked” adults has declined over the past 6 years, but the World Bank’s Global Findex, the most comprehensive database of financial inclusion indicators currently available, estimates that 1.7 billion adults still lacked access to an account with a financial institution or mobile money provider in 2017.13 Developed economies face their own set of financial inclusion challenges, but basic access is almost entirely a developing-world issue. Account ownership in the OECD is nearly 95% versus 63% for low and middle income countries.14

13 The Fundamentals of Financial Inclusion

Profile of the Unbanked

Microcredit remains an important tool in the development toolkit, but for many of the global poor, entrepreneurship is a necessity rather than an ambition. Many would prefer the stability of a wage-paying job to the challenge of subsisting on the uneven cash flows of a microenterprise.

Promoting “decent work for all” is one of the United Nation’s Sustainable Development Goals and the development community has long focused on accelerating job creation in developing economies.21 Small and medium enterprises (SMEs)* play a central role in those efforts. Not only do SMEs employ the most people world-wide, but they also create the most new jobs.22

The Role of SMEs in Developing Economies

In aggregate, SMEs are the largest employers worldwide, in both SMEs are the drivers of job growth in developing economies and, high- and low-income countries alike. However, they play an together, contribute more to GDP than their larger peers.24 outsized role in employment in low-income countries where the median SME share of employment is nearly 80%, according to the International Labor Organization.23

14 The Fundamentals of Financial Inclusion

Profile of the Unbanked

Despite their importance to economic development, survey and statistical data suggests that “access to finance” is one of the key challenges SMEs face in developing countries.25

SMEs are often referred to as the “missing middle” because they are too small to attract the attention of commercial banks but are too large for microfinance institutions.26 The International Finance Corporation estimates that SMEs face a credit gap of over $5.2 trillion and also have limited access to other financial services, such as deposits, insurance, and payment services.27

Chart Key: EAP = East Asia and the Pacific ECA = Europe and Central Asia LAC = Latin America and the Caribbean MENA = Middle East & North Africa SA = South Asia SSA = Sub-Saharan Africa

Micro = Less than 10 employees MSME = Less than 250 employees

In a recent analysis of 128 developing economies, the IFC estimated micro-, small, and medium enterprises (MSMEs) face an annual credit gap of $5.2 trillion in the formal sector* alone, an amount equivalent to nearly 20% of the countries’ combined GDP. The much larger group of MSMEs operating in the informal sector are estimated to have an additional $2.9 trillion in demand, much of which is unlikely being met.28 Though SMEs represent just 14% of the total number of credit-constrained firms in the study (left bar chart above), they account for 86% of the total credit gap (right bar chart above).29

* The “formal” sector refers to non-agricultural businesses that are registered with the government

15 The Fundamentals of Financial Inclusion

30 Financial Inclusion in Macroeconomics

Though discussions on the importance of financial inclusion typically focus on the micro-economic benefits of improved access, a 2015 study from the International Monetary Fund suggests financial inclusion can also have important macroeconomic benefits. The relationship is complex and the authors warn that increasing access to credit, in particular, can be de-stabilizing if it is not accompanied by adequate supervision. But financial inclusion is a potential contributor to growth and can help reduce inequality without threatening economic stability.

Financial Inclusion & Growth • Cross-country comparisons indicate that more inclusive financial sectors “appear more conducive to economic growth,” independent of their broader level of development. • However, the marginal benefits of greater financial inclusion are largest for the least-developed and least-inclusive economies. • Sectors dependent on external financing and those that struggle to pledge collateral capture the greatest benefits of inclusion.

Financial Inclusion & Economic Stability • The sub-prime crisis in the United States highlights the risks of expanding access to credit. However, the authors found that the de- stabilizing effects of increasing access to credit can be counteracted with effective regulation and supervision. • The results also point to the importance of taking a holistic view of financial inclusion. The data suggests that a 10% increase in access to deposits can reduce the likelihood of large deposit withdrawals (20% or more) during periods of stress by 4 percentage points.

Financial Inclusion & Inequality • The authors cite a forthcoming study suggesting that the percentage of adults obtaining loans in an economy has a “significant positive effect” on some measures of income inequality, particularly when high-income countries are excluded from the sample. • Though it does not necessarily indicate a causal relationship, countries with greater gender gaps in account holdings also tend to have greater income inequality.

16 Private Capital and Market Opportunity Private Capital and Market Opportunity

The Role of Private Capital

Financial inclusion is one of several impact issue areas in which financial and social return can be pursued in concert. While philanthropy and subsidy continue to play a role in promoting access to financial services in many markets, the most scalable solutions are those that generate a profit. Philanthropic and subsidized capital is most appropriately used to build institutional and market capacity rather than to provide services directly.

Philanthropic Capital Investment Capital The full landscape of philanthropic and government- Investment capital is at the core of financial inclusion backed efforts to promote financial inclusion are efforts, whether it is intended to deliver market-rate beyond the scope of this review, but types of support or concessionary returns: include: • Concessionary Capital: A number of debt and • Standards of Practice: Organizations like equity investors are willing to invest in the riskiest Accion and the Social Performance Task Force markets or cap their returns in order to support provide guidance on best practices in serving low- small, under-resourced institutions or to reach income consumers, including the promotion of particularly vulnerable populations. Some SME- client protection principles. focused investors also provide technical assistance alongside investment capital to build • Market Development: The Bill & Melinda Gates local operational talent. Foundation funds research into new product designs and supports policymakers in building • Traditional Debt & Equity: The vast majority of effective regulatory regimes.31 financial inclusion investment capital is deployed in traditional debt and equity investments that • Technical Assistance: Some investment seek competitive returns. While some investors managers bundle their capital with technical target financial institutions, others invest across assistance programs that build entrepreneurial the financial services industry. capacity.

18 Private Capital and Market Opportunity

Massive Demand from a Growing Middle Class

The investment opportunity associated with financial inclusion is tightly bound to the transition many emerging markets are making towards consumer-driven societies

Accenture, a consulting firm, estimates that commercial banks alone have the opportunity to earn an additional $380 billion in annual revenue by 2020 if 100% of the unbanked in emerging markets can be served.32

Based on an income range of $11 to $110-a-day (PPP), the Brookings Institution forecasts that the global middle class will grow by an average of 160 million people per year through 2030, reaching a total of over 5 billion by 2028.33 As part of that transition, annual middle class expenditures are forecasted to grow from $35 trillion in 2015 to $64 trillion by 2030, largely as a result of increases in Asia.34

Projected Middle Class Expenditure Growth ($USD PPP)

$35 t. 2015

$64 t. 2030

19 Private Capital and Market Opportunity

Asian Markets are at the Forefront

The largest number of financially-excluded households and businesses reside in emerging Asia, home to high-growth markets such as India, China, Indonesia, and Vietnam.

Accenture estimates that by 2030, annual household banking consumption in the “Asia Pacific” region could increase by $53 billion and that fee revenue from MSME banking could increase to $95 billion a year by 2030 if 100% of the unbanked in the region can be served.35

20 Private Capital and Market Opportunity

Digital Finance and the Inclusion Frontier

There is little doubt that the future of finance, in developing and developed countries alike, is digital. When applied to the provision of credit, savings, payments, and insurance, the combination of digital technology and data-based business models has the potential to meaningfully accelerate the collapse of the global financial inclusion gap. The digital finance landscape is diverse and rapidly-evolving, but two key areas underlie much of the innovation that has occurred to-date.

Mobile Money - (Payments & Savings) One of the earliest and most widely-adopted digital finance innovations was the introduction of peer-to-peer payment transfers over internet and mobile networks. The most basic of these systems allow users to load cash balances onto the SIM card in their phones and transfer funds to a third-party via SMS text message. Transfer recipients can then withdraw cash with the help of a local agent, who may be a shopkeeper or post office that is enrolled in the payment network and serves as a kind of bank teller. Since mobile money was introduced, a number of new applications of the technology have emerged:

• Mobile remittances • Electronic government transfers • Direct deposit systems for employers • Vendors payments (e.g. utilities) • Pay-as-you-go payment plans • Mobile savings accounts

Alternative Data - (Credit & Insurance) The advent of “big data” has created new opportunities to deliver risk-based products to the financially-excluded, including credit and insurance. MFIs, commercial banks, and third-party software providers are all exploring new underwriting methodologies that rely on alternative data sources, such as social network data, biographical information, or even psychometric tests. The data is then used to provide a variety of services, such as:

• SME invoice financing • Consumer loans • Peer-to-peer lending • Life insurance

21 Private Capital and Market Opportunity

The Benefits of Digital Finance

The business and development opportunities of digital finance lie in their ability to overcome many of the barriers that have prevented traditional financial service providers from reaching billions of poor and low-income consumers.

Informational Asymmetry Cultural Sensitivity & Trust Inadequate Infrastructure Alternative underwriting methodologies In many developing markets, mobile network The operations of digital financial service strike at the heart of the informational operators sell customers pay-as-you-go providers depend heavily on asymmetry challenge. When paired with airtime credit, rather than the multi-year communications systems and other digital identification methods, underwriters plans commonly sold in the United States. specialized infrastructure. But their service can provide risk-based services on the One reason for the success of mobile can often reach as far as a cellular signal strength of their algorithms, rather than the payment platforms is that they harness the will travel, including to customers living documentation history of their clients. As familiarity of these airtime credit systems. beyond the electrical grid and those whose customers use these services, their Instead of purchasing airtime credit and only connection to an urban center may be transaction history builds, which can be loading it onto their phones, customers follow a treacherous dirt road. used to access additional services. the same process to convert physical cash to digital cash.

Small Transaction Sizes Affordability The low marginal costs associated with Compared with bank branches, the digital technologies make digital finance McKinsey Global Institute estimates that ideally-suited to the kinds of small, high- digital technologies can reduce transaction volume transaction characteristic of the costs of some digital financial services by poor and low-income consumer segment. as much as 80-90%, much of which is One study suggests that when the scale of passed onto consumers. In addition to the a mobile payment platform doubles, the economies of scale, savings come from cost per transaction can drop by as much the digitization of processes such as as 50%.36 account registration.37

22 Assessing Impact in Financial Inclusion Assessing Impact in Financial Inclusion

Impact in Financial Inclusion

In 2018, our firm and other members of the Global Impact Investing Network’s Investors’ Council piloted a new framework for the evaluation, monitoring, and measurement of social and environmental impact.

Developed by the U.K.-based firm Bridges Impact, the Impact Management Project outlines a set of five “dimensions of impact” that can be used to guide the analysis of any investment. The slides that follow apply this framework to the issue of financial inclusion.

24 Assessing Impact in Financial Inclusion

What & How Much: Revisiting the Meaning of Inclusion

The broad objective of most financial inclusion strategies is to enhance access to basic financial services, but increasing account ownership is not sufficient to declare success.

A number of qualifying factors bring definition to the “what” of financial inclusion and are often crucial in determining “how much” inclusion is ultimately achieved. Based on the priorities identified by leading financial inclusion research institutions and practitioners, we believe the strategies with the greatest impact potential meet one or more of the criteria outlined below.

Overarching Target Outcome: Increased access to financial services, with an emphasis on the following:

• Diverse Product Offerings: Strategies that expand access to a diverse range of investment products are generally preferred to those that focus solely on expanding access to credit. Savings, insurance, and payments systems are all critical components of a well-functioning financial system. Products that help low-income families manage risk are particularly important. • Affordable Products: Products and services that impose excessive fee, interest, or debt burdens on households or SMEs are inconsistent with the goals of financial inclusion. • Well-Designed: Though every market is different, research demonstrates that the financial needs of low-income households and SMEs are often different from those transacting up-market. Flexibility, simplicity, and accessibility are among the features that make financial services attractive and useful to the lower-income segment of the market. • Client Protection Principles: Launched in 2009, the Smart Campaign is an industry-led effort to promote the adoption of 7 Client Protection Principles: appropriate product design, fair treatment, data privacy, responsible pricing, transparency, the prevention of over-indebtedness, and the availability of complaint resolution mechanisms.38 These principles have since been embedded in the Universal Standards for Social Performance Management developed by another industry-led group, the Social Performance Task Force (SPTF).39 Though we do not believe endorsement of these organizations is required of high-impact strategies, alignment with the principles they promote is essential.

25 Assessing Impact in Financial Inclusion

Who: Targeting the Base of the Pyramid

High-impact financial inclusion strategies focus on enhancing the provision of critical financial services to consumers and MSMEs at the “base of the economic pyramid.” But that segment does not necessarily mean the extreme poor.

As poverty rates have fallen in the past decade, the majority of the global population now earns between $2 and $10 a day ($PPP), placing them above the international poverty line of $1.90 a day (PPP).

Global Income Distribution ($PPP) 40 (Pew Research Income Definitions) United States Togo India Ecuador North America West Africa South Asia South America Daily/Annual High (> $50) 56% 0% 0% 2% $50 / $18,250

32% 0% 1% 10% Upper Middle 7% 4% 3% 21%

$20 / $7,300

Middle 3% 64% 77% 60% $10 / $3,650

Low $2 / $730 2% 32% 20% 7% Poor 2 6 26 Assessing Impact in Financial Inclusion

Who: Targeting the Base of the Pyramid

Though low-income consumers have limited individual purchasing power, they number in the billions.

Accenture estimates there are at least 1.3 billion potential customers in the $2 to $10 a day (PPP) income range.41

c. 600 million ~27 million c. 1.3 billion firms

c. 2.3 billion ~370 million firms

27 Assessing Impact in Financial Inclusion

Who: Financial Inclusion is a Gender Issue

At the global level, women fare worse than men across nearly every indicator collected in the Global Findex. Investors have an opportunity to make financial inclusion investments that empower women. As in other areas, success requires a thoughtful approach that goes beyond simply “counting women.”

Serving Female Clients – Necessary but not Sufficient The obvious enabling condition of any financial inclusion investment intended to empower women is that women represent a meaningful portion of a service provider’s clientele. The persistent gender gap in account ownership, for instance, cannot be closed without reaching more women. Fortunately, in this regard, there is a long tradition of microfinance institutions serving, if not explicitly targeting, women.

Product Design & Household Dynamics First and foremost, the most meaningful way that financial service providers can empower women is to focus on the broad objectives of financial inclusion, which is to provide affordable, high-quality products to all customers. However, research suggests that enhancing the impact of those products on women often requires adapting them to the gender dynamics of the local market. • Privacy & Control: Products designed to give customers greater privacy and individual control over their accounts appear to be particularly important for women, who often have low intra-household bargaining power. Individual accounts, for instance, may be more beneficial to women than joint accounts, which can be accessed and controlled by a woman’s husband.42 • Access vs. Commitment: In some markets, women may benefit from access to savings or transaction accounts with liquidity limits or other commitment requirements. Research suggests the poor often find these types of externally-imposed constraints help them maintain spending and saving discipline, but they may be particularly helpful in preventing others from pressuring women to liquidate their savings.43 • Limitations of Credit: Access to credit may only be useful to women if they are able to invest it profitably. Cultural barriers to female entrepreneurship, the tendency for women to work in less productive sectors of the economy, and the risk that male members of a household may divert loan proceeds are all reasons credit provision is not inherently beneficial to women.44 • Products Designed for Women: In societies with strong gender roles, men and women tend to have different household responsibilities, face different expectations, and are often pushed towards different occupations. As a result, women may have different needs than men. For instance, research suggests that women need more flexible products because they tend to face more disruption in their lives. In societies where women have less geographic mobility, digital payment systems may be particularly valuable.45

28 Assessing Impact in Financial Inclusion

Who: SMEs and “Constrained Gazelles”

One of the key lessons of the microcredit impact assessments published in the mid-2000s was that entrepreneurship is more often a necessity for the global poor than an opportunity. Addressing the massive global SME credit gap is critical to job creation, but a thoughtful approach to SME finance is needed to maximize impact. The Aspen Network of Development Entrepreneurs’ (ANDE) offers one of the more compelling frameworks for identifying SMEs likely to make the biggest contributions to poverty alleviation.

“…while it is mainly small firms that currently employ…the poor, it is the growing firms that can help them out of poverty…” The ANDE Research Initiative 2012 (italics in original)46

Financing “Constrained Gazelles” Founded in 2009, ANDE is a non-profit membership network focused on supporting entrepreneurship in developing economies. Guided by academic research and its members’ decades of experience, the ANDE network directs its support to those SMEs that have high growth and job-creating potential, but which are held back by capital and other constraints. Capitalizing these “Constrained Gazelles,” as opposed to SMEs broadly, may offer investors the greatest social return per dollar invested.47 Based on ANDE’s research, the following investment criteria may be useful to those investors seeking to maximize the impact of their SME financing efforts: • Target Fast-Growing Business: The literature on job creation in developed markets suggests that a small number of fast-growing businesses, so-called “gazelles,” are most responsible for job creation. In the U.S., just 4% of firms were responsible for creating 70% of all new jobs between 1988 and 1992.48 Impact investors will maximize their impact if they target these types of firms. • Constraints: Target businesses that face true capital constraints, rather than those simply seeking to lower their cost of capital. • Motivated Teams: Identify entrepreneurs and management teams that are committed to growth. • Check Size: Companies raising between $20,000 and $2 million are typically small enough that they fit the profile of a “missing middle” SME, but are seeking sufficient capital to pursue an aggressive growth agenda. • Inclusive Businesses: A subset of “constrained gazelles” explicitly integrate social and environmental objectives into their business models. These mission-oriented firms may offer opportunities to generate impact across multiple issue areas, all while pursuing profitable growth.49

29 Assessing Impact in Financial Inclusion

Contribution: Additionality in Financial Inclusion

The concept of additionality is at the core of impact investing. It asks investors to consider what, if any, impact outcomes their capital will help generate that would not have occurred otherwise. Proving an investment was additional ex-post is already a difficult task. Ex-ante, the best any investor can do is to develop a robust theory of change. The Impact Management Project has developed a useful framework for classifying the different contributions impact investors can make to an impact issue area, including financial inclusion.

Fiduciary Trust clients’ primary opportunity to promote financial inclusion is to help grow new and undersupplied capital markets indirectly with investments in funds.

Impact Management Project FTI clients can send a signal to the market and deploy capital with investment managers that Contribution Strategies meet a high standard for impact in financial inclusion. Doing so may help those managers attract additional capital from other investors. However, the effects of these signals are difficult to parse Signal that impact and may be weak unless the investor makes their support public. matters • Engagement is typically the purview of equity rather than debt investors because their ownership stake gives them influence over management and company strategy. While most private equity managers in the financial inclusion space take a hands-on approach to their + Engage portfolio companies, deploying capital with the most effective managers can empower them to actively generate additional impact. • Growing new and undersupplied capital markets is the clearest contribution FTI clients + Grow new or can make to the financial inclusion sector. However, due diligence is critical to activating undersupplied this channel. The size of the financial inclusion gap makes it tempting to declare any capital markets investment in emerging markets a “high-impact” investment. Care must be taken to assess an underlying manager’s commitment to serving those markets facing the greatest need. + Provide flexible • Providing flexible, or concessionary capital is an option for financial inclusion investors, but capital it does not necessarily guarantee a higher level of impact. Sustainable business models that reach poor, unbanked households and SMEs are the most likely to scale.

30 Assessing Impact in Financial Inclusion

Impact Risk: Good Intentions, Bad Outcomes

Impact investing is an inherently optimistic enterprise, but even well-researched and competently-executed impact strategies can yield unintended consequences, succumb to unanticipated threats, and ultimately generate disappointing or, at worst, damaging social or environmental outcomes.

Though every segment of the financial inclusion landscape is subject to these “impact risks,” the digital finance sector offers a useful case study. Outlined below are some of the familiar risks digital finance has brought back to the fore and some new risks it has introduced.

Credit-led strategies always face the risk that capital meant to empower individuals and businesses will end-up imposing a Credit Debt debilitating burden. Over-indebtedness was a key feature of the microcredit crises of the mid-to-late 2000s (see slide 37) and is a risk associated with digital lending platforms that may not always consider their users’ existing debt burden. ≡ Perhaps more than others, international impact investors have a responsibility to ensure the capital they invest in a foreign Market market contributes to, rather than detracts from, market stability. In past microcredit crises, inflows of relatively Instability inexpensive foreign debt encouraged some MFIs to imprudently expand their balance sheets.

Digital Though mobile phone ownership is expanding rapidly, the promotion of digital finance platforms does carry the risk of “Haves” & creating a new category of “have” and “have-nots.” Ownership is not the only issue. Customers will increasingly need a “Have-Nots” combination of digital and financial literacy to make the most, and avoid the worst, of digital financial services.

The financial inclusion industry, which is rooted in the effort to alleviate poverty, has always struggled with debates over Pricing & product pricing and profits. All investors must take care to ensure the strategies they capitalize do not cross the line into Profits predation. But even responsible investees may simply be tempted to drift up-market towards higher margin business lines.

Digital finance platforms that rely on “big data” carry with them the risk that customer data will be stolen or misused. In Data Privacy China, for instance, credit scores assigned on digital lending platforms are also being used to gain preferential access to other services. In the absence of critical consumer protections, the potential for discrimination is high.

An oft-cited benefit of digital accounts is that they reduce risk of theft associated with storing cash under the proverbial Security mattress. But until digital payments are widely accepted, customers must still convert their digital cash into physical cash. That process, often executed through networks of independent agents, introduces its own set of security risks.

31 The Investment Landscape The Investment Landscape

Financial Inclusion Investment Strategies

More detailed information on individual investment managers, along with our firm’s recommendations, are available to clients.

Financial inclusion investment funds generally make investments in one or more of the six areas outlined below. Private debt remains the largest segment of the market, but as the field has matured, many funds are diversifying into other sectors. The level of impact varies both within and across these categories. Each investment must be assessed independently against the 5 dimensions of impact previously outlined.

Microfinance & LIFI Debt Microfinance & LIFI Equity Private Debt Private Equity The most common financial inclusion strategy is to lend capital to The microfinance industry has also attracted a number of equity microfinance institutions (MFIs) or other low-income financial investors, who typically purchase minority stakes in microfinance institutions (LIFIs), which then on-lend that capital to households, institutions (MFIs) or other low-income financial institutions (LIFIs). SMEs, farmers, and other types of borrowers. These investors provide both capital and know-how to help their investees mature and grow.

Trade & Direct SME Finance Diversified Venture, Growth & Buyout Equity Private Debt Private Equity The massive SME credit gap has attracted attention from a range Investments in financial inclusion often surface in diversified private of financial inclusion players. In recent years, several strategies equity portfolios. The manager landscape is a mix of established have emerged that focus on providing trade finance facilities, term financial inclusion investors that have branched out and outside loans, and factoring services directly to SMEs in developing managers attracted by the sector’s impact and return potential. economies.

Digital Finance & Innovation Specialty Finance Venture Capital Various The cutting edge of financial inclusion investing is in digital finance. As the microfinance market has matured, an increasing number of Several impact venture capital firms target companies launching investors have sought to apply their financing expertise to other promising new business models or those developing promising “basic services” markets, such as housing, energy, and agriculture. new financial technologies.

33 The Investment Landscape

Financial Inclusion Investment Strategies

Financial risk and return can also vary within and across categories, making it difficult to establish clear expectations. Financial-first impact investors may have an easier time identifying compelling growth equity, buyout, and venture capital firms because their strategies tend to have comparable within the broader universe of traditional emerging markets (EM) private equity (PE) funds. Private debt financial inclusion funds, by contrast, are a unique sub-asset class with few analogues. For that reason, they offer an interesting case study in the challenges of assessing risk and return in financial inclusion.

Microfinance & LIFI Debt ~Net Return 3-5% Microfinance & LIFI Equity ~Net Return 12-15% Private Debt Target: Private Equity Target: • Stable, but low returns • Return targets vary widely • Minimal correlation with other asset classes • Less diversified than debt; more single market risk exposure • Various lending methodologies; No upside potential • Positioned to capitalize on market growth and maturity • Medium liquidity (quarterly to annual) • Low liquidity (10 year vehicles are typical)

Trade & Direct SME Finance ~Net Return 6-10% VC, Growth & Buyout Equity ~Net Return 15-25% Private Debt Target: Private Equity Target: • Return targets slightly higher than MFI & LIFI debt • Return targets consistent with EM PE • Asset-based lending; no upside potential • Concentrated portfolios; financial sector exposure • Medium liquidity (multi-year lock-ups; offer current yield) • Low liquidity (10 year vehicles are typical)

Digital Finance & Innovation ~Net Return Varies Specialty Finance ~Net Return Varies Venture Capital Target: Various Target: • Highest risk category, with high potential returns, but • Return targets vary, depending on the nature of the manager targets vary strategy; though some stand alone specialty finance • Low liquidity (10 year vehicles are typical) strategies exist, these investments are often incorporated into diversified portfolios.

34 The Investment Landscape

Financial Inclusion Investment Strategies

Regardless of strategy, the financial inclusion investments profiled here have varying levels of exposure to several types of emerging market risks. These range from macroeconomic factors to risks unique to the provision of financial services to the global poor.

Emerging & Frontier Market Risks Highly Very Corrupt Clean Though the level of risk varies greater by country and region, the following are among the risks associated with investments in emerging markets: • Political instability - Currency risks • Petty and institutional corruption - Weak institutions • Expropriation and capital controls - Weak property rights Systematic Regulatory & Local Market Risks In the mid-to-late 2000s, microfinance markets in Latin America, North Africa, Eastern Europe and South Asia experienced repayment crises that highlighted the risks associated with expanding access to credit in the absence of adequate regulatory supervision and robust market infrastructure. The Indian state of Andhra Pradesh D. Mallama spoke about her daughter, Durgamma, who ran away from her village in Andhra Pradesh, India, after suffered one of the best-known crises in 2010. The industry all-but-collapsed after a not being able to pay back loans from microfinance period of rapid, credit-fueled growth left many borrowers over-indebted, often holding agencies. 50 multiple loans, each from a different MFI. Kuni Takahashi for The New York Times Enterprise Risk Thorough due diligence of the following portfolio company characteristics is always critical, but particularly so for international investors operating from out-of-country: • Management quality - Portfolio Quality • Corporate governance - Underwriting standards & guidelines

Idiosyncratic • Systems & Controls - Weak property rights

35 The Investment Landscape

Case Study: Risk & Return of Private Debt

Impact investors often confront the challenge of assessing whether a given investment strategy is likely to deliver a so-called “market rate of return.” While most financial inclusion strategies can be compared against asset class benchmarks or their non-impact peers, defining the “market rate” for Microfinance & LIFI Debt investments is particularly difficult. Though they collectively have one of the longest track records in impact investing, their risk and return profile defies easy categorization within a traditional asset class framework. Given that Microfinance & LIFI Debt investments, traditionally referred to as Microfinance Investment Vehicles (“MIVs”), represent a sizeable portion of global impact assets under management, understanding their role in an investment portfolio is an important task for financial inclusion investors and the subject of the case study that follows.

Microfinance & LIFI Debt Returns: Low for Emerging Markets Debt? One of the few sources of information on the performance of the MIV industry comes from Symbiotics, a Switzerland- based microfinance advisory, research, and asset management firm. The firm’s SMX - MIV Debt (USD) Index estimates the monthly returns of a handful of the largest fixed-income MIVs, including responsibility and BlueOrchard’s flagship funds.

Though the index returned as much as 7% at its height in 2008, MIVs followed USD interest rates lower post- financial crisis, settling-in at an average annual return of just under 3%. Given the risks associated with Emerging Returns (2012-2015) – GIIN & Symbiotics, 2018 Market investments, a spread over 12-month LIBOR of roughly 150 basis points during this period may appear surprisingly low. Indeed, the Global Impact Investing Network and Symbiotics found in a 2018 study that “market-rate” MIVs generated an annualized return of just 2.6% from 2012-2015, roughly half the return of Emerging Market bonds, which might seem to be an appropriate comparable.51

From this narrow perspective, fixed-income MIVs may not initially appear to be a compelling investment.

36 The Investment Landscape

Case Study: Risk & Return of Private Debt

MIV returns may appear low on an absolute basis, but when risk-adjusted they become far more appealing. Indeed, one of the main arguments MIV managers make for their strategies is the low volatility and minimal, if not negative, correlation they show against other major asset classes. From 2004 to 2017, the SMX Debt Index had zero or negative correlation with nearly every asset class benchmark, including Emerging Market Bond indices. Though the index has been positively correlated to short-term rates, those correlations have been unstable on a rolling 36-month basis and have generally been below 0.3. Finally, the index has exhibited insignificant betas to the five risk factors we use in its strategic asset allocation.

MIV Debt: An Uncorrelated Sub-Asset Class?

Asset Class Correlations Monthly Data; April 2004 to November 2017

SMX MF Debt ( De- Smoothed) ( SMX) 1.0 0.3 0.3 (0.0) (0.1) (0.1) (0.0) (0.1) (0.1) (0.1) (0.0) (0.1) 0.0

1-3 Month US Treasury Bill (BIL) 0.3 1.0 1.0 0.0 (0.1) (0.1) (0.1) (0.1) (0.0) 0.1 0.1 (0.0) 0.1

6-Month LIBOR (LIB) 0.3 1.0 1.0 0.0 (0.1) (0.1) (0.1) (0.1) (0.1) 0.1 0.1 (0.1) 0.0

Barclays Aggregate (AGG) (0.0) 0.0 0.0 1.0 0.6 0.5 0.3 0.0 0.1 0.2 0.2 0.3 0.0

JP Morgan Corporate EM Bond Index (CEMBI) (0.1) (0.1) (0.1) 0.6 1.0 0.9 0.8 0.6 0.6 0.7 0.6 0.6 0.4

CEMBI - Financials Index (CEMBI-FI) (0.1) (0.1) (0.1) 0.5 0.9 1.0 0.9 0.5 0.6 0.6 0.5 0.5 0.4

CEMBI - High Yield Financials Index (CEMBI-HYFI) (0.0) (0.1) (0.1) 0.3 0.8 0.9 1.0 0.6 0.6 0.6 0.6 0.6 0.5

Russell 3000 Index (R3K) (0.1) (0.1) (0.1) 0.0 0.6 0.5 0.6 1.0 1.0 0.8 0.7 0.8 0.5

MSCI World Index (MWOR) (0.1) (0.0) (0.1) 0.1 0.6 0.6 0.6 1.0 1.0 0.9 0.8 0.8 0.5

MSCI Emerging Markets Index (EM) (0.1) 0.1 0.1 0.2 0.7 0.6 0.6 0.8 0.9 1.0 0.8 0.7 0.6

MSCI Frontier Emerging Markets (FEM) (0.0) 0.1 0.1 0.2 0.6 0.5 0.6 0.7 0.8 0.8 1.0 0.6 0.6

S& P Global REIT Index ( GREIT) (0.1) (0.0) (0.1) 0.3 0.6 0.5 0.6 0.8 0.8 0.7 0.6 1.0 0.4 Risk Factor Sentivities - SMX Debt Index (Unsmoothed) Bloomberg Commodity Index (BCOM) 0.0 0.1 0.0 0.0 0.4 0.4 0.5 0.5 0.5 0.6 0.6 0.4 1.0 April 2004 to August 2017 Currency EM BIL LIB R3K

SM X FEM Equity Duration Credit Inflation ( U SD) AGG GREIT BCOM CEM B I M WOR Beta: (0.01) (0.02) 0.02 (0.04) (0.02) CEMBI-FI

CEM B I- H YFI Standard Error: 0.01 0.02 0.03 0.03 0.02

37 The Investment Landscape

Case Study: Risk & Return of Private Debt

Though the SMX Debt Index is an imprecise measure of MIV returns, the data does suggest there is a case that MIVs can enhance the risk- adjusted performance of a diversified investment portfolio. Another test of that conclusion is to evaluate the pricing on the underlying holdings of these investment vehicles. Using a build-up approach to estimate the yield MIV’s should earn on their underlying holdings suggests they are within range of “market-rate.” Though it is important to note that the characteristics of each individual vehicle will vary.

Actual Yield Build-Up Yield Estimate

Liquidity & Other Risks: ? The debt instruments MIVs hold tend to be illiquid and should command a 6.3% ~ 6.5 - 7.0% premium as a result. Other risk factors unique to an MIV’s portfolio may + 0.7% also be the basis for other risk premia. 5.6% Emerging Market Sovereign Risk The average spread, over the past twelve months, on the 47 two-year, MIV Yield on “Direct Debt Investments” emerging market credit default swaps available from Bloomberg is 224 basis points. However, excluding Venezuela, a country in which no surveyed MIV + 3.1% 52 From 2010 to 2016, had exposure in 2017, drops the average to 70 bps. Symbiotics estimates the weighted-average OAS Spread – iShares 0-5 Yr HY Corp. Bond ETF yield on MIV “Direct Over the past 10-years, MIVs have generally maintained loan loss provisions Microfinance Debt 2.5% less than 2% and write-offs of less than 1%. Based on Moody’s default and Portfolios” has ranged credit loss rates, MIVs would have the profile of a Ba3-rated US corporate from 6.7% to 8.0% and bond, a “high yield” rating.53 remained at 6.9% since 2013. 2.5% Risk-Free Rate – Treasury 2-Year Yield: Symbiotics does not measure the duration of MIV portfolios, but does indicate that the average remaining maturity of the 67 MIV portfolios surveyed was 21.8 months. The 2-year Treasury offers a conservative estimate of the relevant risk-free rate.

38 The Investment Landscape

Case Study: Risk & Return of Private Debt

MIVs are far from uniform and a number of factors will alter the risk profile of any particular investment vehicle, which in turn will affect its relative appeal. Outlined below are some of the major variables investors must consider.

Funding Sources: Market Maturity & Returns According to the World Bank’s Consultative Group to Assist the As the microfinance market matures and more MFIs move into Poor, of the $37 billion of financial inclusion funding deployed in Tier 1 and become regulated, their access to less expense local 2017, 71% came from public sources.54 Depending on how public financing, such as deposits, improves. From an impact funding is deployed and where, it has the potential to distort perspective, this is a positive development. But it means MIVs markets, for better or worse. may feel increasing pressure to add riskier MFIs to their portfolios in order to hit their return targets.

Portfolio Quality Market Maturity & Risk Microfinance institutions (MFIs) are generally categorized into 3 The microfinance industry made it through the global financial tiers, with a relatively small number of large (>$100 million in crisis relatively unscathed, but studies of that era suggest assets) sophisticated institutions in Tier 1, followed by microfinance institutions were not as resilient to capital market progressively smaller, but more numerous institutions in Tiers 2 tumult as previously thought.57 Looking ahead, as MFIs expand and 3.55 There exists a natural trade-off between risk and return their product offerings, broaden their client bases, and diversify as MIVs shift down the ladder away from Tier 1. their funding sources, they naturally become more integrated with and sensitive to the broader domestic and global economies.

Management Fees The average total expense ratio for fixed-income MIVs was 3% in 2017, comprised of 1.5% in management fees and 1.5% in other expenses.56 At these rates, even a “market-rate” portfolio becomes far less attractive on a net basis. However, for impact investors, it is important to consider how these fees are used. Some “other expenses” include technical assistance.

39 Appendix Appendix: Sources

References

1. Jane Jacobs, foreward to Operational Guide for Micro-Enterprise Projects, (Toronto: Calmeadow Foundation, 1988), p. x. Accessed May 2018: https://centerforfinancialinclusionblog.files.wordpress.com/2011/09/an-operational-guide-for-micro-enterprise-projects1.pdf 2. Justin Louiseau, “J-PAL and IPA Policy Bulletin: Where Credit is Due,” Abdul Latif Jameel Poverty Action Lab and Innovations for Poverty Action, 2015, Accessed May 2018: https://www.povertyactionlab.org/sites/default/files/publications/where-credit-is-due.pdf 3. Abhijit Banerjee and Esther Duflo, Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty (New York: PublicAffairs, 2011), p. 171 4. Esther Duflo, Abhijit Banerjee, Rachel Glennerster, and Cynthia Kinnan. 2013. “The miracle of microfinance? Evidence from a randomized evaluation,” (Working Paper, National Bureau of Economic Research, May 2013) Accessed May 2018: http://www.nber.org/papers/w18950.pdf 5. Banerjee and Duflo, p. 173 6. “Financial Inclusion At A Glance,” World Bank Group, 2018, Accessed May 2018: http://www.worldbank.org/en/topic/financialinclusion/overview 7. Inspired by David Roodman’s Due Diligence; David Roodman, Due Diligence (Washington: Center for Global Development, 2012), p. 16-19 8. Exchange rates expressed in terms of purchasing power parity (PPP) reflect the amount of each currency needed to buy the same basket of goods and services. 9. Jamie Anderson and Wajiha Ahmed, “Smallholder Diaries: Building the Evidence Base with Farming Families in Mozambique, Tanzania, and Pakistan,” Perspectives, no. 2 (February 2016): 4, Accessed May 2018: http://www.cgap.org/sites/default/files/CGAP_Persp2_Apr2016-R.pdf 10. Daryl Collins, Jonathan Morduch, Stuart Rutherford, and Orlanda Ruthven, Portfolios of the Poor (Princeton: Princeton University Press, 2009), p.53-57 11. Ibid., p. 230 12. “Reaching deep in low-income markets: Enterprises achieving impact, sustainability, and scale at the base of the pyramid,” Monitor Deloitte, June 2017, p. 18, Accessed May 2018: https://www2.deloitte.com/content/dam/Deloitte/us/Documents/process-and-operations/us-cons-reaching-deep-in-low-income-markets.pdf 13. Asli Demirguc-Kunt, Leora Klapper, Dorothe Singer, Saniya Ansar, and Jake Hess, “The Global Findex Database 2017,” World Bank Group, 2018, p. 4, Accessed May 2018: https://openknowledge.worldbank.org/bitstream/handle/10986/29510/9781464812590.pdf 14. Ibid, p. 18 15. Ibid. p. 17 16. Ibid, p. 36 17. Ibid, p. 24, 25, 74, 80 18. Ibid, p. 39 19. Ibid, p. 38 20. Ibid, p. 36 21. “Sustainable Development Knowledge Platform,” United Nations Division for Sustainable Development Goals, Accessed May 2018: https://sustainabledevelopment.un.org/sdgs 22. “Small and medium-sized enterprises and decent and productive employment creation,” Report prepared for delegates to International Labour Conference: 104th Session, Geneva, 2015. Geneva: International Labour Office, p. 3-4, Accessed May 2018: http://www.ilo.org/wcmsp5/groups/public/---ed_norm/---relconf/documents/meetingdocument/wcms_358294.pdf 23. Ibid. 24. “Small and Medium Enterprise Program: Five Years in Review: 2011-2016,” Innovations for Poverty Action, p. 4, Accessed May 2018: https://www.poverty- action.org/sites/default/files/publications/SME-Program-Report-2011-2016.pdf 25. “IFC Jobs Study: Assessing Private Sector Contributions to Job Creation and Poverty Reduction,” International Finance Corporation, January 2013, p. 37, Accessed May 2018: https://www.ifc.org/wps/wcm/connect/0fe6e2804e2c0a8f8d3bad7a9dd66321/IFC_FULL+JOB+STUDY+REPORT_JAN2013_FINAL.pdf?MOD=AJPERES; and, “MSME Finance Gap: Assessment of the Shortfalls and Opportunities in Financing Micro, Small and Medium Enterprises in Emerging Markets,” International Finance Corporation, 2017, p. 1, Accessed May 2018: https://www.smefinanceforum.org/sites/default/files/Data%20Sites%20downloads/MSME%20Report.pdf

41 Appendix: Sources

References

26. “Small and Growing Businesses: Investing in the Missing Middle for Poverty Alleviation,” Aspen Network of Development Entrepreneurs, p. 7, Accessed May 2018: https://assets.aspeninstitute.org/content/uploads/files/content/docs/ande/ANDE%20Literature%20Review%20-%20FINAL.pdf 27. “MSME Finance Gap,” p. ix 28. Ibid, p. ix 29. Ibid, p. 33 30. Ratna Sahay et al., “Financial Inclusion: Can It Meet Multiple Macroeconomic Goals?” International Monetary Fund, September 2015, Accessed May 2018, https://www.imf.org/external/pubs/ft/sdn/2015/sdn1517.pdf 31. “Financial Services for the Poor: What We Do,” Bill & Melinda Gates Foundation, Accessed May 2018: https://www.gatesfoundation.org/What-We-Do/Global-Growth-and- Opportunity/Financial-Services-for-the-Poor 32. “Billion Reasons to Bank Inclusively,” Accenture, 2015, p. 2, Accessed May 2018: https://www.accenture.com/_acnmedia/Accenture/Conversion- Assets/DotCom/Documents/Global/PDF/Dualpub_22/Accenture-billion-reasons-bank-inclusively.pdf 33. Homi Kharas, “The Unprecedented Expansion of the Global Middle Class: An Update” (Working Paper, Brookings Institution, 2017), p. 11. Accessed May 2018: https://www.brookings.edu/wp-content/uploads/2017/02/global_20170228_global-middle-class.pdf 34. Ibid, p. 15 35. Accenture, p. 4 36. James Manyika, Susan Lund, Marc Singer, Olivia White, and Chris Berry, “Digital Finance for All: Powering Inclusive Growth in Emerging Economies,” McKinsey & Company, September 2016, p. 37. Accessed May 2018: https://www.mckinsey.com/~/media/McKinsey/Global%20Themes/Employment%20and%20Growth/How%20digital%20finance%20could%20boost%20growth%20in%20emerging%20 economies/MG-Digital-Finance-For-All-Full-report-September-2016.ashx 37. Ibid, p. 36 38. “Client Protection Principles,” The Smart Campaign, July 2011, Accessed May 2018: http://smartcampaign.org/storage/documents/20110802_Client_Protection_Principles_FINAL_.pdf 39. “The Universal Standards for Social Performance Management,” Social Performance Task Force, 2018, Accessed May 2018: https://sptf.info/universal-standards-for-spm/universal- standards 40. (All data on slide) Rakesh Kochhar, “A Global Middle Class Is More Promise than Reality” (Data Download, Pew Research Center, 2015) Accessed May 2018: http://www.pewglobal.org/files/2015/08/Appendix-Tables_Global-Middle-Class_Aug-11-2015.xlsx 41. Accenture, p. 6 42. Kyle Holloway, Zahra Niazi, and Rebecca Rouse, “Women’s Economic Empowerment Through Financial Inclusion,” Innovations for Poverty Action, March 2017, p. 5, Accessed May 2018: https://www.poverty-action.org/sites/default/files/publications/Womens-Economic-Empowerment-Through-Financial-Inclusion-Web.pdf 43. Ibid. 44. Ibid, p. 7-9 45. Julie Zollmann and Caitlin Sanford, “A Buck Short,” Bankable Frontier Associates and Omidyar Network, October 2016, Accessed May 2018: https://www.omidyar.com/sites/default/files/file_archive/Pdfs/16-07-01_A_Buck_Short_Report_Digital_FINAL.pdf 46. Aspen Network of Development Entrepreneurs (2012), p. 4 47. Ibid, p. 12 48. Ibid, p. 11 49. Ibid. p. 11-13 50. David Roodman, Due Diligence: An Impertinent Inquiry into Microfinance (Washington: Center for Global Development, 2012), p. 254-257

42 Appendix: Sources

References

51. Marina Parashkevova Holmegaard et. al, “The Financial Performance of Impact Investing through Private Debt,” Symbiotics and The Global Impact Investing Network, April 2018, p. 33, Accessed May 2018: https://thegiin.org/assets/Financial%20Performance%20of%20Impact%20Investing%20through%20Private%20Debt_web_March%202018.pdf 52. Emerging Market 2-year CDS Spreads. May 2018, via Bloomberg LP, Accessed May 2018 53. “iShares 0-5 Year High Yield Corporate Bond ETF: Option Adjusted Spread,” BlackRock, Inc., Accessed May 2018: https://www.ishares.com/us/products/258100/ishares-05-year-high- yield-corporate-bond-etf 54. Olga Tomilova and Edlira Dashi, “International Funding for Financial Inclusion: Key Trends and Developments,” Consultative Group to Assist the Poor (CGAP), December 2017, p. 1, Accessed May 2018: http://www.cgap.org/sites/default/files/Brief-International-Funding-for-Financial-Inclusion-Dec-2017.pdf 55. “Microfinance Funds: 10 Years of Research & Practice,” Symbiotics & CGAP, December 2016, p. 56, Accessed May 2018: http://symbioticsgroup.com/wp- content/uploads/2016/11/201612-Symbiotics_10yMIV_whitepaper.pdf 56. Holmegaard et al., p. 35 57. David Kruiff and Stephen Hartenstein, “Microfinance and the Global Financial Crisis: A Call for BASEL,” International Finance Corporation, 2013, p. 13

43 Appendix: Sources

References

Slide 7: Louiseau Slide 8: (Spandana Logo) Spandana Sphoorty Financial Limited, Accessed May 2018: http://www.spandanaindia.com/wp-content/uploads/2016/07/logo-2.jpg (Poor Economics) Amazon, Accessed May 2018: https://images-na.ssl-images-amazon.com/images/I/51IChGaoXJL._SX331_BO1,204,203,200_.jpg Slide 9: (World Bank Logo) The World Bank Group, Accessed May 2018: http://www.worldbank.org/content/dam/wbr/logo/logo-wb-header-en.svg Slide 9-18: (Family) Cliparts Zone, Accessed May 2018: https://cliparts.zone/clipart/1883051 (Small Business) Openclipart, Access May 2018: https://openclipart.org/image/2400px/svg_to_png/168697/littlestorefront.png (Bar Chart) Microsoft PowerPoint Slide 12: (Portfolios of the Poor) Amazon, Accessed May 2018: https://images-na.ssl-images-amazon.com/images/I/41yNUGllLzL._SX327_BO1,204,203,200_.jpg (Balance Sheet - Image): Fiduciary Trust International (Balance Sheet - Data): Collins, Jonathan Morduch, Stuart Rutherford, and Orlanda Ruthven, p.230 Slide 14: (Chart - Left) Demirguc-Kunt, Klapper, Singer, Ansar, and Hess, p.18 (Chart - Right) Ibid, p.5 Slide 15: (Circle Charts – Left to right) Ibid, pgs. 36, 37, 39, 38, and 37 Slide 16: (Chart - Left) Report prepared for delegates to International Labour Conference: 104th Session, Geneva, p.4 (Chart - Right) “Small and Medium Enterprise Program: Five Years in Review: 2011-2016,” Innovations for Poverty Action, p. 4, Accessed May 2018: https://www.poverty- action.org/sites/default/files/publications/SME-Program-Report-2011-2016.pdf Slide 17: “MSME Finance Gap: Assessment of the Shortfalls and Opportunities in Financing Micro, Small and Medium Enterprises in Emerging Markets,” International FInance Corporation, 2017, Accessed May 2018: https://www.smefinanceforum.org/sites/default/files/Data%20Sites%20downloads/MSME%20Report.pdf Slide 21: (Chart - Left) Homi Kharas, “The Unprecedented Expansion of the Global Middle Class: An Update” (Working Paper, Brookings Institution, 2017), p. 12. Accessed May 2018: https://www.brookings.edu/wp-content/uploads/2017/02/global_20170228_global-middle-class.pdf (Chart – Right, Image) Fiduciary Trust International (Chart – Right, Data) Kharas, p. 15 Slide 22: Accenture, p. 4 Slide 23: (Image – Top) Nurith Aizenman, “Dial M For Money: Can Mobile Banking Life People Our Of Poverty” All Things Considered, National Public Radio, December 9, 2016. Accessed May 2018: https://www.npr.org/sections/goatsandsoda/2016/12/09/504540392/dial-m-for-money-can-mobile-banking-lift-people-out-of-poverty (Image – Bottom) Sidi Yasser El Jassouli, “Alternative Data Based Credit Scoring System,” European Microfinance Platform, Accessed May 2018: http://www.e-mfp.eu/news- and-events/alternative-data-based-credit-scoring-system Slide 26: (Images cropped and adapted) Impact Management Project. Accessed May 2018: http://www.impactmanagementproject.com/understand-impact/ Slide 27: (Smart Campaign) “The Smart Campaign,” (Center for Financial Inclusion Blog, Accion Center for Financial Inclusion) Accessed May 2018: https://centerforfinancialinclusionblog.files.wordpress.com/2011/09/smart_logo-hires11.jpg?w=240&h=141 (SPTF) Social Performance Task Force, Accessed May 2018: https://sptf.info/templates/g5_hydrogen/custom/images/SocialPerformanceTaskForceLogo.png Slide 28: (Flags) “The World Factbook,” Central Intelligence Agency, Accessed May 2018: https://www.cia.gov/library/publications/the-world-factbook/ Slide 29: (Image cropped and adapted) Accenture, p. 6 Slide 31: Aspen Network of Development Entrepreneurs, p. 13 Slide 32: (Image) Fiduciary Trust International (Content) Impact Management Project

44 Appendix: Sources

References

Slide 37: (World Heat Map) “Corruption Perceptions Index 2017,” Transparency International, Accessed May 2018: https://www.transparency.org/news/feature/corruption_perceptions_index_2017 (Transparency International Logo) Transparency International, Accessed May 2018: https://www.transparency.org/ (Article & Image of Woman) Lydia Polgreen and Vikas Bajaj, “India Microcredit Faces Collapse from Defaults,” The New York Times (New York, NY), November 17, 2010, Accessed May 2018: https://www.nytimes.com/2010/11/18/world/asia/18micro.html (CGAP Image – cropped and adapted) Lauren Braniff and Xavier Faz, “Information Systems: A Practical Guide to Implementing Microfinance Information Systems,” Consultative Group to Assist the Poor, 2012, Accessed May 2018: http://www.cgap.org/sites/default/files/CGAP-Technical-Guide-Information-Systems-Jan-2012.pdf Slide 38 (Chart - Image) Fiduciary Trust International (Chart - SMX Index Data) Syminvest, Symbiotics SA, Accessed May 2018: https://my.syminvest.com/microfinance-investment-vehicle/symbiotics-microfinance-indexes Note: The SMX Index Data used in this presentation has been unsmoothed to adjust for serial correlation. (Chart - LIBOR) Monthly 12-Month LIBOR from March 2005 to November 2017, via Bloomberg LP, accessed May 2018. (Table) Holmegaard et. al, p. 33 Slide 39 (Correlation Matrix – Image) Fiduciary Trust International (Correlation Matrix – Data) Bloomberg, LP, Syminvest (Table at Top) Holmegaard et al, p. 33 (Chart – Image) Fiduciary Trust International (Chart – Data) Bloomberg, LP, Syminvest (Table at Bottom – Image) Fiduciary Trust International (Table at Bottom - Data) Bloomberg, LP, Syminvest Slide 43: (Picture & Logo) ACLEDA Bank, Plc, Accessed May 2018: https://www.acledabank.com.kh/kh/eng/md_picturelibrary?id=8d27ba37c5d810106b55f3fd6cdb35842007e88754184bfc0e6035f9bcede633 Slide 44: (Logo & Charts) Emerging Markets Private Equity Association, p.1-2 Slide 45: (Lidya) Accion Venture Lab (CreditMantri) CreditMantri, Accessed May 2018: https://www.creditmantri.com/ (AllLife) “Portfolio,” Quona Capital, Accessed May 2018: http://quona.com/our-portfolio/ (First Access) Accion Venture Lab (Mintifi) Lok Capital (Tienda Nube) Tienda Nube, Accessed May 2018: https://www.tiendanube.com/

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