NYCLA CLE I NSTITUTE Board for a maximum of 2 Transitional and and Non-Tr for amaximumBoard 2Transitional of This course has been approved inaccordance withthe requi toward certification in civil triallaw,criminal incivil trial certification toward 2 hourstotal of credit.CLE these, Of 0qualifyas hours of creditforethics/professionalism, and 0qualify as hours of credi This program has been approved by the Board of Continuing Legal Education of the Supreme Court of New Jersey for

Steven Godeke, Chuck Day, Janiece Brown-Spitzmueller, MICROFINANCE LAW Denise Scotto Prepared in connection withaContinui Prepared in at New York County Lawyers’ Association, 14 Vesey Street, New York, NY York,NY Street,New 14Vesey CountyLawyers’Association, at NewYork 2 TRANSITIONAL ANDNON-T 2 TRANSITIONAL Director, OpportunityInternatio Anita Bernstein, AND PRACTICE

Principal, GodekeConsulting; PROGRAM CHAIR&MODERATOR: NYSBA Internatio PROGRAM CHAIR CO-SPONSOR , Founder,GlobalLegalSt scheduled for May11, 2011. scheduledfor International Section School ofBusiness law, workers compensation law and/or matrimonial law. Professor ansitional credit hours; 2 2 hours; credit ansitional NYC HPD;Chair,Af FACULTY: rements ofthe New York Stat RANSITIONAL MCLE CREDITS: RANSITIONAL MCLE nal Law Committee

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Information Regarding CLE Credits and Certification Microfinance Law and Practice May 11, 2011, 12:00PM to 3:00PM

The New York State CLE Board Regulations require all accredited CLE providers to provide documentation that CLE course attendees are, in fact, present during the course. Please review the following NYCLA rules for MCLE credit allocation and certificate distribution.

i. You must sign-in and note the time of arrival to receive your course materials and receive MCLE credit. The time will be verified by the Program Assistant.

ii. You will receive your MCLE certificate as you exit the room at the end of the course. The certificates will bear your name and will be arranged in alphabetical order on the tables directly outside the auditorium.

iii. If you arrive after the course has begun, you must sign-in and note the time of your arrival. The time will be verified by the Program Assistant. If it has been determined that you will still receive educational value by attending a portion of the program, you will receive a pro-rated CLE certificate.

iv. Please note: We can only certify MCLE credit for the actual time you are in attendance. If you leave before the end of the course, you must sign-out and enter the time you are leaving. The time will be verified by the Program Assistant. Again, if it has been determined that you received educational value from attending a portion of the program, your CLE credits will be pro-rated and the certificate will be mailed to you within one week.

v. If you leave early and do not sign out, we will assume that you left at the midpoint of the course. If it has been determined that you received educational value from the portion of the program you attended, we will pro-rate the credits accordingly, unless you can provide verification of course completion. Your certificate will be mailed to you within one week.

Thank you for choosing NYCLA as your CLE provider!

New York County Lawyers’ Association Continuing Legal Education Institute 14 Vesey Street, New York, N.Y. 10007 • (212) 267-6646

Microfinance Law and Practice Wednesday, May 11, 2011 12:00 PM – 3:00 PM

Table of Contents

“Exploring Human Rights Implications of Microfinance Initiatives,” from the Selected Works of Rebecca Farrar, http://works.bepress.com/rebecca_farrar/1

“Microfinance Needs Regulation,” by Aneel Karnani, Stanford Social Innovation Review, Winter 2011.

Opportunity International – A Microfinance Leader for 40 Years

“Solution for Impact Investors: From Strategy to Implementation,” by Steven Godeke, Raul Pomares with Albert Bruno, Pat Guerra, Charly Kleissner, Hersh Shefrin, November 2009, Rockefeller Philanthropy Advisors; Reprinted with minor updates August 2010, ISBN 978-1- 61658-210-4.

Andra Pradesh Micro Finance Institutions (regulation of money lending) Ordinance 2010

“Islamic Microfinance in the Midst of Armed Conflict” by Janiece Brown-Spitzmueller

“Employing the Youth of the Revolution – A New Model for Microfinance in the North Africa”, by Carli Pierson, Microfinance Focus, May 5, 2011.

“Swiss Capacity Building Facility Launches Microfinance and Microinsurance Credit Facility for Developing Countries”, Microfinance Focus, May 4, 2011.

New York County Lawyers’ Association Continuing Legal Education Institute 14 Vesey Street, New York, N.Y. 10007 • (212) 267-6646

Microfinance Law and Practice May 11, 2011 12:00 PM – 3:00 PM

AGENDA

Program Chair and Moderator: Janiece Brown-Spitzmueller, NYC HPD; Chair, Africa Committee NYSBA International Section

Faculty: Anita Bernstein, Professor, Brooklyn Law School Chuck Day, Director, Opportunity International (A Microfinance Institution) Steven Godeke, Principal, Godeke Consulting; Adjunct Professor, NYU Stern School of Business Denise Scotto, Founder, Global Legal Strategies

11:30AM – 12:00PM Registration

12:00 PM – 1:00 PM Lunch

1:00 PM – 1:10 PM Introductions and Announcements

1:10 PM – 3:00 PM Discussion

From the SelectedWorks of Rebecca Farrar

December 2008 EXPLORING HUMAN RIGHTS IMPLICATIONS OF MICROFINANCE INITIATIVES

Contact Start Your Own Notify Me Author SelectedWorks of New Work

Available at: http://works.bepress.com/rebecca_farrar/1 Abstract for Article : Exploring the Human Rights Implications of Microfinance Initiatives by Rebecca Farrar

Microfinance and microcredit (“MFI”) programs have been advanced as a way to make the world a better place. These programs involve making small loans to people who would otherwise be unable to borrow money to facilitate them starting their own businesses: frequently, the programs focus on women borrowers in developing countries. Muhammad Yunus of the Grameen Bank says microfinance and microcredit programs can literally end world poverty.

This Article explores MFI from several perspectives, with particular emphasis on human rights issues. The emphasis of MFI programs on women in developing countries makes it important to consider these programs in terms of both women’s and indigenous rights, while MFI as an approach to poverty merits a discussion of economic rights.

The Article first explores the concept and scope of MFI programs, identifying key components that the programs share. Particular attention is paid to the Grameen Bank and its much-lauded and prototypical approach. The Article then explores the human rights implications of MFI programs in detail, within the context of economic, indigenous and women’s rights. One particular aspect of Grameen’s program, namely the use of Sixteen Decisions, is also critiqued, applying organizational behavior theory. The Article also examines MFI in respect to other approaches to poverty alleviation in the developing world, including property rights’ initiatives, women’s cooperatives, and social enterprise approaches.

Exploring Human Rights Implications of Microfinance Initiatives

“Poverty does not belong in a civilized human society. It belongs in museums.” Grameen Bank founder Muhammad Yunus

“Give a man a fish, he’ll eat for a day. Give a woman microcredit, she, her husband, her children and her extended family will eat for a lifetime.” Bono

Microcredit and microfinance 1 (“MFI”) programs are increasingly touted as a key solution to making the world a better place. These programs, largely offered to women, have already changed individual lives and families, and there is great potential to change more. Muhammad Yunus, founder of Grameen Bank and winner of the Nobel Peace Prize in 2006 for his extensive work with MFI, says microfinance and microcredit programs can literally end world poverty. 2

This Article will explore MFI from several perspectives. Part I will explore the concept and scope of current MFI programs, describing key components of these programs and assessing comments from both fans and critics. The Grameen Bank, which has been studied extensively and has acted as a model for several other programs, will be examined in detail. Part II of this Article considers MFI in the context of human rights considerations, including economic, indigenous, and women’s rights. Part III will consider MFI in comparison with other approaches to

1 The word “microcredit” refers specifically to the giving of small (micro) loans (credit) to clients while the term “microfinance” is broader and encompasses loans, savings, insurance, leasing and other financial services. Since most microcredit programs have grown in scope and most providers of microcredit also offer their clients access to other financial services, this paper will generally use the term “MFI” to describe initiatives that involve microcredit and microfinance, except when commentary is specific to “microcredit” programs only, or where “microcredit” has a meaning separate from “microfinance”.

2 MUHAMMAD YUNUS , CREATING A WORLD WITHOUT POVERTY (2007), p. 237-248 (speech delivered in Oslo, Norway, December 10, 2006 after receiving the Nobel Peace Prize). poverty, including property rights initiatives, women’s cooperatives and social enterprise approaches.

PART I: Microfinance

Microfinance is essentially a very simple concept. The idea is to take small amounts of money, and loan this money to someone who otherwise couldn’t get a loan so the person can start a business.

This simple concept is being employed broadly right now, all around the world. 3 Groups who hand out the money include non-governmental organizations, 4 banks, 5 private educational institutions, 6 governments, 7 and the United Nations. 8

3 There are currently microfinance initiatives on every continent. For more info by continent, visit CGAP (Consultative Group to Assist the Poor) at their website at http://www.cgap.org/p/site/c/ or the Microcredit Summit Campaign at http://www.microcreditsummit.org/ (Both groups track and report on microfinance initiatives internationally and provide other resources and information in microfinance). CGAP self- describes as a leading independent source for information on the microfinance industry. It is housed at the World Bank but is an independent entity, with a mission to encourage commercial investments in microcredit, and to be a source for information on microcredit. The Microcredit Summit Campaign is a project of the RESULTS Educational Fund, a U.S.-based grassroots advocacy organization committed to ending hunger and poverty.The first Microcredit Summit was held in February 2-4, 1997, attended by more than 2,900 people from 137 countries in Washington, DC. A nine-year campaign was launched to reach 100 million of the world’s poorest families, especially the women of those families, with credit for self- employment and other financial and business services by the year 2005. In November, 2006, the Campaign was re-launched to 2015 with two new goals – (1) to ensure 175 million of the world’s poorest families receive credit by end of 2015 (2) ensure that 100 million families rise above the US $1 a day threshold.

4 The number of NGOs involved in microfinance has expanded rapidly from the 1990’s to the present day. See Catherine A. Madsen, Note & Comment: Feminizing Waste: Waste-Picking as an Empowerment Opportunity for Women and Children in Impoverished Communities , 17 COLO . J. INT ’L ENVTL . L. & POL ’Y 165 (Winter, 2006) at 192 (citing to Yujiro Hayami et al., Found. For Advanced Studies on Int’l Dev., Waste Pickers and Collectors in New Delhi: Poverty and Environment in an Urban Informal Sector 3-4 (2003) at 22). See CGAP website, supra note 3 (Ownership structures: MFIs can be government-owned, like the rural credit cooperatives in China; member-owned, like the credit unions in West Africa; socially minded shareholders, like many transformed NGOs in Latin America; and profit-maximizing shareholders, like the microfinance banks in Eastern Europe. The types of services offered are limited by what is allowed by the legal structure of the provider: non-regulated institutions are not generally allowed to provide savings or insurance).

5 See Banking the Underserved: New Opportunities for Commercial Banks, Financial Sector Team, Policy Division of CGAP for detailed analysis of bank MFI programs in Haiti, Peru, Sri Lanka, Uganda, Mongolia and South Africa, CGAP website, supra note 3. See also Mayada M. Baydas, Douglas H. Graham and Lisa Valenzuela, Commercial Banks in Microfinance: New Actors in the Microfinance World , available at http://www.uncdf.org/mfdl/readings/CommBanks.pdf (chart on p. 8 lists banks in Africa, Asia and Latin America involved in Microfinance, and report analyzes success of Those who receive the money are in many countries, 9 and a high percentage of them are female. 10

each institution and contributing factors ). See generally European Investment Bank website at http://www.eib.org/ for information on microfinance in Europe (European Investment Bank is the lending bank of the European Union. The EIB was founded in 1958 in the Treaty of Rome and undertakes microfinance initiatives in Europe).

6 Stetson University (Deland, Florida) created a Center for Holistic Microcredit Initiatives (CHOMI) and granted a small amount of money ($2500) to villagers in Manio Village in Kilimanjaro, Tanzania. These funds were used to underwrite a credit association and loans given to villagers, who invested in farming of local crops. For more information, visit Stetson University website at https://www.stetson.edu/secure/programs/articles/view.php?type=oldstories&id=208.

7 The United States government has invested in microfinance through USAID. See http://thehague.usembassy.gov/mrs._arnall_microfinance/ for speech delivered by Dawn Arnell, wife of US Ambassador to the Netherlands in 2006 (noting that USAID is the leading donor for microfinance and that USAID initiatives reach 3.85 million entrepreneurs.) See also USAID website at http://www.usaid.gov/policy/budget/cbj2007/si/microfinance.html for details on USAID programs as of 2007 (noting that USAID takes a bilateral approach to lending and estimating that over 6 million low-income people throughout the developing world have access to microfinance as a result of USAID programs). Queen Noor of Jordan has been a very active advocate for microfinance. She chairs the Noor Al-Hussein Foundation, which funds microfinance initiatives in Jordan through the Jordan Micro Credit Company http://www.nooralhusseinfoundation.org/index.php?pager=end&task=view&type=content&pageid=80.

8 Madsen, supra note 4, footnote 221 citing to Yoko Myashita, Microfinance and Poverty Alleviation: Lessons from Indonesia’s Village Banking System , 10 PAC . RIM L. & POL ’Y J. 147, 162-163 (2000)) on U.N. involvement; and at footnote 222, citing to Mayra Buvinic et al., Overseas Development Counsel, Investing in Women: Progress and Prospects for the World Bank 51 (1996) on involvement of international development agencies and the Asian Development Bank. See also Grameen Bank website at http://www.grameen- info.org/index.php?option=com_content&task=view&id=42&Itemid=92&limit=1&limitstart=7 (stating that “since its creation in 1966, the United Nations Capital Development Fund (UNCP) has been the channel for UNDP to fund microfinance interventions. It has so far approved more than US$ 100 million of investment credit activities, the majority being microfinance related…At the present time, UNCDF has an active microfinance portfolio of about $40 million, of which 70 percent is in Africa, 20 percent in Asia and 10 percent in Latin America.”).

9 Different groups have attempted to quantify how many MFI borrowers there are. See CGAP website, supra note 3, Global Estimates, for statistics comparing CGAP (estimating 152 million borrowers in 2004), World Savings Bank Institute (estimating 190 million in 2005), and The Microcredit Summit (estimating 133 million in 2007). Differences in estimates may be the result of differences in methodology (if a group is borrowing, is every member of the group counted or just those who sign the paperwork on behalf of the group), the types of institutions being included, and may also reflect the difficulty in tracking these numbers given the immense number of MFI borrowers. There are examples of MFI initiatives on every continent.

10 See Susy Cheston & Lisa Kuhn, Empowering Women Through Microfinance ( Draft ) stating that “According to the State of the Microcredit Summit Campaign 2001 Report, 14.2 million of the world’s poorest women now have access to financial services through specialized microfinance institutions (MFIs), banks, NGOs, and other nonbank financial institutions. These women account for nearly 74 percent of the Before addressing how many MFIs there are or how MFI works, it is important to clarify what MFI goals are.

First, and perhaps foremost, microfinance has been lauded as a means to address poverty. 11 Poverty is a huge issue globally. The World Bank’s latest estimates show that 1.5 billion people were living in poverty in 2005. 12 This 2005 statistic defines poverty as living on less than $1.25 per day. 13 Microfinance is viewed as a very powerful approach to addressing worldwide poverty. 14 The United

Nations declared 2005 the International Year of Microcredit 15 and then Secretary

General Kofi Annan noted that access to microfinance “helps alleviate poverty by generating income, creating jobs, allowing children to go to school, enabling families to obtain health care, and empowering people to make choices that best serve their needs.” 16

19.3 million of the world’s poorest people now being served by microfinance institutions.” Publication sponsored by UNIFEM and available at http://www.microcreditsummit.org/papers/empowering_final.doc

11 See Yunus, supra note 2, at p. 19 (noting that “there are almost as many definitions of poverty as there are individuals and groups studying the problem. A recent World Bank study mentions thirty-three different poverty lines developed and used by particular countries in addressing the needs of their own poor people” and noting the “widely used poverty benchmark of an income equivalent to one dollar a day or less”).

12 Source: Fact Sheet: End Poverty by 2015, UN Millennium Goals, UN Headquarters, September 25, 2008, available at http://www.un.org/millenniumgoals/2008highlevel/newsroom.shtml. This World Bank Fact Sheet Report also notes that the recent increases in the price of food is expected to affect another 100 million people, pushing them also into poverty, and identifies microfinance as first one its list of “things that have worked” to address poverty. The report states “microfinance has helped many of the world’s poor to increase their incomes through self-employment and empowerment.”

13 Id.

14 Id. Also noting that in 2006, microfinance institutions provided loans to 113 million clients worldwide and highlighting the work of three groups in particular: (1) Grameen Bank of Bangladesh, which started with 10 members in 1976 and now has 7.5 million borrowers, with over 65% having lifted themselves out of extreme poverty; (2) ACCION International in Latin America, and (3) Self- Employed Women’s Association (SEWA) Bank in India .

15 Lisa Avery, Microcredit Extension in the Wake of Conflict: Rebuilding the Lives and Livelihoods of Women and Children Affected by War , 12 GEO . J. POVERTY LAW & POL ’Y 205, 224 (Summer, 2005).

Poverty has a particularly profound effect on women. “Women earn only ten percent of the entire world’s income despite making up over fifty percent of the world’s population, and they own less than 10% of the world’s property”. 17 It is common in several parts of the developing world for women to be responsible for providing food and water for their families. MFIs have specifically focused on women, 18 and the majority of those receiving microfinance loans are female. 19

It is difficult to give definitive numbers of how many people receive MFI assistance. 20 However, CGAP (Consultative Group to Assist the Poor) estimates that there are currently 133 million clients, 93 million of which qualify as the “poorest” on the planet 21 . Almost 90 percent of these are funded by 67 institutions (only 2% of the

16 Jay Lee, Note: Equity and Innovation: Using Traditional Islamic Banking Models to Reinvigorate Microlending in Urban America , 16 IND . INT ’L & COMP . L. REV . 523 (2006) (discussion of equity lending under traditional Islamic banking practices and how such lending might be applied in an urban context in the United States, and at footnote 6 referencing the General Assembly Greenlights Programme for International Year of Microcredit 2005: Observance will Promote Access to Financial Services and Empowerment of Poor, Especially Women, M2 Presswire, Dec. 31, 2003).

17 Rachel Errett Figura, An End to Poverty through Microlending: An Examination of the Need for Credit by Poor, Rural Women and the Success of Microlending Programs , 8 NEW ENG . INT ’L & COMP . L. ANN . 157 (2002) at p. 159, and footnote 26, citing Yoko Miyashita, Microfinance and Poverty Alleviation: Lessons from Indonesia’s Village Banking System , 10 PAC .R IM L. & POL ’Y 147, 157 (2000) – who in turn is citing Microcredit Summit Report, The Microcredit Summit, Declaration and Plan of Action, Feb. 2-4, 1997 at http://www.microcreditsummit.org/declaration.htm.

18 Microfinance agencies have provided access to credit and savings options to more than 3 million women small borrowers in developing countries. See Madsen, supra note 4, citing to Buvinic.

19 Figura, supra note 17, at 168 (“on average, sixty-four percent of MFI clients are women”) citing Jaffer at 186.

20 As noted, supra note 9, there are very pragmatic difficulties in giving definitive numbers. First, there are several different programs with different terms (microcredit vs. microfinance). Second, there are difficulties in getting reports on specific numbers of recipients from all the programs. Third, there are very few groups with the resources to devote to tracking down reports from recipients and donors.

21 CGAP website, supra note 3 . MFIs). 22 CGAP notes, however, that there is a more important message to take from

these statistics.

The worldwide number of poor people that have access to credit is nowhere near the market potential. Given that almost 3 billion people live on less than two dollars a day, clearly the battle to bring financial access to as many people as possible is a very long way from being won. 23

This underscores both the critical need for programs addressing poverty, and the

possible potential for MFI.

Microfinance has also been advanced as an excellent way to involve women

in the global economy, with a particular focus in women in developing countries who

have traditionally been limited in their access to and participation in economic

markets.

Finally, microfinance has been advocated as a financially sound investment

that allows a financial, government or other institution to lend money to a new group

of customers. There is a very high payback rate in MFI programs, with Grameen

Bank quoting 98%. 24 This is extremely impressive, and much higher than the usual

loan repayment rate. 25

22 Id.

23 Id.

24 Muhammad Yunus, How Legal Steps can Help to Pave the Way to Ending Poverty, ABA HUMAN RIGHTS MAGAZINE (Winter 2008, Vol. 35 No. 1).

25 The best comparison for loan repayment on microfinance loans is the loan repayment for small business loans. For statistics on U.S. small business loan repayment , See Robert De Young, Dennis Glennon & Peter Nigro, Borrower-Lender Distance, Credit Scoring, and the Performance of Small Business Loans, FDIC Center for Financial Research (Working Paper No. 2006-04) (March 2006) (this paper reports on a study by the FDIC involving 29,577 loans made by US commercial banks between 1984 and 2001. Table 1 includes the default rate on loans, with default rate on small business loans ranging from 4.85% to 26.59%, with a mean average default rate of 15.22%). Available at http://www.fdic.gov/bank/analytical/cfr/2006/wp2006/CFRWP_2006_04_DeYoungGlennonNigro.pdf These three goals of poverty alleviation, empowerment of women, and

financial profitability, are often cited as jointly achievable by MFIs, particularly by

Grameen Bank, one of the largest and most prominent MFIs. These goals are

different, however, and at times may result in different measurements of success. 26

The differences in the three goals also become significant when human rights

considerations are taken into effect.

One aspect of microfinance programs is particularly important to note. MFIs

loan money to poor people who do not have any collateral so MFIS do not require the

standard “material” collateral. Instead, most MFIs require some form of what has

been termed “social collateral”. This will be discussed in detail in the subsequent

discussion of Grameen Bank.

The Grameen Bank Example

Grameen Bank offers an excellent example of the interplay of MFIs three

goals, particularly the concept of social collateral. A study of Grameen also

demonstrates the actual workings of an MFI that has been in operation since 1974 27 and was one of the earliest MFIs. 28 Its founder, Muhammad Yusuf, was recently recognized with the Nobel Peace Prize and has written best-selling books about the

26 For a fuller discussion of possible conflicts between financial and social development goals, see Todd Arena, Social Corporate Governance and the Problem of Mission Drift in Socially-Oriented Microfinance Institutions , 41 COLUM . J.L. & SOC . PROBS . 269 (Spring, 2008).

27 MUHAMMAD YUNUS , BANKER TO THE POOR : MICROLENDING AND THE BATTLE AGAINST WORLD POVERTY (1999); YUNUS , supra note 2. See also Grameen Bank website at http://www.grameen-info.org/

28 While Muhammad Yunus is often credited as having created microfinance ( see Figura article, supra note 17 at 166, stating microcredit was “created in 1976 by Muhammad Yunus”) and the story of his first loan to a Bangladeshi woman working on a stool is frequently told, the Self Employed Women’s Association (“SEWA”) predated Yunus’s first loan and Grameen Bank. SEWA was started in 1971 in India and is acknowledged as a continuing major force in MFI. See Avery article, supra note 15, particularly p. 219- 220; See also Rekha Mehra, The Role of NGO’s: Charity and Empowerment: Women, Empowerment, and Economic Development , 554 ANNALS 136 (November, 1997) for a general discussion of SEWA in India. Bank and his vision of microfinance. 29 Partners and investors include the Gates

Foundation. 30 Grameen Bank has also been much studied and written about, and other programs have attempted to model themselves on the Grameen Bank approach.

There are some key elements of the Grameen Bank approach that are found in most MFIs. Jameel Jaffer in his article on Microfinance 31 suggests the following elements are common to most MFIs:

(1) small loans are provided (generally of a few hundred dollars or so) to

borrowers without conventional collateral;

(2) the term of the loans is short (usually less than two years);

(3) the MFI normally requires that the loan proceeds be used for investment in

productive capital like equipment (processing industries, agriculture),

materials (crafts, production) or livestock (dairy farming), rather than in

consumption; and

(4) interest rates are usually somewhat higher than those charged by formal

sector banks, but are less than those charged by alternate sources: local

moneylenders or loan sharks. 32

The above four factors differentiate Grameen Bank and other MFIs from formal sector banks that are not willing, suited, or capable of being lending agents to the very

29 Supra note 26.

30 In August 2006, the Gates Foundation gave a $1.5 million grant to Grameen. This loan is a 3 year, unrestricted grant to support Grameen Foundation’s strategic mission to reach five million additional new families. Press release available at http://www.gatesfoundation.org/press-releases/Pages/grameen- microfinancing-five-year-plan-060829.aspx

31 Jameel Jaffer, Microfinance and the Mechanics of Solidarity Lending: Improving Access to Credit Through Innovations in Contract Structure , 9 J. TRANSNAT ’L L. & POL ’Y 183-184.

32 Figura, supra note 17, at 164, citing Jaffer. poor, particularly to very poor women in rural developing countries. Because MFIs focus on poor people, MFIs have developed substitute guarantees for traditional collateral. These include social collateral approaches like peer-lending, and can also include character references, group-based joint liability schemes, and compulsory savings requirements. 33

Grameen means “village” in Bangla 34 , which is fitting, given the program’s focus on the grassroots villages and population of Bangladesh and Grameen Bank’s targeting of poor women as borrowers. 35

Under the Grameen Bank’s MFI, women form five-member groups in their community or village. 36 Group members choose fellow members and are jointly responsible if anyone defaults on a loan. 37 This group responsibility and liability is what constitutes “social collateral.” Only two of the five group members receive the original loans, and until these are paid off, the other members cannot receive their loans. The implications of this will be discussed more fully in Part II of the paper in the discussion of human rights implications, but even a cursory consideration reveals some potential concerns with this approach.

33 Id. citing Yoko Miyashita, Lessons from Indonesia’s Village Banking System , 10 Pac. Rim L. & Pol'y 147 (Dec. 2000).

34 Id. at footnote 131, citing David Bornstein, The Price of a Dream 43 (1996 Bornstein at 20.

35 Id . citing Bornstein, at p. 140.

36 Id.

37 Id. citing Jaffer at 198. Grameen Bank counts on the group members to ensure their borrower makes

loan payments, and initially the Bank was very strict about payments. 38 Both proponents and critics acknowledge that the peer-pressure exerted by the group on the borrower is often shame-based. 39 The combined pressure from peers and loan officers can be intense, and studies have documented some early tragedies, including one woman who killed herself. 40 In response to its early experiences, Grameen Bank made some important adjustments to its program in 2002, replacing its original program (Grameen Bank Basic or “GBB”) with a more forgiving version of the program (Grameen Bank II or “GBS”). 41 Grameen Bank II allows the borrower to

slow down loan payments during difficult times so that instead of being “in default”

of payments, the borrower can opt to pay a higher interest rate for a short period of

time, in order to stay in the program and still meet her obligations. 42 This allows the

Bank to ease up the pressure it exerts on the borrower. But the Bank can’t regulate how the other group members exert their pressure, or whatever additional pressures group members are exposed to at home.

38 See generally Rashmi Dyal-Chanda, Article: Reflection in a Distant Mirror: Why the West has Misperceived the Grameen Bank’s Vision of Microcredit , 41 STAN . J. INT ’L L. 217 (Summer, 2005) for a critical analysis of Grameen Bank, particularly referencing early studies of Grameen Bank by Aminur Rahman and David Bornstein. See also infra , note 40, on Bank’s new “revamped” system (Grameen II).

39 Id. at 263 referencing several studies that report that women are easier to control than male borrowers, and quoting bank workers as saying that women are “shy”, “submissive” and “immobile”, and at 297.

40 Id ., referencing Rahman’s article reporting on the Grameen Bank (“Rahman tells of a defaulting female borrower who was looked by bank workers inside a bank building as punishment…because the woman faced shame, social ostracism, and violence, she hanged herself inside the bank building”).

41 YUNUS , supra note 2, p.60-66.

42 Id.

In her article on the Grameen Bank, 43 Rashmi Dyal-Chanda observes that

the greatest opportunity for mischief results from the combination of a formal loan document (in which the female borrower is solely liable to the microlender), the informal solidarity circle (in which female borrowers are subject to social pressures), and whatever unregulated additional social pressures the female borrowers are subjected to at home (including confiscation of loan funds by family members). 44

These social pressures will be discussed in depth in the discussion of women’s rights

and microfinance in Part II.

The Grameen Bank MFI includes in its long-term objectives “reduction of

poverty, family size, and under and unemployment.” 45 To further these objectives, all

borrowers must agree to the Sixteen Decisions, 46 which were developed by a group of

borrowers, and must be recited at every weekly loan payment meeting between the

borrower and her loan officer. 47

Grameen has impressive results. As of October 31, 2008, Grameen Bank had

dispersed $7,427 million and had collected $6,630.29 million since inception. 48 As of

October 31, 2008, Grameen has 1,204,723 groups and 140,539 centers, and 661,945

houses have been built with loaned monies. 49 Grameen’s program requires borrowers

43 See generally Dyal-Chanda, supra note 38.

44 Id. at p. 286.

45 Figura, supra note 17, footnote 149, citing Shelley Feldman, The Role of NGO’s: Charity and Empowerment: NGOS and Civil Society: (Un)stated Contradictions , 554 ANNALS 46, 57 (1997).

46 For a complete list of the Sixteen Decisions, see Part II, infra.

47 Dyal-Chanda, supra note 38.

48 Available at Grameen Bank website at http://www.grameen- info.org/index.php?option=com_content&task=view&id=453&Itemid=527 (last visited on November 19, 2008).

49 Id . to save a certain amount of their earnings, which are invested in the Bank, and the

Bank offers borrowers microlending insurance programs. This insurance program provides a sense of relief for borrowers and also represents another opportunity for the Bank to make money.

Grameen Bank started with a goal to be self-sustaining, and its initial program was criticized by some for being too harsh, while others defended the Bank as behaving the way any financial institution would. 50 In the original program, there were no excuses for missed or late payments. This changed when Grameen

Generalized System [Grameen II] was implemented between April and August of

2002. 51 Along with the option to go to a slower payment schedule in return for higher interest fees, Grameen II also includes pension plans, self-guaranteed loan insurance, and a community star system. 52 Here is what Muhammad Yunus said about Grameen

II:

The central assumption underlying GGS [the new program] remains the same as it was behind GCS [the classic program] – the firm belief that the poor people always pay back their loans…There is no reason for a credit institution dedicated to provide financial services to the poor to get uptight because a borrower could not pay back the entire amount of a loan on a date fixed at the beginning…We see no reason why the sky should fall on anybody’s head because a borrower took longer time to pay back her loan. Since she is paying additional interest for the extra time, where is the problem?…This is a goal of Grameen…to not fall into the logical trap of the conventional banking and

50 Figura, supra note 17 (stating that the Bank had to be strict in order to ensure repayment and points out that people agreed to this going in.) But note also, that Grameen Bank has modified this with Grameen II.

51 Grameen website, supra note 26. See article entitled Lessons Learned Over a Quarter of a Century by Muhammad Yunus.

52 Lee, supra note 16 at 529.

start looking at their borrowers as some kind of “time- bombs” who are ticking away and waiting to create big trouble on pre-fixed dates…one can benefit enormously by having trust in them, admiring their struggle for and commitment to have decent lives for themselves. 53

Muhammad Yunus also highlights repeatedly the social advancements in Bangladesh that he and the Grameen Bank attribute to their program. 54 The Sixteen Decisions definitely focus on social changes, and the group meetings are also used to give out educational information on birth control, and clean practices for waste and water. 55

“A number of studies have concluded that, as a result of the Bank’s involvement, borrowers have been more likely than the general population to use birth control, to be more articulate, and at least be aware of the positive effects of the directives.” 56

All the accolades and honors aside, Grameen Bank is not without critics.

Criticisms of Grameen Bank and Microfinance

Grameen Bank introduced Grameen Bank II in 2002 to address some early criticism of the program, namely that the Bank was too rigid around payments. But there remain fundamental questions regarding whether Grameen Bank, and other

MFIs can honor two of their primary goals at the same time: combining market principles and financial responsibility with poverty alleviation. 57

53 Yunus, supra note 50.

54 YUNUS, supra note 2, p.p. 103-109 detailing improved social conditions in Bangladesh.

55 Figura, supra note 17 at p. 175 and footnote 177.

56 Dyal-Chanda , supra note 38 at 258, and footnotes 192, 193 and 194.

57 For further discussion of the conceptual relationship between market principles and poverty alleviation, see Kenneth Anderson, Microcredit: Fulfilling or Belying the Universalist Morality of Globalizing Markets? 5 YALE H.R. & DEV . L.J. 85, 86-87 (2002) (Positing that there is a fundamental ambivalence There are several other potential issues as well. There are criticisms of how

well MFIs address poverty alleviation. It is up to members to select their own group

members, and often the poorest members of the community are excluded. 58 A field

study in Malawi of a group-lending MFI revealed that certain women were being

systematically excluded from groups: namely, women living with HIV or AIDS. 59

There was a very practical reason for this. Since the MFI was set up so that no

member could leave the group, most women did not want to include a woman with

HIV or AIDS in the group because they believed she could die and jeopardize their

existing loan and access to future loans. 60 Chi Mgbako, Jeanmarie Feinrich, and

Tracy E. Higgins, authors of the article describing this study, recommend that lending

groups adapt their programs to ensure equal access for all members of the

community. They suggest that special groups could be formed for women living with

HIV/AIDS, and that relaxed standards should be introduce to make it easier for these

women to participate as members of groups. 61 This highlights a general criticism of

both Grameen Bank and other MFIs, namely that these programs don’t reach the

poorest of the poor. 62

about globalizing markets which is reflected in attitudes towards microcredit as well., particularly visible in microcredit's own highly ambivalent application of markets and market principles in international development work with the world's poor).

58 Dyal-Chanda, supra note 38, at 254 and footnote 171, Bornstein citing Helen Todd’s report, Women at the Center, Grameen Bank Borrowers After One Decade 23 (1996).

59 See generally Chi Mgbako, Jeanmarie Feinrich and Tracy E. Higgins, Women, Children, and Victims of Massive Crimes: Legal Developments in Africa: Special Report: We Will Still Live: Confronting Stigma and Discrimination Against Women Living With HIV/AIDS in Malawi , 31 FORDHAM INT ’L L.J. 528 (January, 2008).

60 Id.

61 Id.

As noted earlier, another criticism of MFIs is that some studies show that men

in the household take control of their wives’ loan money. 63 Some programs,

including Grameen, require borrowers to set up savings accounts in their own names,

which may ensure borrowers still have some control of funds. 64 But the involvement of other family members (husbands, in-laws) in confiscating a borrower’s funds raises important women’s rights concerns as well.

Additional criticisms of Grameen Bank and other MFIs will be discussed in

Part II in the analysis on human rights implications, notably from the perspective of the indigenous perspective, and in terms of women’s rights. Scholar Dyal-Chanda, in particular, suggests that the Grameen Bank model has been misperceived by

Westerners, in their zeal to apply it to situations in the United States, and her in-depth critique of Grameen Bank 65 is discussed in detail in Part II.

Probably the most damning criticism that has been leveled against MFIs relates to whether these programs have any impact on poverty reduction. In 1997, a report to the Secretary General of the United Nations said that resources being spent on MFIs could be put to better use in helping rid the world of poverty, and implied that microcredit was squandering aid. 66 This report was commissioned by the U.N.

62 See Figura, supra note 17, at 175 and footnote 180 citing White at 332. The criticism that MFI programs do not always reached the poorest people is also made about other programs designed to help the poor. See also Kristen David Adams, Do We Need A Right to Housing? (forthcoming 2009) (on file with author) for a discussion of federal housing programs in the United States, noting Rachel G. Bratt’s observation that “the primary purposes of federal housing programs have been to create jobs and respond to the needs of what Bratt calls the “submerged middle class.””, citing to Rachel G. Bratt’s A Right to Housing Redux , J. HOUSING & COMMUNITY DEV ., Nov./Dec. 2004, at 6, 8.

63 Id. at 176 and footnote 187, citing White at 332-333.

64 Id.

65 Dyal-Chanda, supra note 38.

Department of Economic and Social Affairs, and the response reflected the positions

of governments from the developing world. 67 Some suggested that the governments

were uneasy with the implications of MFIs, and the potential for activating the

grassroots population. 68 Regardless of the motivations for the specific criticisms, the

U.N. report clearly indicates that microfinance is not universally adored.

Whatever criticisms one can launch at MFIs on a general or conceptual basis,

Grameen Bank can clearly point to the practical impact their program has had on

Bangladesh. In her article examining the success of microlending, 69 Rachel Errett

Figura points out that, when Muhammad Yunus formed Grameen, Bangladesh was so

poor it was known as the Fifth World and labeled an “international basketcase.” 70

Figura notes “2 million people (poorest of the poor) have been served by Grameen

Bank and [the] repayment rate is comparable to that of Chase Manhattan Bank” 71 .

She also notes that “borrowers have increased their income one-third over other

Bangladeshi poor, forty percent of borrowers consume the recommended daily caloric

requirements, fifty-eight percent of borrowers have surpassed the extreme poverty

line.” 72 Figura concludes, “It is unclear how this could be viewed as unsuccessful.” 73

66 Figura, supra note 17, at 178 and footnote 199 (Report to Secretary General of the United Nations).

67 Id.

68 Id . at 179 and footnote 210 citing Craig Turner, “UN Report Slams Loan Plans for Poor; Finance: ‘Microcredit’ Programs to Encourage Entrepreneurship in Developing Countries are Overrates, Study Says”, L.A. TIMES , Sept. 2, 1998 at A4.

69 Figura , supra note 17.

70 Id . at footnote 214, citing Borstein at p.22.

71 Figura supra note 17 at 180 and footnote 220, quoting Bornstein at 19-20.

72 Id ., at footnote 224.

Grameen Bank is probably the most visible of the MFIs but there are several others, including Accion International, FINCA, 74 and the Women’s World Bank. 75

Clearly, each of these groups has several individual clients who have set up and are running businesses.

Still, MFIs should face tough scrutiny. There is a great deal of money being expended on these programs, and they are not the only potential approach that can be taken to address MFIs generally stated goals: to alleviate poverty, empower women, and advance social change. 76 How well MFIs meet these goals, and how they do so should be examined. This Article next considers the human rights implications of

MFIs.

PART II: Human Rights Implications of Microfinance Initiatives

There are several different human rights lenses through which MFIs can be analyzed. This Article will look at economic rights, women’s rights and indigenous rights, as well as noting the special tension of indigenous and women’s rights that results from customary law, and the special circumstances that surround women in times of war.

A. Microfinance and Economic Rights

73 Id . at 180.

74 FINCA (Foundation for International Community Assistance) is the microenterprise peer-lending group funded by USAID. See Avery, supra note 15 at 222 (noting that FINCA opened its first program in Costa Rica in 1985 and delivered services to 200 borrowers within one year; and in 2002, FINCA disbursed $136 million to 227, 388 clients in 20 countries in Africa, Asia, and North and South America).

75 See Lee, supra note 16 at 524 and footnote 13, describing Women’s World Bank as a non-profit lending association that has expanded into fifty nations in Africa, Asia, Latin and North America since its founding in 1979. See also WWB website at http://www.swwb.org/

76 In Part III, other approaches are explored including ROSCAS (Rotating Self Credit Associations), women’s cooperatives, and social enterprise approaches. The Universal Declaration of Human Rights contains two covenants and sets of rights: the “traditional” civil and political rights, as well as economic, social and cultural rights. 77 The United Nations adopted two separate International Covenants, one to deal with civil and political rights (“ICCPR”) 78 and the other to deal with economic, social and cultural rights (“ICESCR”). 79 The ICESCR enshrines for each person “the right to work, which includes the right of everyone to the opportunity to gain his living by work he freely chooses or accepts.” 80

These two types of rights have been characterized as quite distinct, with civil and political rights described as “negative rights” and economic, social and cultural rights being described as “positive rights”. 81 The term “negative rights” refers to a right that it is assumed one has but that is asserted when threatened. 82 For example, the right to free speech is asserted when some body tries to take away or “negativize” someone’s expression of speech. Positive rights, in contrast, reference a right that

77 HENRY STEINER , PHILIP ASTON & RYAN GOODMAN , INTERNATIONAL HUMAN RIGHTS IN CONTEXT (Oxford University Press, 2008), p. 263.

78 ICCPR, entered into force March 23, 1976, available at http://www.unhchr.ch/html/menu3/b/a_ccpr.htm

79 ICESCR, New York 16 December 1966, available at http://www.ohchr.org/english/countries/ratification/3.htm

80 Id. Article 6, p.1.

81 STEINER , ASTON & GOODMAN , supra note 77 at p. 317, excerpt by Cass R. Sunstein, Against Positive Rights, 2/1 EAST EUR . CONSTIT ’AL REV . 35 (1993) (arguing that positive rights should not be included in constitutions because they are non-justiciable).

82 See Adams, supra note 62, for a comprehensive discussion of “positive” and “negative” rights, also characterized in legal jurisprudence as “rights” and “liberties”, noting that “One way of framing the argument regarding the appropriateness of redistributive rights is as a conflict between “rights” on the one hand and “liberties” on the other. In this conception, as recognized by H.L.A. Hart and others, “rights” are positive entitlements to something, while “liberties” are freedom from something, including the freedom from having some of one’s money taken to support another person’s entitlements. An alternative way of describing “rights” and liberties” is as “positive rights” and “negative rights,” respectively.” Adams also notes Dworkin’s analysis which states the perceived tension between rights and liberties is a false conflict, and that society perceives liberty for advantaged groups and equality for disadvantaged groups. must be manifested by some sort of “positive” action. For example, if there is a right to housing, no one starts with a house that someone is trying to take away, so some sort of positive action would be required to manifest a person’s right to a house. 83

There is little debate about the universal right to negative rights but positive rights are more controversial. Some scholars argue that a true right must be enforceable and measurable, and question whether positive rights are truly enforceable. 84 Other scholars have focused on how positive rights could be enforced, and have proposed approaches to do so. 85 Still others focus their efforts on articulating economic, social and cultural rights as equally important to civil and political rights, whether these rights are enforceable or not. 86

83 Id. for comprehensive discussion on rights related to housing.

84 Id. SUNSTEIN at p. 283 and article by Aryeh Neier, Social and Economic Rights: A Critique , 13/2 HUM . RTS . BRIEF (2006) (arguing that economic and social rights should only be legislated where the right can be measured (i.e. each child’s right to a free primary school education vs. broader claims for shelter, housing or other economic resources)).

85 See Albie Sachs, Social and Economic Rights: Can They Be Made Justicable? 53 SMU L. REV . 1381 (2000); See also Katherine Young, Article: The Minimum Core of Economic and Social Rights: A Concept in Search of Content, 33 YALE J. INT ’L L. 113 (Winter, 2008); see also Ubong E. Effeh, Sub-Saharan Africa: A Case Study on How Not to Realize Economic, Social and Cultural Rights, and a Proposal for Change , 3 NW. U. J. INT ’L HUM . RTS 2, 79 (2005) (suggesting a mechanism designed to address violations of the International Covenant on Economic, Social and Cultural Rights in Africa); see also Mark. S. Kende, The South African Constitutional Court’s Embrace of Socio-Economic Rights: A Comparative Perspective , 6 CHAP . L. REV . 137 (2003); Danwood Mzikenge Chirwa, Toward Revitalizing Economic, Social, and Cultural Rights in Africa: Social and Economic Rights Action Center and the Center for Economic and Social Rights v. Nigeria , 10 HUM .RTS . BR. 14 (2002).

86 See Deborah K. Dunn and Gary Chartier, Recent Development: Pursuing the Millennium Goals at the Grassroots: Selecting Development Projects Serving Rural Women in Sub-Saharan Africa , 15 UCLA Women’s L.J. 71, 74 (Fall, 2006). See also Amnesty International USA website for information on AI’s seven year global campaign beginning in 2008 to highlight economic, social and cultural rights (quoting AI’s Secretary General Irene Khan, “I wouldn’t like to think that we used to work on civil and political rights, we’re going to stop working on them now, and we’re going to shift to working on economic, social and cultural rights. That’s not the idea at all…We will try to bring those rights together by looking at how people suffer human rights abuses, and show that human rights are actually inivisible whole…I hope that Amnesty International will in the future stand not only for prisoners of conscience, but also for prisoners of violence, for prisoners of illiteracy, for prisoners of poverty”. Available at http://www.amnestyusa.org/get- activist-toolkit/about-amnesty/economic-social-and-cultural-rights/page.do?id=1101300. Debates about enforceability and justiciability aside, poverty is increasingly in

the spotlight and the concept of economic rights is increasingly referenced.

UNESCO has launched a programme “emphasizing that freedom from poverty is a

human right, a global imperative, and a top priority for governments and the

international community”. 87 Esther Ocloo, founder of Women’s World Banking, says

“credit for women is our right and we must fight for it.” 88

On November 19, 2008, the Third Committee of the UN General Assembly

adopted by consensus the Optional Protocol ICESCR, which was proposed by the

Third Committee of the U.N. 89 Fifty-two member states have so far co-sponsored the

resolution, which will receive final adoption by the General Assembly in plenary

session on December 10th. 90 The addition of the Optional Protocol to the ICESCR

underscores the belief of United Nations members that the rights embodied in the

ICESCR, including economic rights, are important.

Freedom from poverty is still by no means a universally agreed upon human

right. Nor is it clear what part microfinance initiatives would play in addressing this

right, even if an economic right to be free from poverty was acknowledged as a

universal human right, given the earlier controversy from developing nations as to

whether MFIs effectively address poverty. 91 MFI programs might be more properly

87 STEINER , ASTON AND GOODMAN , supra note 77 at 308.

88 Lee, supra note 16, footnote 14.

89 Amnesty International Website, http://www.amnesty.org/en/news-and-updates/good-news/un-adopts- key-economic-social-and-cultural-rights-instrument-20081119

90 Id .

91 See supra note 65 (noting study presented to UN questioning effectiveness of microfinance initiatives). characterized as addressing some sort of “right to credit,” which isn’t specified in any of the international covenants but might be implied in the provisions of the ICESCR

“right of everyone to the opportunity to gain his living” (emphasis provided). 92

The recent crises in the world economies have led many to note that we are in the midst of a huge change in the global economy. In the US, stats…. 93 As more people lose their jobs and homes, poverty will become more prevalent, and this will increase the focus on and advocacy for “economic rights.”

B. Microfinance and Indigenous Rights

One of the most comprehensive critiques of the Grameen Bank in particular has been undertaken by legal scholar Rashmi Dyal-Chanda. 94 Dyal-Chanda says that many in the Western world applaud the Grameen Bank for its apparent

“indigenousness” 95 but that the microfinance model the Grameen Bank utilizes is largely a reflection of Western values ― a “dubious hybridity that fails to incorporate the true values of the target population”. 96

Dyal-Chanda focuses on three key aspects of the Grameen Bank model in her critique: (1) the solidarity circle device; (2) the Sixteen Decisions; and (3) the use of women as lending targets. 97 Of these three, two are common to several MFIs and one

92 ICESCR, Article 6, p.1.

93 See Hunger and Homelessness Increase in American Cities: A Report by the U.S. Conference of Mayors 2008 (December 14, 2008) available at http://www.citymayors.com/features/uscity_poverty.html (This report reveals that on average, cities reported a 12 percent increase in homelessness from 2007 to 2008, with 12 cities (63%) reporting an increase in homelessness because of the foreclosure crisis).

94 Dyal-Chanda, supra note 38.

95 Id. at 221.

96 Id .

is distinct to the Grameen Bank. As previously noted, the solidarity circle is a form

of social collateral, and has been used by other MFIs. Similarly, the Grameen Bank’s

focus on female customers is common to most MFIs. The Sixteen Decisions Doctrine

is exclusive to the Grameen Bank.

1. Criticisms of the Solidarity Circle, The Sixteen Decisions and the Targeting of

Women

Dyal-Chanda is not alone in noting that the solidarity circle produces a benefit

for the Bank. By effectively leaving it up to the borrowers in the circle to determine

whether each individual borrower is a good credit risk, 98 the Bank reduces its overall

transaction costs in both pre-loan credit check approvals, and in ongoing enforcement

of loan payments.

Dyal-Chanda observes that the approach seems attractive to many because it

appears to replicate a very popular indigenous leading device: RCAs (“rotating credit

associations”), also known as ROSCAS (“rotating savings and credit associations”). 99

But Dyal-Chanda distinguishes indigenous programs like RCAS and ROSCAS from

the Grameen approach, because RCAs and ROSCAS are cooperative self-help

networks within the community, unlike the Grameen Bank’s institutional approach. 100

97 Id . at 222, footnote 25 commenting that she is downplaying other aspects that have led to the Bank’s overall success and focuses exclusively on these three aspects.

98 Id at 225 and in footnote 39, citing Mohammad A. Auwal & Arvind Singhal, The Diffusion of Grameen Bank in Bangladesh: Lessons Learned About Alleviating Rural Poverty , 14 Knowledge: Creation, Diffusion, Utilization 7, 16 (1992).

99 Id . at 226 and footnote 43, citing Cao, supra note 5; Thierry van Bastelaer, Imperfect Information, Social Capital and the Poor’s Access to Credit 6-8 (Center for Institutional Reform and the Informal Sector Working Paper 234, 2000) (commenting that these indigenous lending approaches distribute funds either randomly, by auction, or by collective decision).

100 RCAs and ROSCAS are indigenous. For a more in-depth discussion of these approaches, SEE SHIRLEY ARDENER & SANDRA BURMAN , MONEY -GO-ROUNDS : THE IMPORTANCE OF ROTATING SAVINGS AND Dyal-Chanda also believes that the Grameen Bank’s solidarity cycle and

entrepreneurial model play into Western perceptions that have largely influenced the

Community Economic Development (CED) Movement. 101 She notes that Westerners like the “entrepreneurial model,” and says that “the possibility that individuals, no matter how poor, can succeed by ‘going it alone’ is a potent one in a culture where rugged individualism is closely associated with the pursuit of the American dream.” 102 Dyal-Chanda questions how microcredit can truly be indigenous in a culture with a high number of Islamic women, when Islamic legal codes forbid the giving of credit in return for interest and cultural Islamic notions about purdah forbid women from working outside the home. 103

Dyal-Chanda sees a similar Western value bias in the Sixteen Decisions. She notes that they include the “Protestant ethic,” political participation, and formality. 104

The Sixteen Decisions were developed by a group of initial recipients of Grameen loans, 105 but Dyal-Chanda questions whether they have meaning for the women borrowers who are required to recite the list of decisions weekly, every time they make a loan payment.

CREDIT ASSOCIATIONS FOR WOMEN (1995); see also Rosemary Coombe, The Cultural Life of Things: Anthropological Approaches to Law and Society in Conditions of Globalization , 10 AM. U.J. INT ’L L & POL ’Y 791 (1995).

101 Id. at 231-232 and note 66, citing a number of quotes from prominent Americans linking business ownership with the “American dream”.

102 Id.

103 Id . at 296 and footnotes 381 and 382. But see Lee, supra note 16 (for a discussion of the possibility of having microlenders assume part of the loan risk through trustee financing).

104 Id. at 233.

105 Id at 292-293 and footnote 370.

Dyal-Chanda also questions whether the targeting of women for these

programs reflects the social agenda of the Bank or the true wishes of the women. 106

She states that implicit in all MFI programs is the assumption that women want to

start their own microenterprises. Some Bangladeshi women have expressed the view

that it is not their place to handle money, and this thinking has been characterized by

the Grameen Bank as patriarchal, sexist and oppressive. 107 Dyal-Chanda notes that the solidarity circle looks like “a laboratory for cultivating social and even political organization, creating community bonds, and seeking to democratize, where such tendencies may have previously been latent or even nonexistent.” 108

Finally, Dyal-Chanda accuses western thinkers of narcissism: “by failing to ask real questions about core values, the Western development community succeeds in seeing a reflection if itself.” 109

Much of the criticism seems to stem from the Sixteen Decisions, and it is worth studying these in detail to get a better understanding.

2. The Sixteen Decisions

The Grameen Bank’s social change goal is very evident in the Sixteen

Decisions. The inclusion of non-business-related behavior requirements in the

context of a business arrangement is questioned by Dyal-Chanda, who notes this

approach is inconsistent with general rule-of-law principles. She contrasts the non-

business-related requirements with the usual approach to loans, which require clear

106 Id . at 291.

107 Id .

108 Id. at 298.

109 Id. at 295. and unambiguous contracts with specific conditions and considerations. 110 The

human rights implications of behavior-based requirements will be explored further in

the subsequent section on the implications for women’s human rights, but even

setting those concerns aside and assuming that the Decisions can be reconciled with a

borrower’s human rights, a review of the Decisions themselves reveals some other

concerns from an organizational behavior perspective. 111 These concerns may explain why U.S. microlenders that have adopted other aspects of the Grameen Bank model have not included conditions like the Sixteen Decisions in their loan transactions, but have instead opted for training programs. 112

Organizational behavior theory utilizes concepts from the behavioral and social sciences as a basis for understanding human behavior within organizations. There is obvious value for any organization to have a clear mission statement 113 and set of guiding principles 114 that everyone in the organization understands and commits to support. Generally, organizations have a broad mission statement which is supported by a set of guiding principles. The organizational mission and guiding principles remain consistent, and are then translated into more detailed organizational objectives, which result in policies, which in turn guide the organization’s specific

110 Id. at 281-286.

111 Organization behavior theory involves applying psychology and sociology principles to behavior in organizations. See generally, JOHN MINER , ORGANIZATION BEHAVIOR FOUNDATIONS THEORIES AND ANALYSES (Oxford University Press, 2002).

112 Dyal-Chanda, supra note 38 at 283 and footnote 319.

113 Miner, supra note 111. See also Jon Rose, Key Features of Organizational Development, Professional Development and Improved Productivity (2006) available at http://www.drugnet.bizland.com/Practice/orgdev.rtf

114 Id. procedures and rules. This hierarchy of going from a general mission statement to specific concrete rules and procedures is an important one, in part because the mission statement provides the organizational consistency, but also because the larger mission statement and guiding principles provide the underlying reasons for the actual procedures and rules. This makes it easier for individuals in the organization to understand the mission and principles, and it also ensures that the organization can change and adapt its day to day objectives and processes while continuing to adhere to its greater mission. If at any time during the organization’s life span, a rule or procedure is at odds with the organization’s broader mission, people in the organization can question the specific rule or procedure, and adjust so the rule or procedure better meets the mission. This allows the mission statements and guiding principles to remain largely unchanged, while shorter-term objectives, goals, procedures and rules are adjusted to changing needs.

A close examination of the Sixteen Decisions reveals that they combine mission, guiding principles, objectives, goals, procedures and rules in the same document, and in no specific order. The Sixteen Decisions 115 are as follows:

1. We shall follow and advance the four principles of Grameen Bank – Discipline,

Unity, Courage and Hard work – in all walks of our lives.

2. Prosperity we shall bring to our families.

3. We shall not live in dilapidated houses. We shall repair our houses and work

towards constructing new houses at the earliest.

4. We shall grow vegetables all the year round. We shall eat plenty of them and sell

the surplus.

115 YUNUS , supra note 26, at p. 135-137. 5. During the plantation seasons, we shall plant as many seedlings as possible.

6. We shall plan to keep our families small. We shall minimize our expenditures.

We shall look after our health.

7. We shall educate our children and ensure that they can earn to pay for their

education.

8. We shall always keep our children and the environment clean.

9. We shall build and use pit-latrines.

10. We shall drink water from tubewells. If it is not available, we shall boil water or

use alum.

11. We shall not take any dowry at ours sons’ weddings, neither shall we give any

dowry at our daughters [sic] weddings. We shall keep our centre free from the

curse of dowry. We shall not practice child marriage.

12. We shall not inflict any injustice on anyone, neither shall we allow anyone to do

so.

13. We shall collectively undertake bigger investments for higher incomes.

14. We shall always be ready to help each other. If anyone is in difficulty, we shall all

help him or her.

15. If we come to know of any breach of discipline in any centre, we shall go there

and help restore discipline.

16. We shall take part in all social activities collectively.

Clearly, this list is comprised of both guiding principles and rule-based actions.

Some of the “decisions” are very much aspirational and aren’t easily measurable ― for example, the commitments to bring prosperity (#2) or not inflict injustice (#12) ― while others are very specific and easily measurable ― to grow vegetables year-

round (#4), and to build and use pit-latrines (#9).

The point here is not to comment on the actual content of the Sixteen

Decisions, but rather to note that guiding principles and rules have been merged. The

Grameen Bank considers the Sixteen Decisions a key to their success in effecting

social change in Bangladesh, and borrowers are required to recite the Decisions

regularly. The merging of guiding principles and action items is slightly awkward in

terms of organizational behavior theory. Repeating a guiding principle or aspirational

value could be compared to reciting the Oath of Allegiance, but repeatedly reciting an

action item like building a pit-latrine is different. Either the pit-latrine has been built

or it hasn’t. Reciting a commitment to build one loses meaning once the pit latrine is

built, and renders the commitment ineffectual if the pit latrine has not yet been built.

Also, simply reciting a list of commitments may not be the best way to ensure

the commitments are met. It might be more useful for both the Bank and the

borrowers to focus on how the borrowers are working with the Sixteen Decisions, and

how the Bank might better assist them in doing so.

A cautionary note is always sounded as well within an organization when a

guiding principle or rule is ignored, and the organization does nothing to address the

inconsistency. This lack of congruency between stated principle and actual practice

is referred to as “cognitive dissonance”, 116 and it undermines an organization’s

116 “Cognitive dissonance is a psychological phenomenon first identified by Leon Festinger. It occurs when there is a discrepancy between what a person believes, knows and values, and persuasive information that calls these into question. The discrepancy causes psychological discomfort, and the mind adjusts to reduce the discrepancy. In ethics, cognitive dissonance is important in its ability to alter values, such as when an admired celebrity embraces behavior that his or her admirers deplore. Their dissonance will often integrity because the organization’s expressed values are at odds with its practices.

Some studies have suggested that Decision # 11, related to dowry, is often ignored by

borrowers. 117 If that is true, it raises concerns because this particular Decision is stated very specifically in clearly measurable terms: one either takes or pays dowry, or doesn’t. If the borrowers are ignoring this decision and the members of the organization (loan officers and executives) are aware of this and don’t address it, this represents a classic case of “cognitive dissonance”.

The above observations do not diminish the impact the Sixteen Decisions have had on Grameen Bank borrowers, nor in anyway undermine the social changes attributed, in part, to the use of the Decisions. There is another more subtle way in which the Sixteen Decisions may have contributed to the social change agenda, and advancement of women in Bangladesh. In a community or family where a female borrower faces resistance to changes she is trying to make, whether the resistance comes from her husband, family or village, she can use the Sixteen Decisions as a defense for her actions. Since she is required to adhere to the Sixteen Decisions in order to keep her loan, the female borrower can argue that she is just following the rules, even as she pioneers in advocating for her own reproductive choices, control of her own income, and education for her children.

3. Indigenous Rights and Customary Law

Before turning to women’s human rights issues, it is important to take special

note of the special tensions between customary law in several indigenous cultures and

result in changing their attitudes toward the behavior.” Source for definition: http://www.ethicsscoreboard.com/rb_definitions.html

117 Dyal-Chanda, supra note 38 at 259 and footnote 197. women’s human rights. 118 The tensions between customary law, which often limits a woman’s property ownership rights, choice of marriage partner, rights within marriage, and right to earn income, and international human rights law, which recognizes women’s rights, 119 is complex and has been addressed by several scholars and law review articles. 120 Shana Hofstetter focuses on this tension specifically in relationship to microfinance in her article entitled The Interaction of Customary Law and Microfinance,121 in which she analyzes the effect of customary law and cultural

118 For full discussion of tensions of customary tribal law and women’s human rights, see author’s paper, Addressing the Tension of Laws in Legal Pluralism: Women’s Rights in Africa , exploring the interaction of customary tribal, law established by colonizers, and international human rights laws. Available from author.

119 CEDAW, Convention to Eliminate Discrimination Against Women. 185 countries have ratified CEDAW (over 90% of the members of the United Nations). For information on CEDAW, see http://www.un.org/womenwatch/daw/cedaw/states.htm).

120 See Tamar Ezer, Kate Kerr, Kara Major, Aparna Polavarapu & Tina Tolentino, Report: Child Marriage and Guardianship in Tanzania: Robbing Girls of Their Childhood and Infantalizing Women , 7 GEO . J. GENDER & L. 357, 360 (2006); Brenda Oppermann, The Impact of Legal Pluralism on Women's Status: An Examination of Marriage Laws in Egypt, South Africa, and the United States , 17 HASTINGS WOMEN 'S L.J. 65, 80-81 (Winter 2006); Penelope E. Andrews, Symposium: Violence Against Women in South Africa: The Role of Culture and The Limitations of the Law, 3 MICH . J. RACE & L. 307, 320 (Spring 1998); See also Valerie Bennett, Ginger Faulk, Anna Kovina and Tajana Eres, Inheritance Law in Uganda: the Plight of Widows and Children , 7 GEO . J. GENDER & L. 451 (2006) (analyzing women’s lack of inheritance rights in Uganda; Celestine I. Nyamu, How Should Human Rights and Development Respond to Cultural Legitimization of Gender Hierarchy in Developing Countries? 41 HARV . INT ’L L.J. 381, 406-407 (Spring, 2000); Jessica Neuwirth, Inequality Before the Law: Holding States Accountable for Sex Discriminatory Laws Under the Convention on the Elimination of All Forms of Discrimination Against Women and Through the Beijing Platform for Action , 18 HARV . HUM . RTS . J 19 (Spring, 2005) (referencing wife obedience still in effect in Algeria, Mali, Sudan and Yemen at 19,23; and restricted property rights in Lesotho, right to work controlled by husband in Cameroon, and women prohibited from working at night in Madagascar at 19, 24. Also noting that the assault of a wife is not an offense in Penal Code of Northern Nigeria if inflicted “by a husband for the purpose of correcting his wife, “so long as it” does not amount to the infliction of grievous hurt.”); Katherine M. Weaver, Women’s Rights and Shari’a Law: A Workable Reality? An Examination of Possible International Human Rights Approaches Through the Continuing Reform of the Pakistani Hudood Ordinance , 17 DUKE J. COMP . & INT ’L L. 483 (Spring, 2007) (for discussion of changing rights of women in Pakistan under Sharia law); Johanna E. Bond, Women, Children, and Victims of Massive Crimes: Legal Developments in Africa: Article: Constitutional Exclusion and Gender In Commonwealth Africa , 31 FORDHAM INT ’L L. J. 289 (January, 2008); Sarah Crutcher, Stoning Single Nigerian Mothers for Adultery: Applying Feminist Theory to an Analysis of Gender Discrimination in International Law, 15 HASTINGS WOMEN ’S L.J. 239 (Summer, 2004) (for analysis of case in Nigeria of Amina Lawal Kurami, sentenced to being stoned to death due to pregnancy, referencing Sharia law in Nigeria, Nigeria’s ratification of CEDAW, and the international outrage at the Sharia Court’s decision).

norms on microfinance programs in the Dominican Republic, Morocco and

Bangladesh.

Hofstetter notes that customary law and traditional norms can hinder the goals

of microfinance. 122 Customary law is defined as “law consisting of customs that are

accepted as legal requirements or obligatory rules of conduct; practices and beliefs

that are so vital and intrinsic a part of a social and economic system that they are

treated as if they were laws.” 123 Hofstetter explores in detail the impact customary

law and norms have on women’s microfinance initiatives in Morocco, 124 the

Dominican Republic, 125 and in Bangladesh (with focus on Grameen Bank). 126 She

notes the ways in which certain principles in Shariah law limit women in business.

Under the principle of Ta’ah, or obedience, a wife requires permission to leave her

home, and she cannot be away from home for more than one night at a time. 127 Both

of these rules limit a woman’s ability to run a business effectively, and limit her

access to suppliers and customers. 128 Another traditional Shariah concept, the idea of

“ird,” refers to the honor or moral purity of a group. A woman may limit her actions

121 Shana Hofstetter, Note: The Interaction of Customary Law and Microfinance: Women’s Entry into the World Economy, 14 Wm. & Mary J. of Women & L. 337 (Winter, 2008).

122 Id . at 342.

123 Id . at 341 (referencing Black’s Law Dictionary 413 (8th ed. 2004).

124 Id . at 342-345 (for a full discussion of the impact Islamic Shariah law has on Moroccan women borrowers).

125 Id. at 346-348 (for the impact the cultural norm of ‘machismo’ has on women borrowers in the Dominican Republic).

126 Id . at 353-359 (for detailed analysis of Grameen Bank as a model for using customary law as a catalyst for social change).

127 Id . at 344.

128 Id . out of concern for how she is impacting the “ird” of her husband and extended family. 129 Traditional Shariah concepts have led to women focusing on businesses associated with traditional gender roles like embroidery or sewing, or trading in small goods, resulting in smaller businesses and very high rates of competition among women’s micro-enterprises. 130

In the Dominican Republic, the constraints are cultural in nature. Here, the issues are not with the formal law but rather with the cultural norm of “machismo” which allows men to have children outside their marriages, and places a heavy burden on women to provide for their children’s emotional and financial needs.131 Again,

Hofstetter notes that this cultural norm results in women choosing smaller businesses that can be located in their homes or neighborhoods, and also lessens the amount of time a woman can devote to her business. 132

Hofstetter sees the Grameen Bank as utilizing women’s customary group norms in the use of social capital 133 in a positive way. She notes that the peer group approach utilizes women’s traditional emphasis on social networks; noting that women in Kenya responded to the group pressure aspect of social collateral more than men did; 134 and that a study in Zimbabwe showed that women were more willing

129 Id . at 345.

130 Id. referencing Inez Murray & Nadira Barkalli, Women’s World Banking, Gender Baseline Survey: Morocco (1) (2005).

131 Id . at 346-347.

132 Id . at 347-348.

133 Id. at 348-351.

134 Id . at 351.

to sanction other members, and that female sanctions in groups were more effective

than male sanctions in groups. 135

It is helpful to keep in mind the impact customary law has on women while

considering women’s human rights relative to microfinance, since MFIs often focus

on poor women in developing countries where customary law is far more common.

C. Microfinance and Women’s Human Rights

Microfinance borrowers worldwide are predominantly women. 136 This is a

very deliberate choice on the part of those who design MFIs, and is an extension of an

earlier development trend, dating back to the 1970’s, when international development

agencies began to view women as an untapped resource in the developing world. 137

Katherine Spengler describes this as a “complex progressive movement involving

issues of poverty, development, empowerment, and social change.” 138 International institutions and The Women in Development (WID) movement focused on the notion that women, if properly developed, would lead to the advancement in developmental policies for the third world. 139

135 Id. at 351.

136 Grameen Bank estimates that 97% of their borrowers are female but the same difficulties in calculating the number of microfinance loans present in ascertaining specific numbers. See at http://www.grameen- info.org

137 See Katherine Spengler, Note & Comment: Expansion of Third World Women’s Empowerment: The Emergence of Sustainable Development and the Evolution of International Economic Strategy , 12 COLO . J. INT ’L ENVTL . L. & POL ’Y 303 (Summer 2001) (historical perspective on economic development strategy).

138 Id. and referencing The World Resources Institute, World Resources: A Guide to the Global Environment 1994-95, 44 (1994)

139 Spengler, supra note 137, and in footnote 25, referencing Barbara ROGERS , THE DOMESTICATION OF WOMEN : DISCRIMINATION IN DEVELOPING SOCIETIES 9-10 (St. Martin’s Press 1980); at 306-307 and footnote 27, referencing Ester Boserup, whose book (WOMEN ’S ROLE IN ECONOMIC DEVELOPMENT (St Martin’s Press, 1970)) and work are largely credited with fostering WID (the goal being to allow women to transition into economic sectors, whether as agricultural workers or as industrial hands). See also , Mehra, supra note 28, commenting on Boserup’s studies. But Spengler says that the assumptions made by the international aid

community in the 1970’s were detrimental to both the goals of micro-finance

programs and to the women involved in the programs for several reasons. 140 First, the international aid community underestimated exactly how responsible the women were for the economic well-being of their families. 141 Aid groups assumed that women’s need for income was temporary and supplemental, rather than understanding the critical role women played in a family’s economic survival. Second, international aid groups failed to treat women’s economic aid as a comprehensive issue that needed to be implemented into existing national development programs. 142 Finally, income generation and production projects rarely took traditional and customary discrimination into account, including women’s continued entrenchment in the informal community. 143

As a result of these faulty assumptions, early development programs focused

on using women in small, traditionally based businesses, and focused more on

welfare goals, rather than development. Spengler notes that this changed in the

1980’s when the international community identified that “developing countries and

the majority of women inhabitants were starving, stricken, and worse off than before

these programs were implemented.” 144 This led to a new developmental path of

140 Id . at 317.

141 Id . and citing Mehra, supra 28 at 141.

142 Id.

143 Id. footnote 113, citing INSTRAW (UN International Resource and Training Institute for the Advancement of Women), Credit for Women 15 at 19-20, U.N. Doc INSTRAW Ser. B/51, U.N. Sales No. E.96.III.C.2 (1995) (observing that initial programs pursued welfare goals rather than development goals).

“sustainable development”, which focused on development that had to sustain human

progress for the entire planet. 145 This was fully articulated in 1992 at the UNCED in

Rio de Janeiro. 146 Agenda 21 at the Rio Conference noted the critical role for women

to play and the need to empower women. 147 Microfinance and microcredit programs

were, and continue to be, largely embraced as consistent with this new development

agenda.

There are some general observations that have been made about development

programs and women’s rights and lives. Mayra Buvinic coined the phrase “project

misbehavior” 148 for past development programs that pursued welfare goals rather than

development goals. 149 Subsequent development and feminist scholars continue to

caution that MFI programs need to pay attention to their own systemic biases. An

example of a systemic bias would be a program that focuses more on traditional skill

sets associated with women’s traditional roles (home skills like sewing, knitting,

crafts) rather than on skills that are more economically profitable, like farming,

trading or providing services.

144 Id. at 325-326 and referencing Martha Alter Chen, Introduction to Seeds 2: Supporting Women’s Work Around the World (Ann Leonard ed., 1995).

145 Id. (defining sustainable development as a way to protect natural resources while at the same time allowing for the increased production of necessities in order to meet the needs of a growing population, and in footnote 200 cites to World Resources Institute, World Resources: A Guide to Global Environment 1992-93, 2 (1992)).

146 Id. at 328.

147 U.N. BLUE BOOK SERIES VOL . VI, THE UNITED NATIONS AND ADVANCEMENT OF WOMEN 1945-1995 at 54-55, U.N. Doc. ST/DPI/1679 (1995).

148 Mehra , supra note 28, citing Buvinic.

149 Id. footnote 11.

MFIs are not the sole approach used to stimulate women in development, but it

is a high profile and growing area, and the same concerns raised by feminists about

the types of jobs women engage in, relate also to MFI. Rehka Mehra says women’s

roles as mothers and wives have dominated development thinking. 150 This is not

unique to development thinking but also permeates other approaches to women in the

workplace in developed nations and their multiple roles as wives, mothers and

workers. 151 Nor are the balancing issues that face women unique to women who run

their own businesses in MFIs. Some concerns are common to all women who have

both family and work obligations, regardless of income level, size of family, type of

work, or community, but these concerns tend to amplify when the customary societal

norms previously discussed are involved.

Lucie E. White, writing in 1998, noted that legal feminists had tended to

ignore the systemic political and economic inequalities that gender entails,

“turning away from the question of law’s proper role in shifting ‘private-sector’ and

‘intra-household’ distributions of wealth and power” and instead focusing on “tactics

that women can use from within their highly constrained situations to enhance their

own well-being and power”. 152 White also raises several considerations regarding

MFIs and women’s human rights. She states that feminist advocates of microenterprise assistance need to think about how the businesses women are starting promote gender equity or women’s empowerment, particularly noting that, when

150 Id. at 142.

151 Id.

152 Lucie E. White, Article: Feminist Microenterprise: Vindicating the Rights of Women in the New Global Order? 50 Me.L.Rev.327 (1998).

women start businesses that must use “sweatshop strategies” to stay afloat, it does

neither. 153

White raises similar concerns to those previously cited in Dyal-Chanta’s

critique of Grameen Bank’s MFI program and Hofstetter’s analysis of customary law,

namely, that women can get stuck in low-skill, low-pay businesses with low profit

margins. 154 She also echoes concerns previously noted, that loan circles do not tend to reach the poorest women in rural villages, that powerful men in women’s household networks may control the use of loan funds, and that, “without earmarked funding, staffing and fiscal and ideological incentives, loan circles do not tend to engage in activities of mutual support, education, social or individual capacity building and the like.” 155 Finally, White notes that the pressure tactics used by some

women on others to repay their loans may not empower women but rather deepen

their enmeshment in traditional relationships of domination .156 (emphasis provided).

How MFIs treat women in terms of “traditional relationships of domination”

is a recurring theme amongst others who have studied MFI programs. Linda

Mayoux 157 noted that microfinance staff for some MFI programs openly stated that

153 Id.

154 Id . at 33 and citing in footnote 19 to Julie Korraine, Critique of the Cambridge Child Care Resource and Referral Network’s Child Care Enterprise Support Program (Child Care Action Campaign Issue Brief, 1996); also citing to Peter Pitigoff, Child Care Enterprise, Community Development, and Work , 81 GEO . L.J. 1758 (1993).

155 Id at 331-332 and footnote 16 citing to Jude L. Fernando, Nongovernmental Organizations, Micro- Credit and Empowerment of Women , 554 ANNALS AM. ACAD . POL . & SOC . SCI . 150 (Special Issue, The Role of NGO’s: Charity and Empowerment, Jude Fernando & Alan Heston eds., 1997) at 161-64.

156 Id. at 332.

157 Linda Mayoux, Women’s Empowerment and Participation in Micro-Finance: Evidence, Issues and Ways Forward , reprinted in Sustainable Learning for Women’s Empowerment: Ways Forward in Micro- the main motivation for targeting women is that they are perceived as more

conscientious and “docile.” 158 Dyal-Chanda cites studies done in the mid 1990’s that focused on several Grameen Bank practices that reinforced a hierarchy with bank workers at the top and borrowers at the bottom, and notes that Bank practices requiring borrowers to “chant slogans”, “perform physical exercises” and call their loan officers “sir” 159 ran counter to the goal of empowering female borrowers. It must be noted that several of these studies were done in the mid-1990’s, and it is very likely they reference outdated attitudes or practices. But the underlying concern remains valid: how MFIs operate can either encourage or restrain female empowerment.

White encourages feminists to critically examine MFIs from the perspective of both sociocultural and economic change:

If loan circles are promoted because such circles can stimulate wide processes of sociocultural change, then the resources for facilitating the circle’s educational, support, and consciousness- raising activities must be secured in order for the circle to work. If technical assistance for microenterprises is promoted because such businesses can enhance women’s power in a neighborhood’s political and economic structure, while revitalizing its social fabric, then the program must have access to a pool of women with a solid base of both vision and skills, and the neighborhood must be in a position to support the range of businesses that these women are likely to start. 160

Finance 2 (Linda Mayoux ed., 2003) and available online at http://www.microfinancegateway.org/content/article/detail/3765

158 Id.

159 Dyal-Chanda, supra note 38 at 258 and footnote 196, citing several reports that were conducted by Grameen Bank and previously available at the Grameen website, including David Bornstein, The Price of a Dream 19, 26 (1996); Alex Counts, Give Us Credit xiii (1996).

160 White, supra note 152 at 333.

MFIs are not the sole approach to development, and other approaches will be

discussed more fully in Part III. But as long as MFIs promote themselves as a

method of empowering women, the women’s rights concerns raised by these feminist

scholars should be addressed by each program.

This is true of all the human rights implications relative to economic,

indigenous and women’s human rights. The increased involvement of banks and

other financial institutions in MFI programs, as well as Grameen’s own continued

experience indicate that MFI programs can be financially profitable. As MFI

programs continue to work towards alleviating poverty and empowering women, it is

critical that they consider the implications their programs have in terms of advancing

economic, indigenous, and women’s human rights.

Women’s Rights in Times of War

There is one other special situation that needs to be addressed. Women and

children are particularly affected by war. 161 And yet even in the most dire of

situations where women are living in dire conditions in refugee camps, there are still

women who seek assistance to start a business. 162 In her article, Microcredit

Extension in the Wake of Conflict , Lisa Avery refers to refugees in the Kakuma camp on Kenya’s Sudan border who approached the IRC (International Rescue Committee) for funding to expand their small soap production venture. 163 The IRC responded by giving administrative support and monitoring assistance in addition to extending

161 Avery, supra note 15.

162 Id .

163 Id . at 236. credit under its Microcredit program. 164 With help from the IRC, the group was able

to produce a high quality product for the use of the entire camp population and hire an

additional forty men and women to operate their business. 165

Avery tells of Jane Murekeyisoni, a refugee from Rwanda who lost her

husband and home in the 1994 genocide. 166 Jane received a small loan from World

Relief, started a laundry business catering to local taxi drivers, and then went on to

expand her business to provide shoe repair service. 167 Avery also references

Grameen Bank’s microcredit work in Kosovo after the war. 168 Grameen Bank reached

1200 borrowers within its first year in Kosovo, with borrowers running businesses in dairy farming, food sales and sewing enterprises. 169

Microcredit programs in war-torn areas have direct application to addressing women’s human rights. It is often women who are left to support their households after wars. Abuse of refugees in humanitarian aid distribution sites has been well- documented. 170 The more self-reliant a woman can be, the safer she and her children will be.

164 Id. and footnotes 276 & 277 citing Karen Jacobsen, Livelihoods in Conflict: The Pursuit of Livelihoods by Refugees and the Impact on the Human Security of Host Communities , INT ’L MIGRATION , SPECIAL ISSUE 2 (vol. 40(5) at 16).

165 Id.

166 Id . at 217.

167 Id.

168 Id . at 218.

169 Id.

170 Id . and footnote 121, Women's Comm'n for Refugee Women and Children, Rights, Reconstruction and Enduring Peace: Afghan Women and Children After the Taliban (Dec. 31, 2001), at http://www.reliefweb.int/w/rwb.nsf/0/725d9c085ced542e85256b360056e43d?OpenDocument Summary of Human Rights Implications

Clearly, microfinance programs have an impact on human rights, and it is

important to consider how MFI programs affect the human rights of the people and

communities involved. Microfinance has great potential to empower people

economically and engage women in developing nations in the global economy in

ways they have never been involved before. But as MFI programs are developed,

introduced and administered, they will be greatly strengthened by considering the

human rights implications relative to economic, indigenous and women’s rights.

Part III: Microfinance Relative to Other Approaches

Microfinance focuses on an individual entrepreneur starting her own business.

Even though group-lending has been incorporated into several MFI programs, in MFI

programs, the group does not jointly conceive of a business and then jointly run it.

This differentiates MFI from more cooperative ventures.

Microfinance also focuses on fostering businesses pre-inception. Another

option would be to find businesses that are already in existence, preferably in the

early stages, and support them with funding so they can grow to full potential.

Still another approach would be to secure other rights for women, like a right

to own property. If a woman owned her own home or land, this would greatly reduce

the costs of running a business or growing farm crops, and could result in more

women running successful businesses. 171

171 Anthony Faiola , Women Rise in Rwanda , WASH . POST , May 16, 2008 available at http://www.washingtonpost.com/wp- dyn/content/article/2008/05/15/AR2008051504035.html?referrer=emailarticle Women’s Cooperatives

Women’s cooperatives have been initiated and run in several developing nations. Deborah Dunn and Gary Chartier 172 compared several grassroots projects

that were initiated in sub-Saharan Africa in an effort to isolate what factors led to

success, and note that these projects suggest the extension of human rights protections

to women (including protection of their property rights and provision of opportunities

to control their work lives) can be a vital means of ensuring social and economic

benefits accrue to entire communities. 173 They echo that “targeting and involving

rural women is critical to the overall plan for improving the lives of rural people in

sub-Saharan Africa.” 174

Women’s cooperatives involve setting communal goals and sharing the challenges and profits as a group. While Dunn and Chartier focused on grassroots projects in sub-

Saharan Africa that were initiated by international groups like Heifer Project

International (HPI), Catholic Relief Services, and the United Nations Development Fund for Women (UNIFEM) 175 as well as a local community-initiated project (the Ithuseng

Cooperative in South Africa), 176 their observations about what worked and what didn’t

are more widely applicable to cooperatives in general. Dunn and Chartier identify five

different factors for measuring success: (1) savings in time; (2) realistic opportunities for

172 Dunn and Chartier, supra note 84.

173 Id . at 73-74.

174 Id . at 92-93

175 Id . at 93.

176 Id. at 100-110. learning; (3) increased income levels; (4) empowerment of women, and (5) project

sustainability.

Dunn and Chartier note that the Ithuseng Cooperative can help “clarify ways in

which projects can most effectively foster human rights and achieve development

goals.” 177 The brick-making cooperative was located in the village where the women lived so there was no need to travel to get to work. The resources needed to make the bricks (sand and water) were readily available, and women could bring their babies to the cooperative and nurse them throughout the day. 178 There were realistic opportunities for

learning as well. Many of the women had previously worked at brickyards so they didn’t

have to master new techniques or technologies. However, the opportunity to manage the

business and run a bank account presented new growth, and literacy classes were

provided on site to strengthen the skills of those who couldn’t read. 179 The women

earned money but didn’t have to make a substantial capital investment, and as co-owners,

all women shared in the cooperative’s profits. The women used the profits to build two

daycare centers in the village, and most participants indicated their standard of living

improved after participating in the project. 180 The project has potential to be completely

self-sustaining, as well. 181

177 Id. at 100.

178 Id.

179 Id. at 101.

180 Id .

181 Id .

This is not to suggest the project was without challenges. Problems included

difficulties within the group – most of the participating women didn’t know each other

before meeting. There were also production complications when a drought occurred.

During the months when profits were low, the Community Health Center (sponsoring

organization) had to subsidize the cooperative. Dunn and Chartier also note that when

the cooperative was profitable, the participants asserted their ownership of the project;

however, when it was less profitable, they claimed they were merely employees of the

cooperative and not responsible for its problems. 182

Another example of a very exciting women’s cooperative involves the Amal

Oil Cooperative in Morocco. This project is the brainstorm of Zoubida Charrouf, a

professor from the Faculty of Sciences at Rabat. A report on the program, written in

2006, details the work that Charrouf has done with the “argan” or “Moroccan

ironwood tree, a tree that grows only in Morocco. 183 While it has decreased greatly, with more than a third of the argan forest disappearing in the last century, it is still the second most important forest species in Morocco. 184 The argan is an oil-producer, and women have traditionally relied on both the oil and the wood. Charrouf focused her research efforts to conserve the argan tree by involving the community in putting the tree’s products to economic use. She worked with destitute and illiterate women

182 Id. at 102.

183 From an online article entitled “Amal as in Hope”, which was available at www.idrc.ca/en/ev-5416-201- 1-DO_TOPIC.html online (copy retained by author, on file, October 2008) (This article was written by Narjis Rerhaye, a Moroccan journalist, and highlighted the work of Dr. Charrouf in pioneering the extraction of oils with local women working in a cooperative. Note: this article is no longer available and may have been withdrawn because argan tree oils are now being sold and distributed in the United States under Argan Oils, available at http://www.arganoils.com/. News/research section references the work of Dr. Charrouf).

184 Id. who have traditionally depended on the argan tree, using its wood as fuel, its leaves

and seeds as feed for goats, and the tree’s oil, which is reputed to have almost magical

qualities, for medicinal and beautifying purposes. Extracting the oil is difficult and

time-consuming, so Dr. Charrouf formed a cooperative to mechanize the process, and

she involved local destitute and illiterate women, most of them widowed or divorced,

to run it. 185 As of 2006, the Amal 186 oil cooperative, in Tamanar, 70 kilometres south

of Essaouira, employed nearly 50 women on a full-time basis, and another 100 part-

time, and had the distinction of being the first female-run argan oil cooperative in

Morocco. 187 The Canadian government’s International Development Research

Center (IDRC) and the Canadian International Development Agency (CIDA) helped

by providing funding. 188 The words of the women themselves document what this

has meant to them. “My life has really changed. It used to be that I could never leave

my house. Today I am earning an income and can send my children to school.” “We

want to earn respect and show we can take care of ourselves. We don’t want to

depend on anyone.” “Men used to forbid their wives to work here. Now they come

and ask for jobs for their wives.” 189

I In searching for more current knowledge on the Amal cooperative, it was

apparent that Argan oils are now being sold internationally, and the website

185 Id .

186 Id . “Amal” means hope in Arabic.

187 Id .

188 Id.

189 Id . references Dr. Charrouf’s research. 190 The Amal Cooperative is another example of a women’s cooperative that was initiated on a grassroots level, and was funded by development money.

Supporting Women Entrepreneurs in Ways Other than Microfinance

Another way to support women who have started businesses is by helping them gain greater access to global markets. Terry Dworkin and Cindy Schipani 191 discuss technology mentoring programs used to help female entrepreneurs, notably by

UNIFEM (United Nations) 192 , whose International Membership Committee and program “Bridging the Gender Digital Divide Through Strategic Partnerships” has helped expand the success of Rwandan entrepreneurs who employ Rwandan female artisans, and promoted international sales. 193 Since 2005, Macy’s has been selling products such as peace baskets, Christmas ornaments, and women’s satchels, all made by Rwandan women. 194 For the Rwandan artisans and entrepreneurs, access to

190 Available at: http://www.arganoils.com/

191 Terry M. Dworkin and Cindy A. Schipani, Linking Gender Equity to Peaceful Societies , 44 AM. BUS . L.J. 391 (Summer 2007)

192 Id . at 406. See also http://www.wougnet.org/Documents/UNIFEM/EmpowerRwandaWomen.html for a full discussion of the program, and all the groups involved in this project, go to http://www.wougnet.org/Documents/UNIFEM/EmpowerRwandaWomen.html noting (“An International Business Mentoring Committee is being set up to support innovative initiatives linking women’s associations with foreign markets and investors. An example is a partnership between KIST, RITA, RwandaTel, the Ministry of Gender and the Ministry of Communications, to scale up through ICTs the activities of AVEGA, the association of widows of the genocide. AVEGA is already acting as focal point for many Rwandan women producers of local crafts, some of which have been sold on the international market through intermediary organizations”, and referencing http://www.bpeace.com/projprog_rwanda.php).

193 Id .

194 Dworkin and Schipan I, supra 191at footnote 78, citing Keiko Morris, Macy's Sells Rwandan "Peace Baskets," KNIGHT RIDDER TRIB. BUS. NEWS, Mar. 15, 2006, at 1. See also Macy’s website at (last visited November 23, 2008) to get information on the Rwandan artisan items being sold through Macy’s. Macy’s customer base greatly expands the market for their products, and Macy’s

benefits as well, by offering high quality goods at reasonable prices to its

customers. 195

Strengthening Women’s Property Rights

Yet another approach that could have a tremendous impact on women’s rights

would be to increase women’s property rights. Juliette Ayisi Agyei 196 notes the

tremendous impact changes in property ownership had on women in Ghana. This has

been a particular goal of the DWM (December Women’s Movement), a national

woman’s movement, founded in 1982 by the wife of the head of state, Nana Konadu

Agyeman Rawlings. 197 In 1985, the DWM forced the government into enacting a set

of new laws covering customary marriage and divorce, administration of estates, and

intestate succession. 198 Agyei says, “More than anything else, these laws have been

instrumental in assuring Ghanian women equal treatment under the law.” 199

In 2005, the Commission on the Legal Empowerment of the Poor (LEP) was

created under the auspices of the United Nations Development Program, with a

195 It would be of interest to know who buys these products from Macy’s, and whether the idea of supporting women in the developing world is a factor in their decision making. I was unable to find any data on this but if Macy’s customers value purchasing actions that support women in the developing world, Macy’s may gain from their promotion of these products in reputation terms by being perceived as “socially conscious”. This could attract new customers, or attract a different market segment, resulting in more sales and profits for Macy’s.

196 Juliette Ayisi Agyei, Note: African Women: Championing Their Own Development an Empowerment- Case Study, Ghana , 21 WOMEN ’S RIGHTS L. REP . 117 (Spring, 2000).

197 Id . at 126.

198 Id . at 127.

199 Id . and at footnote 167, citing KEVIN SHILLINGTON , GHANA AND THE RAWLINGS FACTOR , 155-56 (1992).

mission “built on the conviction that poverty can only be eradicated if governments

give all citizens, especially the poor, a legitimate stake in the economy by extending

access to property rights and other legal protections to populations and areas not

currently covered by the rule of law.” 200 Karol Boudreaux explores how changes in

titling have worked in South Africa, concluding that major institutional reforms are

needed to use property to empower the poor. 201 Rwanda provides an interesting

example of a country where property has transferred to women as a result of a

humanitarian crisis. 202 In Maraba, a southern village in Rwanda, several women

found themselves in charge of family-owned coffee plantations after all their male

relatives died in the 1994 Rwandan genocide. 203 Women who inherited property

showed more willingness than men to embrace new techniques aimed at improving

quality and profit, resulting in female farmers outdoing their male counterparts,

numbering about half of all farmers in the village’s cooperative and producing 90

percent of its finest quality beans for export. 204 A recent article in the Washington

Post quoted Rwandan officials as stating that women invested more profits in the

family, renovated homes, improved nutrition, increased savings rates, and spent more

200 Karol C. Boudreaux, Article: The Legal Empowerment of the Poor: Titling and Poverty Alleviation in Post-Apartheid South Africa , 5 HASTINGS RACE & POVERTY L.J. 309 (Summer, 2008); see also http://www.undp.org/legalempowerment/faq/

201 Id .

202 Faiola, supra 170.

203 Id.

204 Id. on children’s education. 205 Agnes Matilda Kalibata, minister of state in charge of agriculture, stated

Rwanda’s economy has risen up from the genocide and prospered greatly on the backs of our women. Bringing women out of the homes and fields has been essential to our rebuilding. In that process, Rwanda has changed forever…We are becoming a nation that understands that there are huge financial benefits to equality. 206

While the conditions that have led to this change in Rwanda were tragic, the impact on the women in the country has been very positive. Legal reforms were passed in 1999, enabling women to inherit property, and women began rising to higher levels of political power, and now hold about 48% of the seats in

Rwanda’s parliament. 207 Rwandan women own about 41% of businesses, compared to 18% in Congo. Rwanda also has the second-highest ratio of female entrepreneurs in Africa, behind Ghana with 44 percent. 208

Clearly property ownership can play a major role in improving women’s economic empowerment. Laws that allow women to inherit and own property can work in conjunction with other practices that allow women to work outside the home, own their own businesses, and support women’s access to global markets.

205 Id.

206 Id.

207 Id .

208 Id. quoting the World Bank.

Social Enterprise

It is beyond the scope of this article to study social enterprise approaches in detail but this approach also offers some promising potential for both alleviating poverty and empowerment of women within their societies. Social enterprise describes any non-profit, for-profit or hybrid corporate form that utilizes market-based strategies to advance a social mission. 209 Social enterprise approaches are an extension of sustainable development theory, dedicated to developing a social sector of the economy by applying business strategies to generate social value.210 This can be a relatively small venture, like a Goodwill

Thrift store, or can be much larger in context, like hospitals or public education

institutions that introduce a profit-earning portion of their business in order to

help support their operation and reduce their dependency on grant monies. 211

Some sample projects that have been advanced under a social enterprise program

called NESsT (Nonprofit Enterprise and Self-Sustainability Team) 212 include the

following: a home-delivery organic food service by Open Garden Foundation in

Gondollo, Hungary, that finances its sustainable agriculture and education

programs; Betlam in Czech Republic operates a construction company as a means

of supporting its work with the severely mentally and physically disabled. 213 It

would be interesting to take a social enterprise approach to a village or

209 Social Enterprise Alliance website at http://www.se-alliance.org/.

210 Id.

211 Id .

212 NESsT website at http://www.nesst.org/.

213 See http://www.nesst.org/documents/NESsTUniqueandUniversalpaperMay2003.pdf.

community, and see how this approach could work to support and sustain the

community’s needs. 214 Conceivably all members of the community, both men and women, could be involved in profiting in a social enterprise approach.

Conclusion

Clearly, there are several different approaches to addressing poverty by

supporting women’s economic initiatives, whether through MFIs, women’s

cooperatives, increased property rights or social enterprise programs. All offer

different approaches, and there may be advantages to offering more than one

approach.

Some women will want to be entrepreneurs, and MFI will meet their needs

perfectly. Other women may prefer to work as part of a collective project and

prefer women’s cooperatives. There may be villages or communities that want to

take on a social enterprise program, and involve both men and women in the same

project. Depending on what business is most profitable in the area, increased

property rights for women may be the critical variable that makes a difference

between women being able to effectively enter the workforce or not.

In understanding what approaches work best and why, it is critical to pay

careful attention to the human rights implications of the various programs, in both

their design and their application. Consideration of economic, indigenous and

women’s human rights can only strengthen any program aimed at addressing

global poverty.

214 The author had conversations with Sherry Sacino, who has studied social enterprise. Ms. Sacino referenced ongoing discussions of business investors on a plan to work with villages in Africa to build resorts that would allow employment opportunities for locals but would use the profits to support child care centers, schools, and hospitals.

In his article musing on whether the Microcredit programs fulfill or bely the universal morality of globalizing markets, 215 Kenneth Anderson ends “on a note of ambivalence” with a poem by David Whyte. 216 This article ends with the same poem but with a sense of hope, that MFI has and can make a difference in people’s lives, and that in this time of “loaves and fishes”, MFI can be “one good word” that helps multiply both loaves and fishes for all.

Loaves and Fishes

This is not the age of information.

This is not the age of information.

Forget the news, and the radio, and the blurred screen.

This is the time of loaves and fishes.

People are hungry, and one good word is bread for a thousand.

- David Whyte

215 Kenneth Anderson, Microcredit: Fulfilling or Belying the Universalist Morality of Globalizing Markets? 5 YALE H.R. & DEV . L.J. 85 (2002)

216 Id . at 122, poem by David Whyte, from THE HOUSE OF BELONGING , in Alan Rugman, The End of Globalization 1 (2000) at 88.

Microfinance Needs Regulation By Aneel Karnani

Stanford Social Innovation Review Winter 2011

Copyright  2011 by Leland Stanford Jr. University All Rights Reserved

Stanford Social Innovation Review Email: [email protected], www.ssireview.org Microfinance Needs Regulation

The volatile combination of profit-seeking microfinance companies, minimal compe- tition, and vulnerable borrowers has opened up dangerous potential for exploit- ing the poor. The microcredit industry needs to be regulated—through policies that address transparency, high interest rates, and abusive loan recovery practices.

Since Muhammad Yunus By Aneel Karnani primarily because they will pay in- pioneered the concept of microcre- terest rates most Americans would dit in 1976 and founded the Grameen Illustration by Oliver Munday consider outrageous, if not usurious,” Bank in Bangladesh, microcredit has wrote BusinessWeek journalists Keith become a major movement. World- Prahalad argued that there is much Epstein and Geri Smith in a December wide, 3,552 microcredit institutions untapped purchasing power at the 2007 article. MFTransparency, a self- provided loans to 155 million clients, bottom of the pyramid (BOP), and monitoring microfinance industry as- finds theState of the Microcredit Summit that private companies can make sig- sociation, finds that private companies Campaign Report 2009. Grameen Bank nificant profits by selling to the poor, have been attracted to microcredit “by alone disbursed more than $5 billion while simultaneously bringing them near-monopoly lending environments in microloans over the last 10 years, prosperity. Focusing on efficiency and misleading pricing systems com- and it now has 7.7 million borrow- and low default rates, Prahalad cites pounded by borrowers’ frequent lack ers. According to the Grameen Bank microcredit as a good example of the of understanding of the financial de- website, microcredit is “offered for BOP proposition. And indeed, in the tails of credit transactions.”1 creating self-employment for income- past few years hundreds of for-profit Whether fair or not, a few recent generating activities and for housing companies have begun financing and high-profile events have galvanized for the poor, as opposed to consump- marketing loans to the poor in devel- criticism of microfinance institu- tion.” The poor are expected to invest oping countries. But, in an ironic twist, tions (MFIs). When Banco Compar- the microloans to start up or grow a private companies are making a for- tamos in Mexico went public in April microbusiness and thus climb out of tune in microcredit by doing exactly 2007, the initial investors’ stake of $6 poverty. Microcredit is the latest silver what microcredit was designed not to million was valued at $1.5 billion—a bullet for alleviating poverty. do: exploit the poor. “Now poor people return of roughly 100 percent a year In his popular 2005 book For- are turning into one of the world’s compounded over eight years. This tune at the Bottom of the Pyramid, C.K. least likely sources of untapped profit, profitability is due to the fact that

48 Stanford Social Innovation Review • Winter 2011 Winter 2011 • Stanford Social Innovation Review 49 Compartamos charges interest rates that exceed 100 percent an- many countries in the region [Asia], the majority of microcredit nually on their loans to the poor. Yunus was particularly critical of is provided by a few leading institutions, and competition among Compartamos, telling BusinessWeek, “Microcredit was created to them is mostly on non-price terms.” 5 fight the moneylender, not to become the moneylender.” Later in their open letter, Danel and Labarthe concede that mi- In the Indian state of Andhra Pradesh more than 200 people crocredit is not a competitive market. They justify their bank’s high committed suicide, allegedly because of intimidation by MFIs. Gov- interest rates and high profitability on the grounds that they “wanted ernment authorities closed down 50 branches of two major MFIs in to build an industry … to draw in investors and competition.” The 2006 and charged them with exploiting the poor with usurious inter- promise is that “competition will make for more and better products est rates and intimidating the borrowers with forced loan recovery at better prices in the future.” This is a rather disingenuous defense practices. Y.S. Rajasekhara Reddy, chief minister of Andhra Pradesh, of exploiting the poor. Let’s follow the argument: Exploitation today was quoted in The Times of India as saying, “MFIs were turning out will enable future competition that will then reduce exploitation. to be worse than moneylenders by charging interest rates in excess (So the monopolists exploiting the poor today are doing a service of 20 percent.”2 And over the past few years, there has been growing for tomorrow’s consumers.) By this logic, we should be grateful to criticism of MFIs by government officials and politicians in Bangla- the loan sharks of past centuries for charging usurious interest rates desh, Cambodia, India, Pakistan, and Sri Lanka. that have attracted microcredit firms to the market. I argued in an earlier article in this magazine that microcredit The second and bigger problem with the free market argument does not significantly alleviate poverty (see “Microfinance Misses is the assumption that microcredit clients are rational economic Its Mark” in the summer 2007 issue of the Stanford Social Innova- actors. Even in a rich country like the United States, there are laws tion Review). The vast majority of microcredit clients are caught in to protect financial services customers. Since the 2008 economic subsistence activities and compete in overcrowded markets. They crisis, there has been a strong push by the Obama administration usually have no specialized skills, hire no paid staff, own few assets, to increase consumer protection with, for example, the Credit Card and operate on too small a scale to achieve efficiencies, and so they Accountability Responsibility and Disclosure Act of 2009. The do not earn enough to rise out of poverty. In March 2009 the World Obama administration in July 2010 created an independent agency, Bank published Moving Out of Poverty, one of the most thorough the Consumer Financial Protection Bureau, with broad authority field studies of the dynamics of poverty based on narratives from to protect consumers of financial services from abusive, decep- 60,000 poor or formerly poor people in 15 countries of Asia, Africa, tive, and unfair practices. The administration justified regulatory and Latin America. The study notes an “important insight” that reform on the grounds that “financial products are complex, and “the tiny loans usually provided under microcredit schemes do not it is often difficult for even the most financially astute consumers seem to lift large numbers of people out of poverty.” to recognize the risks financial products can present.” 6 If financial Regardless of this debate, microcredit has grown dramatically in literacy is a problem in the United States, it is a much bigger prob- the last 30 years and become increasingly commercialized. The vola- lem for microcredit clients in poor countries. In fact, poor people tile combination of profit-seeking companies, minimal competition, are often illiterate and innumerate. The adult illiteracy rate in India and vulnerable, ill-informed, and ill-educated borrowers has opened is 39 percent, and clearly much higher among the poor. This prob- up dangerous potential for exploiting the poor. There is a dire and im- lem is exacerbated for microcredit clients who are overwhelmingly mediate need to regulate microcredit to protect poor borrowers. female and have an even higher illiteracy rate. There are very few empirical studies on financial literacy, especially Deny the Problem in developing countries. A survey of clients of two microfinance orga- One response of the microcredit industry to mounting criticism nizations in India found, not surprisingly, very low levels of financial has been to deny the problem. In a June 2008 open letter to critics, literacy.7 The great majority of the respondents could not identify Carlos Danel and Carlos Labarthe, the co-founders of Compartamos, the interest rates on their loans (due in part to a lack of transpar- write, “In an open and free market, we are convinced our clients are ency, which I will discuss below). The survey also found that only 17 in the best position to make the right choices for themselves and percent of the respondents were able to solve the arithmetic problem their families.” 3 The first problem with this assumption is that the “divide 8,000 by 10,” and only 3 percent of respondents could solve the microcredit organizations do not operate in free and competitive problem “multiply 4,500 by 18.” Given such low levels of numeracy, markets. They are actually often quasi-monopolies. The Consulta- it is difficult to see how microcredit clients can make good financial tive Group to Assist the Poor (CGAP), a consortium of development choices, such as comparing two loans with different terms. agencies and private foundations dedicated to promoting micro- The microcredit industry has tried to downplay the problem of credit, states, “In most countries, the microcredit market is still consumer exploitation. In a February 2009 paper CGAP argues, “It is immature, with low penetration of the potential clientele by MFIs a mistake to assume that Compartamos’ interest rates are typical of and little competition so far.” 4 Nimal Fernando, a microfinance the industry, or even a substantial part of the industry.” 8 But should specialist working for the Asian Development Bank, concurs: “In we wait until exploitation has become pervasive before implementing Aneel Karnani is an associate professor of strategy at the University of Michigan’s consumer protection regulation? There are laws against stealing, even Ross School of Business. His research focuses on competitive advantage, strategies for though most people are not thieves. In developed countries there are growth, global competition, and poverty reduction. Karnani is the author of “Microfi- nance Misses Its Mark” and “Romanticizing the Poor,” which appeared, respectively, in laws regulating loan recovery process, even though abusive practices the summer 2007 and winter 2009 issues of the Stanford Social Innovation Review. are not widespread. Moreover, high interest rates are not as rare as

50 Stanford Social Innovation Review • Winter 2011 CGAP implies. By their own analysis, 5 percent of microcredit loans to compare competing products, which requires pricing transparency. worldwide are at interest rates higher than 50 percent per year; and Regulation is needed that mandates microcredit organizations to ex- this does not take into account fees and compulsory savings that sig- plicitly state the effective interest rate calculated using a standard and nificantly increase the effective interest rates. Lack of transparency is prescribed approach, and to describe all the loan terms simply. almost universal. Chuck Waterfield, microfinance expert and founder High Interest Rates of MFTransparency, argues that the true price of microcredit loans has “never been accurately measured nor reported. … This is hard to Criticism of the microcredit industry for charging high interest rates imagine and even harder to explain.” 9 Regulation of the microcredit has intensified in recent years, especially with the growth of for-profit industry must focus on three issues: lack of transparency, high inter- MFIs. A paper published by CGAP argues, “It is fair to criticize an est rates, and abusive loan recovery practices. MFI’s interest rates as unreasonable only if its profits or some con- trollable element of its costs is unreasonable.” 11 This is happening: Lack of Transparency Interest rates, profits, and controllable costs are unreasonably high At a Microcredit Summit Campaign conference in July 2008, MF- for a significant part of the microcredit industry—and the need to Transparency was launched as the industry’s policeman. Since then, regulate an interest rate cap for microcredit is imperative. 183 industry leaders have endorsed the organization. On its website, Based on data from 555 sustainable MFIs in 2006, the above CGAP MFTransparency states its reason for forming: “Due to complica- paper shows that the median interest rate is 28 percent per year. Even tions of market conditions and lack of regulation, the true price of this number is understated because it does not include the impact of loan products has never been accurately measured or reported.” compulsory savings, which increases the effective cost of the loan to MFTransparency’s phrase “complications of market conditions,” the borrower. Yunus argued in 2009 that if the microcredit interest however, seems to be a euphemism for market failure. rate is more than 15 percent above the cost of funds, then it is “too The effective interest rate that a borrower pays for microcredit is high. … You are moving into the loan shark zone.” Generously allow- very different from the stated interest rate of the loan. Microcredit ing 10 percent for cost of funds implies that more than half of MFIs organizations routinely hide the actual interest cost by using “cre- charge interest rates that Yunus would consider too high. In Sub- ative” practices, such as charging interest on the original value of the Saharan Africa and Latin America, 5 percent of MFIs charge interest loan rather than on the declining balance; up-front fees; collection rates above 70 percent; around the world, 5 percent of MFIs charge of a security deposit (deducted from the loan amount); compulsory interest rates above 50 percent per year. Although Compartamos’ savings (collected with loan installments); and charging an insurance interest rates exceeding 100 percent might be exceptional, interest premium. With such hidden charges it is common for the effective rates exceeding 50 percent are certainly not rare. annual interest rate to be more than 100 percent, when the stated Many MFIs are very profitable. In the CGAP study, MFIs earned interest rate is only 15 percent. 2.1 percent return on assets annually, which is well above the 1.4 per- Subrata Mitra, finance professor at the Indian Institute of Manage- cent earned by banks in the same countries. MFIs are usually not ment Calcutta, describes a typical Indian MFI loan of 1,000 rupees as highly leveraged as banks, thus lowering their return on equity. (Rs) with an annual interest rate of 17.5 percent due in 47 weekly in- In spite of this, 10 percent of worldwide microcredit loans earned stallments. The total repayment would be 1,175 Rs at 25 Rs per week. return on equity above 35 percent in 2006. These are high profits by But there would also be a security deposit of 10 percent of the loan any business criteria. The CGAP study concludes that MFI profits deducted up front and refunded with 5 percent interest at the end of are high because “the microcredit market is still immature, with low the year, as well as an insurance premium of 2 percent deducted up penetration of the potential clientele by MFIs and little competition front. The borrower would also be required to save 10 Rs per week for so far.” Monopoly rents and vulnerable consumers are the cause of one year at 5 percent interest rate.10 With these terms, the effective high prices and profits in microcredit. annualized interest rate is 121 percent compared to the stated inter- The industry response is that the high interest rates are due not est rate of 17.5 percent. Given the low levels of numeracy and literacy, to high profits but to high costs. Because of fixed costs in servicing let alone financial literacy, it is impossible for microcredit clients to a loan, it is proportionally more expensive to service a microloan compare two loan products with a plethora of confusing terms. than a larger loan. Moreover, the poor infrastructure in develop- The 2009 book Portfolios of the Poor applauds MFIs for charg- ing countries leads to high costs. But this argument is not consis- ing up-front fees as a good way to reduce risk. In fact, up-front fees tent with empirical evidence. In a July 2009 analysis of 22 MFIs in and the other complicated terms serve only to reduce the effec- Mexico, Waterfield shows a very wide range of loan prices—from tive amount of the loan and to increase the effective interest rate 38 percent to 90 percent—within similarly sized loans.12 Analysis charged, which increases the MFI’s profits but does no good for of 48 MFIs in the Philippines and 31 MFIs in Ecuador yields similar the poor. It is ironic that the savings feature of microcredit loans is results. As Waterfield’s analysis holds the loan size and environment touted as serving the poor’s savings needs. The poor clearly need constant, the price differential is likely due to local monopoly power, savings facilities, but bundling together savings with microcredit which leads to high profits. Costs measured by operating expenses in a non-transparent manner is ineffective and unethical. If the se- as a percentage of loan portfolio also vary widely—ranging from 25 curity deposit is increased to 20 percent in the loan example above, percent to 55 percent—for Philippine MFIs with similarly sized loan the effective interest rate jumps to 194 percent per year. products. Once again, since this analysis controls for loan size and An essential condition for an open and free market is the ability the environment, the cost differential is likely due to some MFIs

Winter 2011 • Stanford Social Innovation Review 51 having unreasonably high controllable costs. In Bangladesh in 2006, Alternatives to Regulation: the state-backed wholesale funder of microfinance publicly voiced Too Little, Too Late concerns about poor borrowers having to pay high interest rates be- cause of inefficient MFI operations. In a competitive industry, such The potential for consumer exploitation in the case of microcredit is wide differentials in costs and prices would not persist, and firms a direct result of market failure. This failure is due to two underlying with inefficient operations and high prices would be penalized. This causes: first, too little competition; many MFIs exercise significant is further evidence that microcredit is a monopolistic industry, and market power that results in very high interest rates. Second, the regulated interest rate caps are needed urgently. consumers of microcredit are ill informed, which allows MFIs to be Fernando argues that interest rate ceilings will reduce the avail- non-transparent in loan terms and engage in abusive recovery prac- ability of microcredit.13 A CGAP paper by Brigit Helms and Xavier tices. When the profit-maximizing behavior of firms in a free market Reille concurs that interest rate ceilings “often hurt rather than results in negative consequences to public welfare, constraints need protect the most vulnerable by shrinking poor people’s access to to be imposed. Constraints can be achieved through four approaches: financial services.” 14 The flaw in this argument is the assumption corporate social responsibility, self-regulation by the industry, ac- that microcredit is a competitive industry. Price controls in a com- tivism by civil society, and government regulation. petitive industry will lead to reducing supply; but that is not true in a Many MFI proponents do acknowledge the problems of consumer monopolistic industry. Setting an appropriate interest rate ceiling will exploitation but do not like the solution of regulation. They plead actually expand the availability of microcredit, given the monopolis- with microcredit organizations to act more ethically, or argue that tic nature of the industry. This should not be difficult, since the gap the industry should regulate itself. These responses are at best na- between the competitive and monopoly price today is so big. ively optimistic and will not work. Commercial organizations given opportunities for increasing Abusive Loan Recovery profits usually act in their self-interest. In a Jan. 20, 2005, survey Microcredit is also coming under increasing criticism for its debt col- on corporate social responsibility (CSR), The Economist magazine lection practices. Although there is no systematic evidence, there is concluded that for most public companies, “CSR is little more than anecdotal evidence that some MFIs use coercion to enforce loan repay- a cosmetic treatment.” Appeals for self-restraint on the grounds of ment. In Kalihati, one of the first Bangladeshi villages to benefit from ethics and values have not been effective in the business world, and Grameen’s low-interest credit scheme, the villagers who have taken out there is no reason to believe commercial microcredit organizations a loan are unable to reimburse their credit and claim to be harassed by will be any different. Grameen Bank representatives. Korshed Alom, a former debt collec- An appeal on ethical grounds is complicated by the fact that in- tor, was put into early retirement for questioning Grameen’s methods. dustry participants do not agree on a common set of values. A group “Their technique is to scare borrowers and insult them,” he told France of leaders in microfinance signed the Pocantico Declaration in April 24 in a June 4, 2008, report on microfinance. “We tell them to sell their 2008 in an attempt to develop common ground and a set of princi- clothes, that they have no other choice. I’m not proud of myself, but sev- ples. Unfortunately, the declaration is full of vague statements and eral times I had even been obliged to say, ‘Sell your children.’” 15 platitudes, and no consensus on specific issues. In fact, it indicates Some MFIs in Andhra Pradesh were charged with intimidating explicit dissent when it states, “We also recognize that we hold di- borrowers with forced loan recovery practices. According to a Jan. 8, verse views about the appropriate levels and usage of profit.” 17 2008, Wall Street Journal article, one delinquent borrower was vio- There has been much discussion about the microcredit industry lently beaten by a thug working for a collection agency that was hired regulating itself. Alex Counts, CEO of Grameen Foundation, pro- by ICICI Bank. The Delhi Consumer Commission fined ICICI for what poses a third-party certification scheme in his summer 2008 Stanford the judge called “the grossest kind of deficiency in service and unfair Social Innovation Review article, “Reimagining Microfinance.” The trade practice.” In Mexico, clients of Azteca who slipped behind on major drawback is that there is no authority to ensure compliance. repayment received frequent visits from motorcycle-riding collection Since 1993, 33 microfinance organizations have joined the MicroFi- agents, according to a Dec. 13, 2007, BusinessWeek article. Much mi- nance Network and signed a Pro-Consumer Pledge that states “mem- crocredit relies on group liability. Sometimes the coercive practices bers will price their services at fair rates. Their rates will not provide are undertaken not by the MFI but by the group members. excessive profits, but will be sufficient to ensure that the businesses Exploitation can occur even without an MFI using coercive loan can survive and grow to reach more people.” All that needs to be said recovery practices. All that is needed is for the borrower to believe is that Compartamos is one of the members of this network. coercion will be used. A survey of clients of two microfinance or- On a larger scale, the American experiment with deregulation ganizations in India finds that 53 percent of respondents believed of the financial services industry has been a failure, and the United “it is all right” for an MFI to confiscate assets such as cows, house, States is now on a path toward greater government regulation. There land, and machinery if the borrower is unable to repay the loan.16 is little reason to believe that the microcredit industry in develop- This is particularly disturbing because the crux of microfinance is ing countries will succeed in self-regulating while facing much less uncollateralized lending. The survey results do not imply that as- competition, less scrutiny, and more vulnerable consumers. In 2005, sets are in fact confiscated by the MFI in the event of default, but South Africa switched from relying on the Micro Finance Regulatory the perceived threat of confiscation (or any other threat) is in itself Council, which used a self-regulatory approach, to establishing the intimidating and abusive. National Credit Regulator, which is a classic public sector regulator.

52 Stanford Social Innovation Review • Winter 2011 Another potential source of constraints is citizen activism. In de- wholesale funder of microfinance capped the on-lending rate of all its veloped countries, citizen activism has succeeded even when there clients at 24 percent annual effective rate. More recently in 2009, the are no governmental regulations. Witness the recent pressure on Microcredit Regulatory Agency in Bangladesh announced that MFIs McDonald’s to introduce healthier menu options. But activism is in- must limit the interest rate to 30 percent. A 2004 presidential decree in adequate in most developing countries, because so many citizens lack Bolivia also imposed interest rate ceilings on small loans. Each country’s the resources, awareness, and traditions necessary for such empower- government needs to determine the appropriate interest rate ceiling ment. There are few activist movements exerting pressure on MFIs for microcredit, so that it is high enough to cover operating costs and to reduce or prevent exploitation of microcredit consumers. One is reasonable profits and not so low as to stifle the development of the the popular debtors’ rebellion in Nicaragua—the “No Pago” (I Won’t industry—nor so high as to be exploitative of the poor. Pay) movement—that has spurred mass demonstrations protesting Although I believe governments should be the primary force in high interest rates and demanding a legal ceiling on them. regulating microcredit, there still is a role for other organizations It is doubtful that CSR is an effective constraint on firm behavior to constrain the behavior of MFIs. Industry self-regulation can be a even in developed countries, let alone in less developed countries. useful supplement to legal regulation. International donor organiza- Institutional maturity and public support are needed for effective ac- tions, such as the World Bank and U.S. Agency for International De- tion by civil society and for self-regulation by industry. As countries velopment, can put pressure on their MFI clients to reduce or prevent develop economically, politically, and socially, these mechanisms exploitation of the poor and to help governments draft appropriate for constraining markets will improve. But we should not toler- regulations and transfer knowledge of best practices. Large commer- ate exploitation of the poor today while we wait—probably a long cial banks that are wholesale lenders to MFIs should exercise their time—for such changes to occur. For now, government regulation social responsibility and press their MFI clients to behave respon- is the best way to protect microcredit clients. sibly. And civil society organizations can play a large role in shining the light on MFIs that behave inappropriately and in educating poor The Path to Regulation borrowers about their rights. But none of these approaches can be The best place to start the regulation of the microcredit industry sufficiently effective without government regulation. n is to require transparency on loan terms. The U.S. Truth in Lend- ing Act of 1968 requires all financial firms to disclose the annual Notes percentage rate (APR), using a standardized formula that takes 1 Gde Anugrah Arka, “Microcredit Lenders Urged to Improve Transparency,” Reuters, July 28, 2008. into account the various loan terms and fees. The European Union 2 Sudhirendar Sharma, “Death by Microcredit,” The Times of India, Sept. 16, 2006. and the United Kingdom have similar regulation, although they 3 Carlos Danel and Carlos Labarthe, “A Letter to Our Peers,” June 2008. Available at use a different formula. The key is to mandate a standard formula http://www.compartamos.com. that facilitates comparisons across loan providers. Implementing 4 Richard Rosenberg, Adrian Gonzalez, and Sushma Narain, “The New Moneylenders: transparency regulation for microcredit should be fairly easy, since Are the Poor Being Exploited by High Microcredit Interest Rates?” Occasional Paper such regulation does not require many government resources and 15, Washington, D.C.: Consultative Group to Assist the Poor, February 2009. is unlikely to be controversial. 5 Nimal Fernando, “Understanding and Dealing with High Interest Rates on Micro- credit,” Manila: Asian Development Bank, May 2006. Developed countries have laws regulating recovery of personal 6 “Strengthening Consumer Protection.” Available at http://financialstability.gov/ loans. In the United States, the Fair Debt Collection Practices Act of docs/regulatoryreform/strengthening_consumer_protection.pdf. 1978 prohibits debt collectors from using abusive, unfair, or deceptive 7 Akhand Tiwari, Anvesha Khandelwal, and Minakshi Ramji, “How Do Microfinance practices to collect personal debts. Collectors are even prohibited Clients Understand Their Loans?” Chennai, India: Centre for Micro Finance/ from repeatedly telephoning debtors. Enforcing such laws, if they Institute for Financial Management and Research, October 2008. 8 Rosenberg, Gonzalez, and Narain, “The New Moneylenders: Are the Poor Being Ex- existed in developing countries, might be difficult, especially in rural ploited by High Microcredit Interest Rates?” areas. But difficulty is not a good reason to avoid implementation. 9 Chuck Waterfield, “Implementing Pricing Transparency in Microfinance,” Governments should regulate microcredit loan recovery practices MFTransparency Newsletter, 2009. and attempt to enforce the regulation. In addition, governments 10 Subrata Kumar Mitra, “Exploitative Microfinance Interest Rates,” Asian Social and civil society organizations should better educate microcredit Science, 5(5), May 2009: 87-93. borrowers about their rights. This is clearly an uphill battle—all the 11 “The New Moneylenders: Are the Poor Being Exploited by High Microcredit Interest Rates?” more reason to get started soon. 12 Waterfield, “Implementing Pricing Transparency in Microfinance.” Today, 40 developing countries impose ceilings on interest rates. 13 Fernando, “Understanding and Dealing With High Interest Rates on Microcredit.” Many developing countries liberalized interest rates and removed 14 Brigit Helms and Xavier Reille, “Interest Rate Ceilings and Microfinance: The Story limits during the 1980s as part of financial sector reform. This was So Far,” Occasional Paper 9, Washington, D.C.: Consultative Group to Assist the appropriate, since there was enough competition among financial Poor, September 2004. service firms catering to middle-class and affluent people in develop- 15 “The Crushing Burden of Microcredit,” France 24, April 4, 2008. Available at http:// www.france24.com/en/20080404-bangladesh-burden-microcredit-caring-grameen- ing countries. But the same is not true for microcredit targeted at the bank-mohammed-yunnus. poor. As Yunus pointed out in 2007, “The existing regulations are de- 16 Tiwari, Khandelwal, and Ramji, “How Do Microfinance Clients Understand Their Loans?” signed with commercial banking in mind, but microfinance requires 17 The Pocantico Declaration is available at http://www.accion.org/Document.Doc?id=442. 18 a dedicated regulator and a relevant set of rules.” In Bangladesh in 18 Muhammad Yunus, “Lifting People Worldwide Out of Poverty,” Knowledge@ 2004, when there were no laws limiting interest rates, the state-backed Wharton, May 27, 2009.

Winter 2011 • Stanford Social Innovation Review 53

OPPORTUNITY INTERNATIONAL – A MICROFINANCE LEADER FOR 40 YEARS

Overview

Opportunity International, a non-profit 501c3 organization, is the global leader in building, owning and operating regulated commercial microfinance banks focused on serving poor entrepreneurs in the developing world.

Opportunity International is a world-class financial institution committed to meeting the needs of the economically active poor in developing countries. We believe that our microfinance banks should operate as professionally as any other major bank. The difference, however, is our mission to empower people to work their way out of chronic poverty, transforming their lives, their children’s futures and their communities. Motivated by Christ’s call to serve the poor, Opportunity serves clients of all faiths and no faith. Since its founding in 1971, Opportunity International has fostered a culture of innovation and taken bold steps to expand its outreach and services. It exemplifies the next generation of microfinance.

Over its 40 years, Opportunity has built 17 regulated banking institutions (in which it is either the sole or majority shareholder) and 28 non-profit microfinance institutions. These 45 institutions have financed more than 3 million micro and small businesses in 28 countries of Africa, Asia, Central Europe and Latin America during the last 15 years. About 85% of these businesses are owned and operated by women.

Opportunity serves 700,000 voluntary savings clients and 1.4 million active loan clients. In addition, Opportunity’s subsidiary MicroEnsure is the global leader in designing and offering a range of microinsurance products for the poor including life, funeral, livestock, property and weather-indexed crop insurance. Currently more than 3.5 million people in ten developing countries are covered by some form of insurance designed and delivered by Opportunity.

Opportunity places high priority on serving the most economically, socially and geographically marginalized people in the world—specifically:

· The Most Impoverished Rural Entrepreneurs · Communities affected by HIV/AIDS · Orphans & Vulnerable Children · Internally Displaced People · Women & Adolescent Girls · Disadvantaged Youth

Today, Opportunity operates in the following regions and countries:

Africa Asia Eastern Europe Latin America Dem Rep of Congo China Albania Colombia Ghana India Poland Dominican Republic Kenya Indonesia Macedonia Honduras

Opportunity International, 2122 York Rd, Ste 150, Oak Brook, IL 60523 (800) 793-9455 www.opportunity.org

Malawi The Philippines Romania Mexico Mozambique Russia Nicaragua Rwanda Serbia Peru South Africa Tanzania Uganda Zambia Zimbabwe

Managing Successful, Large-Scale Projects

In the past ten years, Opportunity has raised over $77 million from USAID, $20 million from DfID, and over $125 million from private donors, including the Bill and Melinda Gates Foundation, MasterCard Foundation, UN Capital Development Fund (UNCDF), Inter-American Development Bank (IADB) and others. Some of Opportunity’s strategic partners include:

ACDI/VOCA AED AfriCap Bill & Melinda Gates Foundation Blue Orchard Finance Caterpillar Foundation Compassion International Credit Suisse Goldman Sachs Habitat for Humanity Conrad N. Hilton Foundation IDP Foundation, Inc. ING Inter-American Development Bank (IADB) International Justice Mission (IJM) John Deere Foundation Lenovo MasterCard Foundation NIKE Foundation Omidyar Network Oracle/Hyperion United Nations Capital Development Fund (UNCDF) UPS United States Agency for International Development (USAID) Western Union World Bank’s Consultative Group to Assist the Poor (CGAP)

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Opportunity has proven itself as a pioneer in product and technology innovation and its capacity to administer large-scale projects. A few of these projects have included:

Ø Financial Services for Rural Communities and Smallholder Farmers in Africa - $16 million. The Bill & Melinda Gates Foundation and the MasterCard Foundation are supporting Opportunity’s push to extend a full range of financial services to rural areas, including the provision of comprehensive and crop-specific agriculture loans to smallholder farmers. Through this initiative, Opportunity will deepen its penetration in the rural areas to both agriculture and non-agriculture related borrowers and savers, reaching over 1.3 million savings accounts (950,000 rural accounts) and finance at least 90,000 agriculture producers. To reach its targets, Opportunity will deploy a range of cost-effective delivery channels, including satellite branches, low-cost kiosks, mobile vans, ATMs and POS devices, to expand the number of bank outlets in rural areas.

Ø Opportunity’s Micro Insurance Agency - $24.3 million. Funded by the Bill & Melinda Gates Foundation, Opportunity’s Micro Insurance Agency will develop, test and scale high impact microinsurance products in fourteen developing countries in Asia, Africa and Latin America. Within five years, twenty million low-income individuals in these countries will be covered by life insurance; one million will utilize health insurance product(s); and 500,000 farmers and their family members will have access to crop insurance.

Ø Building Microfinance Banks Across Africa - $15.5 million. With a $10 million PRI and a $5.5 million grant, the Bill & Melinda Gates Foundation is supporting the development of commercial microfinance banks in Ghana, Rwanda, Kenya, Uganda and the DR Congo, each with a nationwide network of customized access points utilizing low-cost structures and technologies. By 2011, these five institutions will serve 164,000 loan clients and 200,000 savings clients.

Ø Financing Economic Development in Montenegro - $11.4 million. The United States Agency for International Development embarked on a 5-year partnership with Opportunity in 1999 to provide sustainable banking services for micro, small, and medium enterprises in Montenegro. USAID’s contributions were leveraged more than twenty-fold since the project’s inception with the bank’s deposits reaching $197 million and its other short- and long-term debt and equity reaching $52 million. Today, Opportunity Bank Montenegro serves over 42,000 loan and 73,000 savings clients.

Ø Reaching Poor Entrepreneurs in the Philippines – $5 million. This project, designed to expand clients in the Philippines from 25,000 to 250,000 over 5 years, exceeded its goals. Opportunity now serves 648,000 loan clients throughout the Philippines.

Client-Centered Products

Opportunity listens to our clients and develops services in response to the needs identified by them as important. Our banks and institutions design tools that have the greatest impact in the daily lives of families living in poverty and create lasting change.

Microfinance Loans Trust Groups are self-made groups of approximately 25 peers that collectively guarantee each other’s

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loans. After receiving four to eight weeks of business, financial and personal training, Trust Group members are eligible to receive their first loan, often the first loan from a bank that these entrepreneurs have ever received. Throughout the loan, Opportunity loan officers hold weekly meetings to provide business advice, training, accept payment and offer personal counseling. As clients’ businesses grow, they can apply for larger individual loans. Opportunity also provides agricultural loans to small-scale farmers to enable them to increase their yields and feed their families and communities.

Savings Historically, people living in poverty in most countries have been excluded from formal banking. Small savings were kept in and around homes, or held by collectors who charged high service fees. To provide savings accounts to people who have never had access, Opportunity is building accessible banks right in the poorest communities throughout the developing world. Opportunity provides secure, convenient ways for clients to save and prepare for a crisis or business opportunity. Savings bring stability and empower individuals, especially women.

Insurance In 2002, Opportunity International began offering insurance through its subsidiary MicroEnsure. As the world’s first microinsurance intermediary, MicroEnsure is making affordable insurance available for the first time, exclusively to people living in poverty. Innovative products cover policyholders with crop, health and life insurance – offering clients a safety net when an unexpected hardship or disaster occurs. Other policies include; covering persons infected with HIV/AIDS, weather-indexed crop insurance for rural farmers and affordable health insurance for the economically marginalized.

Technology Drives Outreach

Opportunity is advancing its use of innovative technology in its efforts to continually improve services for its clients and to reduce costs associated with product and service delivery for its institutions. In this way, Opportunity seeks to maintain client trust and loyalty while helping them gain access to the products and services they need to build their businesses, protect their assets, and work their way out of poverty.

Delivery Channels

ATMs, POS devices, and debit cards. With ATMs and POS devices deployed in rural markets, clients are able to make transactions and withdraw funds without the need to travel to a full-service branch. This saves money and time for both the client and the bank, as many teller transactions are those that can easily take place using an ATM or POS. In addition, these devices often utilize biometric technology, giving clients a secure way to access financial services without the need for a national identify card. Opportunity will use a combination of ATMs & POS devices that operate on an internal switch and ATMs & POS devices that link with other banks so as to give clients increasing access to their accounts.

Mobile vans. The mobile van is often the first opportunity for individuals in rural areas to access financial services. These armored vehicles, with nearly all the capabilities of a bank branch, enable customers to receive banking services within walking distance of their homes and businesses when the mobile unit comes to their community. This bank on wheels typically covers 4-8 call points, including 2- 4 primary locations on a given route, which it will take once or twice a week, depending on the demand and coordinated with market day schedules.

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Mobile vans are a key component to assessing demand for financial services in rural areas. Because they are mobile, they can easily add or change call points to meet the areas with highest demand. Further, these outlets have also been influential in cultivating demand in rural areas. In some areas, these van stops have stimulated so much activity that it has justified a permanent banking structure (such as a kiosk, mini-satellite, or satellite branch) in order to service the amount of clients that would come to transact with the bank during one of its stops. Whereas the traditional bricks and mortar bank branches are necessary for establishing a strong foundation from which Opportunity can expand into the rural areas, providing a cost-efficient and flexible way to reach rural communities through low-cost mobile structures is imperative.

Client relationship management (CRM) system. Opportunity is currently aggressively targeting the agriculture industry with tailored (and crop specific) products and services that most appropriately serve the input and cash flow needs of farmers. An integral part of this initiative is profiling farmers and mapping their land (using GPS handheld devices) to determine the exact land area available for farming and the precise level of inputs needed for increased crop production and household income. This system allows Opportunity to accurately assess the farmer’s financing needs, rather than over- or under- lending, as many MFIs currently do, thereby undermining the productivity potential of targeted farmers.

Opportunity has created and is piloting an initial screening matrix to input this critical information used for issuing a loan and understanding the financial pressures on the household. This system – The Client Relationship Management System – provides the following information:

• Demographics on the household, including number and gender of dependents; • Information on the three major crops a farmer is growing and the land devoted to each; • Total net income, based on the number of dependents, land area per crop, and the cost of production of that crop; • The coverage ratio (net income versus amount of loan repayment) based on the assumptions of the loan.

Leadership Development

Most of Opportunity’s leaders are business and finance executives, coming from many of the world’s top corporations including Barclays, Grant Thornton, General Electric, Federal Express, Moody’s Investors, JP Morgan Chase, National Westminster Bank, Amoco, Citigroup, ING, and Bank of America.

Improving leadership development and employee enablement at every level is essential to the microfinance industry’s ability to scale up and therefore significantly reduce global poverty. As a leading microfinance organization committed to serving the poorest of poor, it is crucial that we develop microfinance leaders who will not only guide Opportunity but the entire industry.

Recognizing the importance of effective leaders in a global organization, Opportunity International has begun to expand and drive a comprehensive leadership development initiative across its operations to strengthen and leverage our global talent. Opportunity is taking a two-tiered approach, addressing the organization-wide culture from the top through the Culture of Leadership program and creating a Culture of Learning throughout the organization with the Hire Right, Train Right, Treat Right program.

Culture of Leadership

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The Culture of Leadership (COL) is a strategy to build the capability of leaders at every level to bridge client expectations with employee behavior. The main goal of the program is to build an internal environment for employees where leaders live their commitment to the Opportunity brand and live out the brand in their every day interactions with clients and colleagues. The Opportunity Way Leadership Brand consists of the following values:

• Provide the highest quality of care for clients and staff, being attentive and responsive to their feedback and needs; • Maintain and develop knowledgeable staff, building and improving their capacity through systematic training and mentorship; • Deliver responsive and affordable financial products and services; • Display humility in every day interactions with clients and colleagues, creating a culture of honesty, dependability and trustworthiness; • Honor our Code of Conduct; • Treat all with dignity and fairness, resolving complaints promptly and fairly, and diligently assisting customers when they are experiencing difficulty. • Clearly display product prices and fees, transparently communicating how financial products and services work so as to empower and not overburden clients with debt; • Encourage client ambitions and self-development through authentic relationships;

Hire Right, Train Right, Treat Right

Hire Right, Train Right, Treat Right (HTTR) is aimed at loan officers on the ground. The HTTR program will be piloted at one of Opportunity’s banks and then expanded to other implementing partners across the globe. HTTR will create an ongoing process for employee onboarding, training and development aimed at improving employee performance aligned with Opportunity values in order to deliver lasting change to clients, their families, and their communities. Creating a culture of learning involves:

A. Improving the orientation for greater employee engagement and the onboarding process to reduce the learning curve for new employees; B. Enhancing performance management for greater impact; and C. Improving employee training as a road to growth and transformation.

Monitoring & Evaluation

Opportunity’s teams are experienced in the development and implementation of planning, budgeting, reporting and monitoring systems. Opportunity manages a Network-wide budgeting process, which accounts for sources and uses of over $84 million in annual grant funding and over $71 million in debt financing. Opportunity developed and now manages a quarterly reporting and monitoring system including a standardized finance and program data report, a trend analysis report for each financial institution, country and region and a comparative performance review report that compares institutions across regions and across the world in 13 critical performance areas. Opportunity International also deploys a Network Accreditation System in which Opportunity institutions participate in an on-site peer review and self-evaluation process. Opportunity also undergoes annual financial and A-133 audits.

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Solutions Solutions for Impact Investors: From Strategy to Implementation

Solutions for Impact Investors: From Strategy to Implementation Godeke Pomares SAN FRANCISCO OFFICE 50 California St. Suite 3165 San Francisco, CA 94111 (415) 543-0733 DVISORS LOS ANGELES OFFICE 6300 Blvd. Wilshire Suite 820 Los Angeles, CA 90048 (323) 658-4200 A www.rockpa.org HILANTHROPY P CHICAGO OFFICE 980 N. Michigan Ave. Suite 1120 Chicago, IL 60611 (312) 324-0742 OCKEFELLER R BOUT MAIN OFFICE 48th St. 6 W. 10th Floor NY 10036 New York, (212) 812-4330 A Rockefeller Philanthropy Advisors is a 501(c)(3) nonprofit organization that helps donors create thoughtful, effective philanthropy throughout it the traces world. its City, Headquartered antecedents in to New York who John in Sr., D. 1891 Rockefeller, began to professionally manage his philanthropy “as if it were a business.” Rockefeller Philanthropy Advisors provides research and counsel on charitable giving, develops philanthropic programs, and offers complete program, administrative and management services for foundations and trusts. Rockefeller Philanthropy Advisors currently advises on and manages more than $300 million in annual giving in more than 60 countries. maximizecoverREPRINT_Layout 1 7/27/10 1:31 PM Page 1 Page PM 1:31 7/27/10 1 maximizecoverREPRINT_Layout maximizecoverREPRINT_Layout 1 7/27/10 1:31 PM Page 2

Major support for this publication was made possible by grants from KL Felicitas Foundation and the Rockefeller Foundation. The information presented herein has been prepared for informational purposes only and is not an offer to buy or sell, or a solicitation of an offer to buy or sell, any security or fund interest. The offering circular of each security or the respective fund’s confidential offering memorandum contains important information concerning risks and other material aspects of the investment and must be read carefully before a decision to invest is made.

Additional underwriting was provided by The Betsy and Jesse Although the information presented herein has been obtained from and Fink Foundation, The Eleos Foundation, the Flora Family is based upon sources we believe to be reliable, no representation or Foundation, the LBJ Family Foundation, Legacy Works, the warranty, express or implied, is made as to the accuracy or completeness Sidney E. Frank Foundation, The Springcreek Foundation, of that information. No assurance can be given that the investment and the Woodcock Foundation. objectives described herein will be achieved.

Rockefeller Philanthropy Advisors does not provide tax, financial or legal advice and individuals or institutions are strongly urged to consult with their tax, financial or legal advisors regarding any potential decision regarding their investments and or their philanthropy. The material contained in this publication is for informational purposes only. The material is based upon information which we consider reliable, but we do not represent that such information is accurate or complete, and it should not be relied upon as such.

Book Layout and Graphics: art270 and Patricia Holland Design Typeset using Janson Text and Trade Gothic.

E This publication was printed with soy-based ink on Edited by 100% post-consumer waste paper fiber, made by a Lisa Kleissner Forest Stewardship Council certified printer. The choice of paper allowed us to preserve 36 trees Lauren Russell Geskos for the future. We also avoided creating: 105 pounds of water-borne waste; 3,351 pounds of greenhouse gases; 1,702 pounds of solid waste; and 15,382 gallons of wastewater flow. In addition, we conserved This publication was printed with soy-based ink on 100% post-consumer waste E 25,649,600 BTUs of energy. paper fiber, made by a Forest Stewardship Council certified printer. MaximizingREPRINTwchart_Layout 1 7/27/10 12:40 PM Page 1

Solutions for Impact Investors: From Strategy to Implementation

Steven Godeke Raúl Pomares

with

Albert V. Bruno Pat Guerra Charly Kleissner Hersh Shefrin

Original © November 2009, Rockefeller Philanthropy Advisors Reprinted with minor updates August 2010

ISBN 978-1-61658-210-4 MaximizingREPRINTwchart_Layout 1 7/27/10 12:40 PM Page 2

table of contents

5 Foreword & Acknowledgements

9 Chapter 1: Introduction From Strategy to Implementation Impact Investor Categories: Commercial and Philanthropic The Target Audiences Publication Goals Beyond the Tyranny of OR Uncertainty and Risk Behavioral Finance and Impact Investing Challenges Ahead The Impact Investing Cycle Harnessing the Genius of AND

23 Chapter 2: Articulating Mission and Values The Road Map Applying the Road Map/Articulating the Mission RSF Social Finance KL Felicitas Foundation Calvert Social Investment Foundation Impact First, Financial First and Blended Transactions

31 Chapter 3: Creating Impact Themes Impact Investment Theme Selection Selecting the Right Partners and Advisors Impact Investor Resources

37 Chapter 4: Defining Impact Impact Investing Tools & Tactics Active Ownership Strategies Screening Impact First Investments Financial First Investments Guarantees Articulating An Impact Investment Thesis

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Meyer Memorial Trust’s Geographic Impact Thesis Evolution To More Direct Impact Beyond Rational Man: Incorporating Behavioral Finance in Impact Investing Market Failures and Impact Investing

55 Chapter 5: Developing an Impact Investing Policy Asset Allocation Basics F.B. Heron Foundation’s Mission-Related Investment Approach Asset Allocation and the Impact Investor Relationship Between Risk & Return Measuring Financial Risk Correlation: Diversifying Asset Classes to Reduce Risk Microfinance and Correlation Asset Class Framework Mapping Impact Themes to Asset Classes Applications Across Impact Themes Developing the Investment Policy Statement Portfolio Process Overview

79 Chapter 6: Generating Deal Flow Building the Transaction Pipeline Direct Versus Funds Strategy Fund Investment Selection Criteria Current Universe of Impact Investment Funds Impact Investment Profile Template E+Co People & Planet Notes Neuberger Berman Socially Responsive Equity Zouk Cleantech Europe II UNEP FI’s Environmental and Social Responsibility Observatory

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95 Chapter 7: Analyzing Deals Due Diligence of Impact Investments Investment Processes Pico Bonito Investment Process Triodos Sustainable Trade Fund Case Study Dial 1298 For Ambulance Case Study

115 Chapter 8: Evaluating Impact Defining and Measuring Impact Core Beliefs for Impact Assessment Beartooth Capital One Family’s Approach to Microfinance and Impact Creating Structural Change for Measuring Impact

123 Conclusion: Coming Full Circle Using the Impact Investing Cycle

128 Appendices: Impact Investment Profile Summary Selected Bibliography About the Authors Important Disclosures

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foreword

Since we published Philanthropy’s New Passing Gear: Mission- Related Investing in early 2008, the investment and philanthropic landscape has changed dramatically. Despite the global economic volatility we have seen in the past year, and perhaps in part a result of it, interest in impact investing — creating social Sand environmental impacts in addition to investment returns — has grown significantly. Investors are creatively challenging the status quo in order to address major problems such as poverty, climate change and the inequality between rich and poor. While organizations serving the needs of investors and philanthropists interested in this approach have begun to multiply, and new tools are being developed to provide insights into how people and markets interact, barriers still exist. There is a clear need for established best practices and for practical guidance in developing an asset allocation framework; sourcing investment opportunities; performing due diligence on managers and opportunities; understanding the behavioral and external factors that motivate investment decisions; analyzing risk and return from a financial, social and environmental perspective; as well as measuring and benchmarking the performance and impact of these types of investments. The pathways to scaling social and environmental innovation are also changing. Collaborations among the public, private and social sectors have proliferated as governments have responded to the current financial crisis and sought to find innovative means to address these challenges. While philanthropy has always relied on other sectors to co-create and sustain social change, the fact remains that governments and traditional philanthropy do not have sufficient funds to address the world’s most serious problems. Commercial capital and the

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tremendous power of market forces will have to be part of the solution. Solutions for Impact Investors: From Strategy to Implementation aims to increase the rigor with which impact investors frame their investment decisions and demonstrate the integration of impact investing across asset classes. In conjunction with the team of academics and practitioners who have produced this monograph, Rockefeller Philanthropy Advisors highlights some of the areas in which behavioral economics and innovative organizational and legal structures can be applied to the discipline of impact investing. By describing best practices in transparency, disclosure and rigorous decision- making, we also hope to bridge the divide between traditional and social purpose investing. We believe impact investing will continue to play a central role in creating positive social change. The need for impact and rigor will become more, rather than less important. Underlying factors such as wealth creation, vast generational transfers of wealth, efficiency and leverage will remain. Impact investors are continuing to build the field by doing a better and innovative job of generating positive social change as well as devising ways to leverage more of their assets toward these efforts. We hope you will be inspired by these tools and stories to seek out opportunities to apply impact investing to bring more capital to bear on addressing the pressing social and environmental challenges of our time.

Kevin P.A. Broderick Chair, Board of Directors Melissa A. Berman President & CEO Rockefeller Philanthropy Advisors, October 2009

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acknowledgements

The authors wish to thank everyone who helped inform and inspire this publication. We especially extend our gratitude to our advisory council — a passionate group of impact investors, academics and practitioners. This guide would not have been tpossible without their invaluable input and support. • Doug Bauer, Executive Director, The Clark Foundation; • Antony Bugg-Levine, Managing Director, the Rockefeller Foundation; • Mark Campanale, Director, Halloran Philanthropies; • Sam Collin, Charity Adviser, EIRIS Foundation; • Lisa Hagerman, Director, More for Mission Campaign Resource Center; • Al Hammond, Senior Entrepreneur, Ashoka; • Pamela Hartigan, Director, Skoll Centre for Social Entrepreneurship at Oxford Said Business School; • Harry Hummels, Professor of Economics and Business Administration at Universiteit Maastricht; • Steven Lydenberg, Chief Investment Officer, Domini Social Investments and Vice President of the Domini Funds; • Preston D. Pinkett III, Vice President, Social Investment Program, Prudential Financial; • Meir Statman, Glenn Klimek Professor of Finance at Santa Clara University; • Georgette Wong, Principal, Correlation Consulting; and • David Wood, Director, The Institute for Responsible Investment.

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We also wish to thank the following colleagues who helped develop case studies and review the text: Shari Berenbach, Melissa Berman, Candi Deschamps, Julian Himes, Koert Jansen, Robert Katz, Tracy Palandjian, Carl Palmer, Luther Ragin, Jr., Ravi Shankar, Gary Schick, Don Shaffer, Gary Sprague, Doug Stamm, Bill Tarr, Joan Trant, Brian Trelstad and Rosa Wang. Hasani Sinclair served as lead researcher for the impact investment profiles featured in this guide and on RPA’s Web site; and Rob Steiner contributed to the final format and content of these profiles. The authors received strong editorial support from Lisa Kleissner and Lauren Russell Geskos. The book was beautifully designed and produced by Art270. Patricia Holland Design contributed to the design of many of the graphics. We would like to extend special thanks to Charly and Lisa Kleissner from the KL Felicitas Foundation; Antony Bugg- Levine and Brinda Ganguly from the Rockefeller Foundation; Russ Hall and Alan Marty from Legacy Works; Jesse Fink from the Betsy and Jesse Fink Foundation; Stuart Davidson from the Woodcock Foundation; and Steve Toben from the Flora Family Foundation. Without their enthusiasm and support, this publication would not have been possible. We are grateful for their commitment to impact investing and to broadly disseminating its potential to as wide an audience as possible. This work also builds on the pioneering work of the F.B. Heron Foundation. Finally, please let us know what you think. Please send any comments or feedback to [email protected]. We hope you find the guide useful and meaningful to the important work of moving more capital into impact investments. — The Authors

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Chapter 1: Introduction

From Strategy to Implementation: How can our investments make a difference? How can we maximize our impact?

“Impact Investing seeks to generate social and environmental impacts in addition to financial returns.”

As we look out at the challenges facing the world and the limits of the current resources addressing them, we see impact investing playing a central role in bringing forward real solutions. We believe impact investing can create social good at ascale and begin to address some of the world’s most pressing problems where commercial markets and donor-based programs have not. The sharp dichotomy between profit-maximizing financial investment and “give-it-away” charity is gradually losing its edge. Jed Emerson has used the term “Blended Value Investing” to describe this combination of investment and philanthropy. He concisely framed the concept in the following:

“There is an idea that values are divided between the financial and the societal, but this is a fundamentally wrong way to view how we create value. Value is whole. The world is not divided into corporate bad guys and social heroes.” 1

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However, if we want to ensure that our good intentions create real impact, these aspirations must be supported by a well-considered investment strategy and a rigorous execution process. Impact investors are now able to execute strategies across a range of asset classes, risk-adjusted financial returns and impact themes — these investors face the challenge of selecting outstanding impact investments directly or indirectly through the appropriate funds which, in turn, evaluate and select the impact investments. Given the growing opportunities in today’s marketplace, these strategies can and should be driven by an impact investor’s dual goals of addressing specific social and/or environmental impacts while seeking an appropriate level of investment return. Our team of academics and impact investment practitioners set out to explore the structures and processes impact investors can use to tighten the link between investment decision-making and generation of impact. We have chosen the broader term “impact investing” in this monograph since its relevance extends to individual and institutional investors in addition to philanthropic investors such as foundations where mission-related investment would describe this activity. As we seek to create impact and investment return simultaneously, the framing is critical. By clarifying our definitions of investment and impact, we can better understand some of the assumptions and views people bring to this field.

Impact: a meaningful change in economic, social, cultural, environmental and/or political conditions due to specific actions and behavioral changes by individuals, communities and/or society as a whole.2

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Investment: the choice by an investor to risk his or her assets with the goal of a financial gain in the future.

Are these two objectives at cross-purposes? Must we sacrifice return in order to generate impact, or conversely, must we dilute impact to gain additional financial return? Is there a middle ground between creating dependencies through grantmaking and sacrificing long-term sustainability to achieve short-term financial returns? Or can pursuing both objectives result in enhanced financial returns with a meaningful impact?

Impact Investor Categories: Commercial and Philanthropic

Impact investors can approach the question of financial return and impact very differently. Traditionally, impact investors such as US-based public pension funds have been restricted to making only market-rate investments due to their understanding of their fiduciary responsibilities. Similarly, a foundation’s charitable status may drive it to make below-market impact investments. High net-worth individuals and families may use multiple avenues to pursue their impact investment objectives. In the recent impact investing report by the Monitor Institute,3 the authors coined the terms “Financial First” and “Impact First” to describe this distinction:

1. Financial First Investors seek to optimize financial returns with a floor for social/environmental impact. This group tends to consist of commercial investors who search for sub-sectors that offer market-rate returns while yielding some social/environmental good.

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These investors may be driven by fiduciary requirements as in the case of pension plans.

2. Impact First Investors seek to optimize social or environmental returns with a financial floor. This group uses social/environmental good as a primary objective and may accept a range of returns, from principal to market-rate. This group is able to take a lower than market-rate of return in order to seed new investment funds that may be perceived as higher risk, or to reach tougher social/ environmental goals that cannot be achieved in combination with market-rates of return.

Looking across the universe of impact investors, it is important to keep this distinction in mind in order to understand the investment opportunities specific impact investors will pursue. However, investors may also make both financial first and impact first investments. This clear separation between financial returns and impact may be less appropriate for investors who use a broader, more integrated approach — including both financial and non-financial factors — when evaluating their investment opportunities.

The Target Audiences

Solutions for Impact Investors: From Strategy to Implementation is written from the perspective of the impact investor supplying the capital rather than the enterprises using the capital. Our expected audience includes investors who may have already made impact investments, but have not yet connected these investments to their overall investment strategy, and traditional investors who have not made impact investments and struggle

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with how impact investing can be integrated into pre-existing asset allocation and portfolio management models. While we acknowledge the important role which grant-based philanthropy can play in furthering social and environmental goals, it is not the focus of this monograph. Interested readers include: • Philanthropic investors seeking to enhance their knowledge of social, mission-related and program-related investments; • Individual investors (e.g., high net-worth individuals); • Institutional investors (e.g., pension fund managers); and • Advisors (wealth management advisors, investment advisors and family trust advisors) seeking to provide their clients with impact investment opportunities.

Publication Goals

In writing this monograph, our main goal is to provide impact investors with tools to tighten the link between their investment decisions and impact creation. Our intent is threefold: to attract more capital to impact investing; to assist impact investors as they move from organizational change to executing and refining their impact investment decision-making process; and to narrow the gap within foundations between program professionals and investment professionals thereby contributing to a mutual understanding and implementation of a portfolio approach to impact investing. Additionally, we intend to help break down the barriers making it difficult to identify opportunities in impact investing. To this end, we provide examples throughout the monograph and at www.rockpa.org/impactinvesting of impact investment opportunities in most major asset classes.

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While we understand the important role that impact investors can play in providing financial capital, we also want to acknowledge the wide range of non-financial resources needed to address the world’s problems. Our intent with this monograph is not to provide a comprehensive list of investments across asset classes nor any type of investment advice with regard to the selected profiles. We strongly encourage the reader to conduct their own assessment and evaluation for risk and suitability before considering any investment.

Beyond the Tyranny of OR

In the business bestseller, Built to Last,4 author Jim Collins emphasizes the importance of companies avoiding what he called the “Tyranny of OR” and encouraged them to harness the “Genius of AND” when making business decisions. He cites some of the characteristics of Built To Last companies: • Purpose beyond profit AND pragmatic pursuit of profit; • Clear vision & sense of direction AND opportunistic experimentation; • Audacious goals AND incremental evolutionary progress; • Selection of managers steeped in the core activities of the firm AND selection of managers that induce change; and • Investments for the long-term AND demands for short-term performance.

We believe successful impact investing is based on moving beyond a similar false assumption that investors must choose between social and environmental impact OR financial return. Specifically, we believe that an impact investor can benefit from:

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• Creating new impact-related processes AND operating within strict investment policy discipline; • Optimizing for environmental & social impact AND applying the rigor of investment management tools; • Investing in new markets & asset classes AND maintaining exposure to traditional investment strategies; • Embracing new business models AND adhering to recognized financial theory; • Evaluating impact performance AND subjecting investments to recognized financial benchmarks; and • Expanding the scope and scale of philanthropic capital AND maintaining adherence to fiduciary responsibilities.

Throughout this monograph, we illustrate how the impact investor can embrace the Genius of AND to successfully develop and execute a rigorous approach, utilizing existing portfolio theory and investment discipline.

Uncertainty and Risk

The generation of investment returns and impact requires us to take actions we hope will deliver positive social and financial returns in the future. Whether making a loan or funding a program, this desired future outcome is subject to risk. We must understand that both investing and generating impact operates under uncertainty. Given this uncertainty, we need to stay alert to both the societal changes we seek and the changing investment environment and formulate clear investment policies to express our risk preferences and ensure well-informed and focused investment decisions.

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Behavioral Finance and Impact Investing

In addition to embedding impact investing within the traditional investment framework of risk and return, we would like to explore how elements of behavioral finance can be applied to the discipline of impact investing. Traditional finance uses models in which people are self-interested and rational. While this framework is appealingly simple, evidence from psychology, economics and finance indicates that both assumptions are unrealistic. People can be altruistic and less than fully rational. With the study of rationality, the behavioral finance literature emphasizes that both investors and managers of firms deal with the real world complexity of financial markets by relying on rules of thumb known as heuristics. These influences typically cause investors and managers to be subject to specific biases. These biases seem to contradict Adam Smith’s concept that an “invisible hand” efficiently allocates resources in competitive markets. This invisible hand conclusion is derived under special conditions in which externalities and public goods are absent and information is freely available to all. We now understand that these are unrealistic conditions and that the presence of externalities, public goods and imperfect information can lead to inefficiencies known as market failures. Impact investors can also make mistakes, accepting tradeoffs whereby they misjudge either the social benefits generated by the investment or its full costs. In this regard, the lessons of behavioral finance apply as much to impact investors as to others. Here are a few lessons from behavioral finance that impact investors might keep in mind: • Recognize your cognitive limitations; • Making the absolute best decision is an unrealistic goal. Economics Nobel laureate Herbert Simon pointed out that

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most of us ‘satisfice’ rather than optimize, meaning that we are content with decisions that achieve some goal with which we shall be satisfied, rather than delaying a decision until we find the absolute best alternative; • Recognize that you, and others, will be relying on rules of thumb to make your decisions; and • Recognize that the challenge is to find sensible rules of thumb. Indeed, one goal of this monograph is to provide sensible heuristics for impact investing.

Throughout the monograph we highlight behavioral finance issues, how they affect investment decisions, and how these issues can be addressed in the context of impact investing. Along with specific guidelines, we also provide general suggestions for mitigating bias. Finally, we help investors develop a menu of sensible behavioral finance questions to assist in the investment evaluation process.

Challenges Ahead

Translating impact investing from a concept into action raises several challenges we wish to address: • How do impact investors formulate a strategy to support their mission and values and then find the appropriate investment opportunities to realize that strategy? • How are impact investors’ intentions to create financial returns and a social or environmental impact captured in the evaluation and selection of impact investing opportunities? • What is the appropriate operating framework for evaluating impact investing options? • Given the broad universe of potential impact investments, how

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can impact investors most efficiently and effectively make these investment decisions? • How can investments be made at sufficient financial scale without diluting the impact? • How can organizations develop an impact investing policy to address strategic and governance issues? • What are the organizational changes needed to implement impact investing and how can impact investors select the right advisors and partners? • What are the appropriate legal structures for impact investing vehicles? • How can impact investors evaluate the trade-off between a focus on specific impact themes and the need to apply portfolio diversification and asset allocation tools most effectively? • How can impact investors integrate aspects of behavioral finance?

To provide a framework in which impact investors can move toward action, we separate impact investing into two distinct activities: (1) Establishing an Impact Investing Strategy; and (2) Implementing and Maintaining an Impact Investing Strategy.

The Impact Investing Cycle

Establish Strategy Implement and Maintain Strategy

Articulate Create Define Develop Generate Analyze Evaluate Mission Impact Impact Impact Deal Deals Impact and Themes Investing Flow Values Policy

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We first outline how an impact investor can develop a strategy and then translate that strategy into concrete implementation steps. In this split between strategy and execution, we see the Impact Investing Policy as the critical link. The Impact Investing Policy is the tangible result of establishing an Impact Investing Strategy. It explicitly articulates hypotheses, or theories of change, about how the investment will generate a social and/or environmental impact. To date, these assumptions have not typically been rigorously defined, and investors have relied on loose theories of change in order to support their investments. Most impact investors have expended considerable effort in developing and articulating their mission and are now focusing on the execution steps of generating deal flow, analyzing deals and monitoring. However, the initial analysis or investment thesis about how a specific investment will create impact remains underdeveloped. We also draw upon developments in asset allocation and behavioral finance to provide deeper insight into the impact investing theses in specific sectors and to serve as tools for assisting impact investors in making prudent investment decisions. All of these steps continuously inform the Impact Investing Policy and often result in adjustments to and adaptations of portions of the Impact Investing Policy including asset allocation, definition and evaluation of impact. To help illustrate these concepts, we have selected the following three organizations for their work in impact investing across missions, values, impact themes and levels of engagement. They act as direct investors, make investments through third parties, and in the case of RSF Social Finance and the Calvert Foundation, structure products for other impact investors. • RSF Social Finance (www.rsfsocialfinance.org) is a 501(c)(3) public foundation originally established in 1936 to support

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projects inspired by the work of social philosopher Rudolf Steiner. Today, RSF’s mission is to transform the way the world works with money by providing innovative investing, lending and giving services that address key issues in the areas of Food & Agriculture, Education & the Arts, and Ecological Stewardship. • The KL Felicitas Foundation (www.klfelicitasfoundation.org), a California-based private family foundation, was established by the Kleissner family in 2000 with the following mission: to enable social entrepreneurs and enterprises worldwide to grow sustainably, with an emphasis on rural communities and families; and advocate the foundation’s sustainability, mission, and social investment strategy. • The Calvert Social Investment Foundation (www.calvertfoundation.org), a 501(c)3 non-profit corporation, was launched in 1988 with the support of the socially responsible mutual fund company, Calvert Group Ltd. and several major foundations. Calvert Foundation’s mission is to maximize the flow of capital to disadvantaged communities in order to foster a more equitable and sustainable society. Calvert Foundation’s goal is to end poverty through investment.

Harnessing the Genius of AND

Today, the field of impact investing has all of the necessary pieces in place for investors to create and execute innovative solutions to address critical social and environmental issues. The intent of this monograph is to provide an effective and persuasive toolkit that pulls together all of these financial and non-financial pieces. Impact Investors are successfully

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harnessing the Genius of AND to effect real change across impact themes ranging from community-based water projects in the developing world to improving education in the US. We hope to inspire you to roll up your sleeves and take on the hard but rewarding work of impact investing and make its promise a reality.

1 www.blendedvalue.org 2 “McKinsey’s Approach to Learning for Social Impact,” Discussion Paper, Draft June 2009. 3 Freireich, Jessica and Katherine Fulton, “Investing for Social & Environmental Impact,” Monitor Institute, 2009. 4 Collins, James C. and Jerry I. Porras, “Built to Last: Successful Habits of Visionary Companies,” 1997.

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Chapter 2:

Articulating Mission

and Values

Establish Strategy Implement and Maintain Strategy

Articulate Create Define Develop Generate Analyze Evaluate Mission Impact Impact Impact Deal Deals Impact and Themes Investing Flow Values Policy

The Road Map

Your impact investing strategy should be firmly aligned with your personal or institution’s core values and mission. Reflecting Rockefeller Philanthropy Advisors’ own mission of helping donors create thoughtful, effective philanthropy throughout ythe world, the following questions were developed as a

Philanthropic Road Map to assist donors in structuring their goals and missions. We have adapted this Philanthropic Road Map to become the Impact Investing Roadmap. This tool can

help you clarify your motivations, select impact themes, determine your approach to these issues and structure your

actions. Consider the following questions as a way to determine your current position and clarify assumptions before formalizing an impact investing strategy.

Motivation: Why are you interested in impact investing? Some answers include: seeking an enhanced financial return while

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making positive social and/or environmental impacts; heritage; expression of values; leaving a legacy; affiliations; causes; involving younger generations; environmental awareness; social change; making a difference; giving back; creating a vehicle for working with your family; exploring your interests; using your talents and skills for a different purpose; supporting the people and institutions important to you.

Issues: What issues will your impact investing address? Do you want to address widespread global problems such as poverty, disease or climate change, or would you rather focus on specific or domestic issues like literacy, local education or affordable housing? Geographic choices must also be made as well as decisions about how you can best effect change — through leaders, institutions or both?

Approaches: The How and When of Your Theory of Change. What is your strategy to make this change happen? Is it through policy, advocacy, research, grassroots or a national versus local campaign? What problem are you trying to solve and how do you solve it? What organizations, institutions and partners should be involved? Where are the gaps? Do you want to support philanthropic efforts or attract commercial capital? How will you assess progress? How will you implement the strategy?

Involvement: The Who. How would you like to be involved in and manage your impact investing? Hands-on management, formal or informal management structures, collaborative or independent?

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Evaluation: What is your time horizon and level of engagement? What is your tolerance for risk? How do you define success or progress toward your goal?

The complete Impact Investing Road Map should identify your motivations and issues, define your goals and approaches for key issues, and select the appropriate types of investments. It will become part of your Impact Investing Policy. Based on this Road Map, you will be in a position to see and assess results, and adjust as needed. Your mission and values can then be operationalized through the appropriate legal structures and investment vehicles.

Applying the Road Map/Articulating the Mission

We first present how RSF Social Finance, the KL Felicitas Foundation and The Calvert Social Investment Foundation developed their missions, created their impact investing philosophies and identified their impact investing themes. We also note how they approach financial first and impact first transactions and select their partners and advisors. We then highlight how they have translated their strategies into concrete impact themes in order to reflect their theories of change. And finally, we share how they are applying tools such as asset allocation and portfolio theory to deal generation, due diligence, portfolio monitoring and a customized evaluation process to fine tune their strategies over time.

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RSF Social Finance

RSF Social Finance (RSF) was incorporated in 1936 and until 1983 engaged exclusively in fundraising and charitable giving to organizations inspired by the work of Austrian social philosopher Rudolf Steiner. In 1984, RSF began providing direct loans to organizations that likewise supported Steiner’s insights on associative economics and social renewal. Then, in the late 1990s, RSF expanded its mission to serve a broader range of clients with compatible values and intentions, including those engaged in non-profit and for-profit social enterprise. Today, RSF offers investing, lending and philanthropic services. RSF strives to create innovative financial vehicles that not only generate deep social and environmental impact, but also foster community among participants. RSF currently has more than 1,000 clients and $130 million in consolidated assets, and has made over $190 million in loans and over $90 million in grants since 1984. RSF frames all of its work in terms of an overarching purpose to transform the way the world works with money. This purpose is informed by the following set of core values: Spirit: The primary role of money is to serve the highest intentions of the human spirit. Trust: People are best served by financial transactions that are direct, transparent and personal, based on long-term relationships. Interdependence: Economic success will be defined by social and ecological impact, not by financial results alone. Community: Networks and associations will be increasingly important in the circulation of money.

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Innovation: A deeply entrepreneurial culture is required to generate breakthrough ideas at the intersection of social change and finance. Equality: All those seeking to align their values and their money will have access to opportunities for investing, lending and giving.

With regard to impact investing, RSF offers funds designed to serve a range of individual and institutional investors. The funds include a core lending program of short-term notes supporting non-profit and for-profit social enterprises; a mezzanine debt fund providing growth capital for for-profit social enterprises; and a program-related investment (PRI) fund designed for foundations wishing to invest in PRIs but lacking the in-house capacity to do so.

KL Felicitas Foundation

The KL Felicitas Foundation (KL Felicitas) founders, Charly and Lisa Kleissner, first became interested in sustainability, mission and social investments as a way to break down the “value/ethic firewall” between their personal and business lives. Impact investing is a logical extension of their core beliefs. It enables the foundation to use a wide range of investment vehicles to support social enterprises, including grants, social loans, loan guarantees and private equity. Impact investing also allows family foundations like KL Felicitas with assets of approximately $10 million to maximize their impact by augmenting annual grantmaking with the effects of an investment strategy aligned with their mission. The Kleissners apply the following approach/values to their personal lives and work including their role as trustees of the foundation:

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• Commitment to high touch; • Belief that a grass-roots approach is more successful and sustainable than a top-down approach; • Belief that systemic societal problems can be addressed most effectively through cross-sector partnerships, market forces and/or hybrid solutions; • Commitment to leverage as many aspects of the foundation’s structure and activities as possible; and • Commitment to considering the holistic impact of everything they do.

Calvert Social Investment Foundation

The Calvert Social Investment Foundation (Calvert Foundation) was launched in 1988 with the mission of maximizing the flow of capital to disadvantaged communities. Although it was launched with the support of Calvert Group, Ltd., and major national foundations, Calvert Foundation operates as an autonomous non-profit entity. Calvert Foundation’s investment philosophy is to provide investors a modest financial return while generating a high social impact. The foundation is able to provide needed capital to underserved markets while seeking to control risk for investors. Calvert Foundation places loans primarily with affordable housing lenders and developers, small business lenders, microfinance institutions and other community development organizations that have a track record of success. Calvert Foundation operates three main programs:

Community Investment Notes: Calvert Foundation issues Community Investment Notes (Notes), which are senior, general recourse obligations of the

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foundation paying investors a below-market fixed interest rate. Investors accept this below-market interest rate in exchange for supporting the positive social impact generated by Notes proceeds. These proceeds are invested in a diversified pool of high credit-quality non-profit financial intermediaries, federally- insured community development banks and credit unions, affordable housing developers, marketable fixed income securities, microfinance institutions, fair trade cooperatives, and for-profit social enterprises. As of year-end 2008, Notes sales exceeded $158 million to more than 4,600 investors.

Community Investment Partners: Community Investment Partners (CIP), Calvert Foundation’s business services unit, offers consulting, analysis, asset management and capital markets solutions to institutional and individual investors who wish to create or enhance their community investment programs, and to organizations wanting to raise capital through non-traditional distribution networks. At year-end 2008, CIP was servicing 26 clients, representing an additional $66 million in community investment assets under management.

Calvert Giving Fund: The Calvert Giving Fund, Calvert Foundation’s socially responsible donor-advised fund, provides donors opportunities to: make tax-deductible donations to the Giving Fund; invest their donated assets in the Calvert Group socially-screened mutual fund Notes, or alternative socially responsible instruments; and recommend donations to non-profit organizations around the world. Calvert Giving Fund was launched in 2000, and at year-end 2008 had net assets of over $26 million from 413 donor-advisors.

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Impact First, Financial First and Blended Transactions

As demonstrated by RSF, KL Felicitas and Calvert Foundation, impact investors can have distinct approaches to the question of financial return and impact. Calvert and RFS offer impact first only investments to their clients. KL Felicitas utilizes all three types of investments in their portfolio — impact first, financial first and blended transactions. In some circumstances, investors with different return requirements will co-invest in the same enterprise or project. In these collaborative deals, it makes sense for the financial first and impact first investors to combine capital to fund the transaction. This type of structure is also widely used by the public sector to attract capital into particular target programs or industries (e.g., the US Federal Government’s Low Income Housing Tax Credit or the International Finance Corporation’s risk-sharing structures with private investors). In these structures, the impact first investors must be very clear as to how their subsidy of financial first investors is increasing the overall impact and capital of the project and not just de-risking the deal for the commercial investors. KL Felicitas supports the view that many systemic approaches to social issues require a partial subsidy in the form of a grant or a PRI. In these deals, the partial subsidy often reduces the risk for the financial first investment in a partner organization. These types of hybrid investments should ideally achieve an impact that could not otherwise be accomplished.

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Chapter 3:

Creating Impact

Themes

Establish Strategy Implement and Maintain Strategy

Articulate Create Define Develop Generate Analyze Evaluate Mission Impact Impact Impact Deal Deals Impact and Themes Investing Flow Values Policy

Impact Investment Theme Selection

Once your organization has defined its mission and target areas of impact, you will face the challenge of translating impact themes into investment themes. At first glance, this appears to be a simple exercise, but it may ultimately require significant time and research. The gears of impact and investment o opportunity must be tightly aligned if your impact investments are to be successful. Our team has reviewed the universe of possible social, environmental and blended impact themes

investors and fund managers might pursue. In many instances, funds aim for social and/or environmental impact in more than

one of these areas. This is by no means a comprehensive list, but some of the more common themes which we have found impact investors organized around include: • Climate Change; • Energy; • Water;

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• Community Development; • Social Enterprises; • Health & Wellness; • Sustainable Development; and • Education.

The impact themes RSF, KL Felicitas and Calvert Foundation have used to define their impact investment activities provide insight into how impact investors are translating impact goals into investment themes. Even among these impact investors, there is a clear diversity of impact themes. The integration of impact themes across investment asset classes is presented in Chapter 5.

RSF Social Finance: RSF’s impact themes are derived from its three impact focus areas: Food & Agriculture; Education & the Arts; and Ecological Stewardship. Food & Agriculture supports diversification, region-first approaches and sustainable practices. Education & the Arts invests in initiatives that address the intellectual, emotional, aesthetic and social needs of children and adults. Fine arts and performing arts include investments that foster spiritual awareness or increase access to learning and the arts for all communities; entrepreneurship, job training, consumer education and other awareness-building programs; and handicrafts produced and distributed according to fair trade principles. Ecological Stewardship promotes energy- and eco- efficiency; green building materials and green consumer products; ecological remediation and restoration, land conservation and land trusts; and environmental legal defense.

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KL Felicitas Foundation: KL Felicitas Foundation’s mission is to enable social entrepreneurs and enterprises worldwide to grow sustainably, with an emphasis on rural communities and families. These social enterprises can be for-profit ventures, non-profit ventures, or hybrid ventures that combine the passion and aspiration of a social/environmental mission with the discipline, innovation and determination commonly associated with a for-profit business. These social enterprises should have one or more of the following characteristics: (1) they provide goods and services for the poor or disadvantaged, and/or (2) they employ people from the poor or disadvantaged, and/or (3) they are majority owned by the poor or disadvantaged communities. KL Felicitas’s definition of social enterprise is broad and not limited to particular impact themes like healthcare, education or water. Therefore, its investments are spread across a range of impact themes.

Calvert Foundation: Calvert Foundation seeks to use investment as a tool to end poverty. Calvert Foundation’s capital is placed with local intermediaries who enable individuals, families and whole communities to work their way out of poverty. In the US, Calvert Foundation finances community development financial institutions, affordable housing developers and other local social enterprises. Overseas, the foundation reaches microfinance institutions, fair-trade cooperatives and other community development initiatives.

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Selecting the Right Partners and Advisors

Building the right team to execute an impact investing strategy is critical to your success. While other sectors of investment management such as tax, legal and portfolio management have become increasingly specialized, you may find that impact investing falls between the insulated fields of philanthropy and investment. Several barriers exist for the efficient delivery of impact investment advisory services: • Impact investing requires active ownership, and there are typically several layers of intermediaries between the asset owner (donor, trustee, individual, institution) and the ultimate deployment of the capital; • Disconnect between long-term investment objective of impact investors and investment consultants who are evaluated on a short-term basis; • Lack of consensus on how to define and measure social and environmental impact with most consultants either using a “you-know-it-when-you-see-it” approach, or deferring judgment on social and environmental issues to their clients; • Advisors typically focus on select assets rather than offering services across all asset classes; • Lack of existing investment infrastructure means significant cost associated with research and due diligence of impact investments, particularly for international strategies; and • Lack of consensus and/or understanding between investor and advisors on impact thesis.

At present, the relationship between impact investors and their financial advisors follows two distinct models: • The financial advisor may also be the impact investment advisor; or

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• Impact analysis is provided separately by a specialist and must be coordinated with traditional financial advisors’ workflows.

Despite these challenges, new service providers have emerged to provide solutions due to the pioneering efforts of impact investors throughout the field. These new service providers include institutional consulting firms, global asset management firms, private banks, specialized product providers, boutique advisory practices and thematic research providers along with peer networking and collaborative investor groups of impact investors. These impact advisory service providers are helping to break down the barriers and build the field of impact investing.

Impact Investor Resources: Investors should also seek out resources and networks created for impact investors which focus on specific impact themes and investment vehicles. Impact Investor Resources: • Blended Value (www.blendedvalue.org) • Boston College Institute for Responsible Investment (www.bcccc.net) • Carbon Disclosure Project (www.cdproject.net) • Certified B Corporation (www.bcorporation.net) • Charity SRI (www.charitysri.org) • CleanTech Venture Network (www.cleantechnetwork.com) • ClearlySo (www.clearlyso.com) • Community Development Bankers Association (www.communitydevelopmentbanks.org) • Community Development Venture Capital Alliance (www.cdvca.org) • Community Investing Center Database (www.communityinvestingcenterdb.org) • Confluence Philanthropy (www.confluencephilanthropy.org) • Corporate Impact Reporting (www.iosreporting.org) continued

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• Environmental Defense Fund Innovation Exchange (www.innovation.edf.org/home.cfm) • Global Impact Investing Network (www.globalimpactinvestingnetwork.org) • GreenBiz.com (www.greenbiz.com) • Greentech Media (www.greentechmedia.com) • Impact Reporting and Investment Standards (www.iris-standards.org) • Initiative for a Competitive Inner City (www.icic.org) • Institutional Investors Group on Climate Change (www.iigcc.org) • International Association of Microfinance Investors (www.iamfi.com) • Investors Circle (www.investorscircle.net) • Microcapital (www.microcapital.org) • MIX Market Microfinance Information Platform (www.mixmarket.org) • More for Mission – The Campaign for Mission Investing (www.moreformission.org) • New Economics Foundation (www.neweconomics.org) • New Energy Finance (www.newenergyfinance.com) • NextBillion.net (www.nextbillion.net) • PRI Makers Network (www.primakers.net) • Principles for Responsible Investment (www.unpri.org) • Research Initiative on Social Entrepreneurship (www.riseproject.org) • Responsible Investor (www.responsible-investor.com) • Responsible Property Initiative (responsibleproperty.net) • Rockefeller Philanthropy Advisors (www.rockpa.org); • Social Enterprise Innovation Network (www.sein.net) • Social Finance (www.socialfinance.org.uk) • Social Funds (www.socialfunds.com) • Social Investment Forum (www.socialinvest.org) • Social ROI: A Social Entrepreneurship Blog (www.socialroi.com) • Social Venture Network (www.svn.org) • Stanford Social Innovation Review (www.ssireview.org) • Symbiotics (www.symbiotics.ch) • The Nature Conservancy (www.nature.org) • The UNEP Finance Initiative Asset Management Working Group (www.unepfi.org) • Triplepundit (www.triplepundit.com) • Xigi.net (www.xigi.net)

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Chapter 4:

Defining Impact

Establish Strategy Implement and Maintain Strategy

Articulate Create Define Develop Generate Analyze Evaluate Mission Impact Impact Impact Deal Deals Impact and Themes Investing Flow Values Policy

Impact investors generally make assumptions about how their

investments can translate into desired social or environmental impacts. Some of these assumptions are explicit in terms of outputs while others are implicit. These impact investment theses are also known as theories of change and describe the istep-by-step process through which a particular investment activity will translate into a desired outcome. In Philanthropy’s

New Passing Gear: Mission-Related Investing , we defined five distinct tools impact investors can use. Each has its own impact investment thesis. The first tools of active ownership

strategies and screening are values-based tactics. The other three — financial first investments, impact first investments

and guarantees — have specific social and environmental impacts and represent the majority of the impact investing we will outline in this monograph. For each of the tools, we have included the related impact investment thesis or theory of change.

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Impact Investing Tools & Tactics

Active Ownership Strategies As a long-term owner and fiduciary of holdings in publicly- traded securities, you have the ability to influence corporate behavior and further your desired impact through proxy voting, shareholder resolutions and informal shareholder engagement with the corporate management of the companies you hold in your portfolio. Many companies have changed their policies and practices on a host of issues important to impact investors, not only because of market forces, but also because their shareholders demanded change.

Impact Investment Thesis: Constructively engaging with the management of publicly-traded companies through proxy voting, shareholder resolutions and engagement will cause companies to stop undesired activities or begin desired activities of importance to a specific impact investor and to the company’s array of stakeholders.

Screening Screening is the practice of buying and selling publicly-traded securities based on the evaluation of impact criteria that reflect your personal or institution’s values. Your investment decision may be to avoid certain companies (negative screening) or to support particular companies (positive or best-in-class screening). The ultimate goal of screening is for your portfolio to reflect your values and mission, mitigate risks and use your investment capital to encourage or discourage specific corporate behaviors.5

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Impact Investment Thesis: The buying and/or selling of a publicly- traded security will cause companies to stop undesired activities or start desired activities. Active Ownership Strategies and Screening can also create market signals about the specific companies and set the terms for public debate of corporate behaviors. These tactics can be accomplished at low cost and may be fully leveraged by partnering with other investor groups.

Impact First Investments Impact first investments can be made by foundations as well as public sector and high net-worth impact investors. Some impact investments made by US foundation impact investors are categorized as program-related investments (PRIs).6

Impact Investment Thesis: The investment will directly generate specific desired outcomes (e.g., units of housing created, land preserved or children immunized). The subsidy enables an additional outcome that would otherwise not be possible.

Financial First Investments Financial first investments create a risk-adjusted rate of return in addition to creating specific desired outcomes. For example, public and private pension funds, along with insurance companies and other institutional investors, are increasingly seeking to attract capital to underserved urban markets and build assets in low-income communities. These programs target financial first returns against established financial benchmarks in addition to generating social and environmental benefits.

Impact Investment Thesis: The investment will generate specific desired outcomes similar to impact first, but without subsidy.

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Guarantees Guarantees are another important tool impact investors use to mitigate the credit risk created by an organization when it receives a loan from a bank or other lending institution. You can use your assets as collateral to provide security (guarantee) to an organization based on this collateral. Unlike other impact investments, a guarantee may not require upfront deployment of cash by the impact investor. Through guarantees, an investor can create more impact by leveraging his guarantee with additional capital from other investors. For example, a recent partnership between the Nairobi-based Alliance for a Green Revolution and South African-based Standard Bank exemplifies the power of guarantees. By committing $10 million to cover potential losses in a targeted loan portfolio, the Alliance induced Standard Bank to commit $100 million in loans to farmers in Africa who would otherwise be unable to access finance.

Impact Investment Thesis: The investment will generate specific desired impacts and additional leverage.

Articulating An Impact Investment Thesis

As the industry of impact investing coalesces, and global investors begin to organize and coordinate more effectively, standard frameworks for structuring and articulating an impact investment thesis are developing. In the meantime, pioneers in the field have developed their own approaches to articulating impact investment theses. These tend to remain quite subjective and specific to the context of the investor’s motivations. However, they provide structures that other investors can draw on in developing their own approach. For example, RSF Social

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Finance has developed distinct impact criteria for evaluating potential loans through its Core Lending program:

Core Lending Impact Criteria • Product — generates major shift in consumer preferences. • Manufacturing processes — utilizes sustainable energy use, waste management, etc. • Supply chain — seeks highest values alignment possible. • Employee practices — strives for high positive impact; includes profit/ownership sharing. • Community — maintains strong presence beyond token contributions. • Governance Structure — allows entrepreneurs’ values to stay intact. • The entrepreneur is committed to changing the rules and practices of an entire industry.

For Calvert Foundation’s Community Investment Note, potential borrowers must have an explicit focus on serving low- income communities and individuals, or on providing financial services to individuals without access to traditional sources of capital. Borrowers must be engaged in community development initiatives that help expand opportunities, promote job growth, develop small business and promote homeownership in underserved areas. The foundation lends to organizations that work in both urban and rural settings, in the US and abroad. The Calvert Foundation’s Global Impact Ventures (GIV) funds allow donor advisors to invest in funds that have private debt and/or equity stakes in social enterprises, innovative non- profits and microfinance institutions. Many of them provide unique “gap-filling” financing — channeling capital to markets that cannot get financing from traditional commercial sources.

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This funding helps organizations scale, and in many instances allows them to develop their business models to the point where more traditional financing becomes available to them.

Evolution To More Direct Impact

RSF’s donor-advised fund offering has evolved over time to create opportunities for more direct impact investments. Prior to 2004, RSF provided interest rate returns to donor-advised

Meyer Memorial Trust’s Geographic Impact Thesis

Meyer Memorial Trust (MMT) was created by the late Fred G. Meyer who built the chain of retail stores bearing his name throughout the Pacific Northwest. MMT is a private, independent foundation with the stated mission “to invest in people, ideas and efforts that deliver significant social benefit to Oregon and southwest Washington.” MMT operates three programs: Strategic Initiatives, Grants and Program-Related Investments. MMT has developed and documented an effective means to prioritize its impact investing opportunities. As illustrated at right, MMT uses a multi-tiered geographic model to define its impact thesis. MMT adopted this model in 2008 and applies it to their investment analysis as they expand their impact investment portfolio. MMT prioritizes investments having direct environmental, social or economic impact (ES&I) within the state of Oregon, the MMT’s service region. MMT then recognizes the ES&I impact benefits that investments may offer the Pacific Northwest and beyond. MMT gives lower priority to investments creating no impact (benefit or harm) in its stated mission areas. Finally, MMT seeks to understand, avoid and over time eliminate any investments deemed to directly harm or operate in a manner contrary to the MMT’s mission.

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funds based on RSF’s cost of capital, as is typical for many non- profit intermediaries. Beginning in 2004, RSF designed a traditional socially-responsible investment (SRI) program (i.e., screening and active ownership strategies) by contracting with several SRI asset managers within three portfolios — Equity, Fixed Income and Cash. Investments were primarily in public equity, public debt and cash, making it difficult to determine the degree to which investments were aligned with RSF’s mission and theory of change. In 2005, RSF moved to a more directly managed SRI program with one institution providing expertise

ct Harm s Dire use Ca Neither Bene n, fit no sio r D is ic Northwe ire M cif st c Pa t H to nd a y o r r ey it in Pacific m a B ef No r t en rt t fi B hw n e I e o n & s C S e E t B I

&

S E ES&I Benefit in Oregon

E = Environmental S = Social I = Economic Impact Source: Meyer Memorial Trust

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in the field of screening, advocacy and solutions-based impact investing. Nevertheless, as investments were still primarily in public equity, public debt and cash, it remained difficult to determine the impact being generated. Following a strategic review in 2007, RSF designed and implemented a more direct and transparent donor-advised fund investment program in order to achieve the deepest possible social impact through these investments. As part of this new program, RSF expanded its holdings in private equity and private debt vehicles, and modified its due diligence process to include more extensive analysis of potential investees’ social impact. Donor-advised fund accounts are now invested in three portfolios called Impact, Liquidity and Transformation, all of which aim to reduce unnecessary levels of intermediation while continuing to meet rigorous diversification, risk and return criteria. Within the Liquidity Portfolio, for example, RSF has begun the process of transferring all money market and commercial paper investments into deposits at the highest-performing community development and environmental banks in the country. Within the Impact Portfolio, RSF invested in Beartooth Capital, a private real estate fund that generates strong financial returns through the restoration and protection of ecologically important ranch land. (See Case Study in Chapter 8.) This investment contributed both to RSF’s goal of making more direct investments as well as diversifying the portfolio through the addition of real assets. Going even further toward direct investing, the Transformation portfolio is designed to make direct venture and debt investments in enterprises that seek to solve the most pressing social and environmental issues of core importance to RSF and its clients. RSF believes that by pursuing more direct investment opportunities, it will be better able to

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ensure mission alignment and report on the concrete social and environmental impacts of its investments.

KL Felicitas Foundation KL Felicitas initially used negative screening as its impact investing strategy, but soon realized that the impact was indirect, unleveraged and unaligned as well as nearly impossible to measure. At the same time, they made the strategic decision to hire a team of advisors rather than rely on any one consultant or firm to provide full services. This approach brought together the best possible team from multiple disciplines (e.g., family coach, family office manager, tax advisor, philanthropic advisor and investment advisor). In addition to providing the desired ‘checks and balances,’ this approach fosters high engagement by all team members. The Kleissners began to explore philanthropy more deeply and were introduced to Jed Emerson’s thoughts on blended value investments. Participation in The Philanthropy Workshop West (www.tpwwest.org) and the Global Philanthropy Forum (www.philanthropyforum.org) further exposed them to international investment and grant opportunities. A key turning point in the process occurred when the foundation merged its impact investing policy with its asset allocation strategy and formalized the deal flow process. KL Felicitas organizes its impact investing activities into four categories: Sustainability Investments, Mission-Related Investments, Program-Related Investments and Social Component Investments. It is important to point out that the Kleissners are not only engaged in impact investing in their family foundation, but are actively doing impact investing with the assets of their Family Limited Partnerships and Charitable Remainder Trusts as well.

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KL Felicitas believes that helping social entrepreneurs and social enterprises reach scale in a more sustainable and impactful way can make a meaningful contribution to the alleviation of poverty, as these social enterprises either provide affordable goods and services or meaningful employment for the poor and disadvantaged. In addition to Program-Related Investments and Mission-Related Investments, KL Felicitas also uses ‘Sustainability Investments’ and ‘Social Component Investments’ as part of its overall impact investment strategy. The foundation has set an aggressive goal to move to 100% impact investments. Since it will take time to find appropriate Mission- and Program-Related Investments for all its assets, KL Felicitas decided to invest and track ‘Sustainability Investments’ and ‘Social Component Investments’ (aligned with their values, but not with their mission or programs) while moving into more Mission- and Program-Related Investments. KL Felicitas defines Social Component Investments as investments that allocate part of their profits either directly or indirectly to social beneficiaries. Since these types of investments are not directly aligned with KL Felicitas’ mission, opportunities in this space are evaluated opportunistically. Given a choice between a Non-Social Component Investment and a Social Component Investment in the same asset class, KL Felicitas Foundation chooses the latter. KL Felicitas defines Sustainability Investment as investments having a demonstrable focus on holistic sustainability, i.e., sustainability from an economic, environmental, social and spiritual perspective. KL Felicitas does not yet have a core set of simple and easily understood indicators and metrics to demonstrate this type of holistic sustainability, so it is using a set of discrete sustainability indicators in its due diligence process as described on its website.

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Beyond Rational Man: Incorporating Behavioral Finance into Impact Investing

As impact investors seek to more tightly link investment and impact, behavioral finance can be a powerful tool to better define their impact investment thesis. Traditional finance uses models in which the economic agents are assumed to be rational. While this framework is appealingly simple, it has become clear that basic facts about markets are not easily understood within this framework. Behavioral finance is based on the alternative notion that most investors are subject to behavioral biases that can cause their financial decisions to be less than fully rational.7 Validated through empirical research and experimentation, behavioral finance is increasingly recognized for its power to explain human and investment behavior more accurately than traditional models. Altruism, psychologically induced mistakes, externalities and information asymmetries all create opportunities for impact investors to make a difference. For example, information asymmetries can lead to capital gaps in underserved urban and rural areas creating opportunities overlooked by conventional investors. Climate change is arguably the most important externality facing the global community. The failure of the global community to act quickly in order to fashion a collective response has a significant psychological component. In the past, altruism led some people to expend their own resources in an effort to address climate change through research and the sharing of information. Impact investors, with the appropriate knowledge, experience and inclination, also have a role to play in developing systems and social infrastructure. This type of investment can focus on building people’s skills with the goal of helping

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communities become self-sufficient. We know from experience that both governments and markets can fail, and some of those failures present opportunities for impact investors. Altruism and narrow self-interest co-exist in most people. For most people there are limits to how much they are willing to sacrifice in order to help others. Some impact investors are willing to accept lower financial returns relative to risk in exchange for generating a social benefit, or what some might call a social return. Others are willing to engage in impact investing, as long as they do not need to sacrifice financial returns while pursuing impact objectives. Behavioral finance has several implications when it comes to impact investing. First, impact investing adds value when it is able to counter some form of market failure. Second, investors will benefit if they understand the psychology which underlies a market failure. Third, the activity of impact investing will increase if investors become more comfortable with it. In his book The Management Illusion, Hersh Shefrin developed a checklist for managers to test whether they are subject to behavioral biases. This checklist is also useful for assessing impact investment opportunities. Below you will find examples of these behavioral biases. Each example is presented in three parts: a definition; diagnostic questions; and an illustration of the concept.

1. Overconfidence — Investors overestimate their ability and the accuracy of the information they have. • Are we as good as we think we are? Are we too sure of our views? Are we underestimating risks?

In a recent article in The New Yorker, Malcolm Gladwell places the responsibility for a large part of the current financial crisis

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on the systemic overconfidence of investors — particularly the senior managers of large Wall Street investment banks such as Bear Stearns.8

2. Unrealistic Optimism — Individuals attach too high a probability to events favorable to them, and too low a probability to events unfavorable to them. • Are we looking at the world through rose-colored glasses?

3. Representativeness — Investors place excessive reliance on stereotypes, for example by equating good stocks with good companies. • In making judgments, are we placing too much reliance on stereotypes?

This bias is particularly relevant for impact investors who often are seeking to fill gaps created by the lack of information in specific impact themes such as the financial performance of charter schools or the repayment rates of microfinance borrowers.

4. Conservatism — Forecasters cling to prior beliefs in the face of new information. • Are we downplaying information we don’t want to hear, and playing up information that we do want to hear?

Despite substantial initial public offerings of stock and mergers and acquisitions in India, many investors still hesitate from making impact equity investments in social enterprises in India due to their incorrect belief that exit strategies do not exist.

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5. Availability Bias/Recency Effect — Investors overweigh readily-available information, e.g., by overstating recently observed events. • Are we placing too much weight on evidence that is in front of us, or easily recalled, and insufficient weight on information that is harder to obtain, or less easily recalled?

Impact investors investing in alternative asset classes sometimes only review a very small slice of data to make their investment choices. Since it may be impossible for them to view and analyze the rest of the data, they may base their decision on this readily- available data only instead of completing the appropriate due diligence process.

6. Framing and Anchoring — The form of presentation of information can affect the decision made. When the presentation of information is clear, the frame is said to be transparent. Otherwise the frame is said to be opaque. • Are we using judgments that start with an anchor from which we make adjustments? If so, are we adjusting enough?

Many impact investing opportunities — particularly in developing countries — might not yet have public relations expertise to present themselves in the way expected by investors in developed countries. This might lead to a decision not to invest, even though the underlying fundamentals are good. Conversely, fledgling social enterprises effectively utilizing modern media tools might be able to present an overly optimistic picture. Both of these examples accentuate the need for solid due diligence.

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7. Mental Accounting — Individuals allocate wealth to separate mental compartments and ignore fungibility and correlation effects.

As outlined throughout this monograph, impact investing reflects the desire by investors to overcome the bias that financial assets dedicated to financial return cannot be mixed with assets targeted toward the creation of social or environmental impact. This is particularly true in private foundations with sharp separation of their endowment investment and grantmaking activities.

8. Regret and Loss Aversion, and Aversion to a Sure Loss — Individuals make decisions in a way that allows them to avoid feeling emotional pain in the event of an adverse outcome. Individuals can be too conservative, because they are extremely sensitive to the pain of loss. • When things don’t turn out as we expected, are we prone to feel regret, meaning the pain from imagining ourselves to have made a different decision? • Are we prone to make decisions with a view toward minimizing anticipated regret? • At the same time, might our attitudes toward bearing risk change dramatically if we view ourselves as facing the possibility of having to accept a loss? • Are we reluctant to accept losses, instead taking chances where we have to beat the odds in order to be successful?

Many investors might shy away from impact investments in general or from impact investments in early stage social enterprises not only because of the risk associated with these types of investments, but because of the fear of an adverse investment outcome.

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Market Failures and Impact Investing

Impact investors have positive roles to play in addressing market failures, especially when it comes to dealing with issues involving public goods, externalities, and imperfect information. In this regard, consider the upcoming case studies in this volume: • Triodos Sustainable Trade Fund — a guarantee fund that allows investors to support trade financing for certified fair trade and organic producers, and • Dial 1298 for Ambulance — a for-profit social enterprise providing emergency medical service ambulances in India.

Water and energy tend to be natural monopolies while health and education are public goods. Environmental sustainability falls into the category of externalities. But what about ambulance services, especially if the intended market consists of low income households unable to pay? As we shall see in the description of the case, the business model to address this issue involves the ability to engage in cross subsidization, thereby exploiting a market failure for this purpose. We see a clear role for behavioral finance in impact investing, particularly in how aspects of behavioral finance can help investors articulate and better frame their impact investment theses. In some cases, impact investing can even be viewed as correcting behavioral finance biases, which traditional market mechanisms are not addressing. By being cognizant of our biases, and on the look-out for potential market failures, the impact investor can invest both more prudently and create more positive social and environmental impact.

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5 Investors should be aware that screened portfolio performance may or may not have the same performance as an unscreened portfolio when measured against a selected benchmark. Screening out certain companies also makes it impossible to take active ownership positions. Studies about the relationship between screening and investment performance are available at www.sristudies.org. 6 PRIs can be in the form of debt or equity and must be made with the primary intent to further program objectives. Following are the three criteria in the Tax Reform Act of 1969 section 4944 — used by the IRS to determine if an investment can be categorized as a PRI: The primary purpose of the investment is to advance the foundation’s charitable objectives; neither the production of income nor appreciation of property is the primary purpose; and the funds cannot be used directly or indirectly to lobby for political purposes. 7 See Krugman, Paul, “How Did Economists Get It So Wrong?,” New York Times, September 6, 2009 for a discussion of behavioral finance’s role in the financial crisis. 8 Gladwell, Malcolm, “Cocksure: Banks, Battles, and the Psychology of Overconfidence,” The New Yorker, July 29, 2009.

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Chapter 5:

Developing an

Impact Investing

Policy

Establish Strategy Implement and Maintain Strategy

Articulate Create Define Develop Generate Analyze Evaluate Mission Impact Impact Impact Deal Deals Impact and Themes Investing Flow Values Policy

Once you decide to proceed with an impact investment strategy

and have articulated an impact thesis, the process of translating this effort into a working portfolio begins. As outlined in the introduction, impact investors need to reframe their objectives to embrace the Genius of AND in order to move beyond the o artificial dichotomy of financial return versus positive social and environmental impacts.

While certainly not an advocate of impact investing, David F. Swensen, the Chief Investment Officer of Yale University and the author of Pioneering Portfolio Management,

offers these investment suggestions which we think are also applicable to impact investors. Swensen writes that “…a rich understanding of human psychology, a reasonable appreciation

of financial theory, a deep awareness of history, and a broad exposure to current events all contribute to the development of well informed portfolio strategies.”9 Throughout this chapter, it

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is our intent to illustrate how the impact investor, embracing the Genius of AND, can successfully develop and execute a rigorous approach to applying existing portfolio theory and investment discipline. First, we return to the cornerstone of traditional investment principles: asset allocation.

Asset Allocation Basics

Asset allocation is an approach in which investors spread investments over different asset categories, such as traditional stocks, bonds and cash along with what some call alternative investments (e.g., private equity, hedge funds, real estate and other commodity strategies). This allocation of assets hinges upon several factors, including investment objectives; attitudes toward risk and investing; desired return; age, income and tax bracket; time horizon; view on how various markets will perform in the short and long term; AND for the impact investor, desired environmental and/or social impact. Asset allocation is based on the observation that different broad categories of investments have shown varying rates of return and levels of price volatility over time. By diversifying investments across several asset classes, investors may reduce risk and volatility while pursuing their return objectives. Generally, downturns in one investment class are expected to be tempered (or even offset) by favorable returns in another. Just as using different asset categories within a portfolio can reduce risk, an investor’s choice of individual strategies or securities within an asset class can do the same. For instance, choosing stocks from different industries (e.g., automotive, high technology, retail or utilities) within the equity allocation can be less risky than investing all of the stock allocation in one industry or company.

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F.B. Heron Foundation’s Mission-Related Investment Approach

The F.B. Heron Foundation supports organizations that help low- income people to create and preserve wealth thereby helping them take control of their lives and make decisions for themselves and their families. The F.B. Heron Foundation pioneered the integration of mission-related investment across its asset allocation. They created a mission-related investment continuum to provide a framework within the foundation’s overall asset allocation to use as a tool to evaluate mission-related investment opportunities. By viewing grants as part of a broader range of philanthropic tools available to foundations to create impact, F.B. Heron is able to seek out the best agents for achieving impact in a program area whether through a non-profit or for-profit opportunity. F.B. Heron has systematically built out its mission-related investment portfolio across a range of asset classes and program areas while increasing the total share of mission-related investments in its endowment. This expansion followed a clear investment discipline and conformed to the foundation’s overall asset allocation policy, performance benchmarks and prudent underwriting practices. Source: F.B. Heron Foundation

Asset Allocation and the Impact Investor

Impact investors often find themselves questioning their ability to successfully execute an impact investment portfolio approach across their entire asset allocation. When starting this process, one of the first questions to answer is whether you are a financial first or impact first investor, or perhaps both. For the financial first investor, sound economic principles that simultaneously satisfy social and/or environmental criteria serve as the drivers of opportunities in the portfolio construction process. In doing so, the investor can recognize

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and separate factors which serve as inputs to the financial component of the asset allocation process from those that do not. Although important, the potential social and/or environmental impact should not influence the financial risk attributable to a given asset class or investment in the asset allocation modeling process. For the impact first investor, positive attributes of a desired social or environmental impact may outweigh pure financial considerations in the ultimate decision to allocate to a given investment. An investor may choose to go beyond traditional philanthropy and grants to employ flexible, patient capital opportunities that reflect the investor’s desire to leverage social and environmental programs. Nonetheless, choosing the impact first approach should not dismiss the inclusion, evaluation and consideration of the financial risk associated with the proposed investment within the asset allocation framework.10 In some cases, an investment may satisfy both impact first and financial first investors. Opportunities that have high financial, social and/or environmental return are scarcer, but should be easier to identify once a clear investment thesis and theory of change have been developed. The impact investor’s next step is to decide if they will fully embrace the Genius of AND by integrating impact investments into the overall portfolio allocation as opposed to a carve-out, a dedicated pool of capital allocated outside the portfolio. A carve-out approach may be appropriate for someone new to impact investing, but a committed impact investor should implement an integrated strategy to fully realize the potential of this type of investing. In either case, all the fundamental allocation and investment principles apply. For the integrated approach, the investor’s risk tolerance and existing target asset allocation should serve as the basis for the inclusion of impact investments. Regardless of the

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portfolio construction methodology, the integrated impact investor should evaluate and allocate investments within their defined investment policy. If opting to use a carve-out approach, a risk profile, investment objective and target asset allocation should be developed for this portion of the portfolio. Although some investors envision replicating their overall asset allocation objectives within this segregated impact investment pool, there are often practical limitations in doing so. Asset size of the portfolio and potential cost of the investments are two such constraints. For example, the investment universe available to a $100 million portfolio is far different from that of a $2 million portfolio. Additionally, costs are typically higher for smaller or more retail-focused products. This higher cost may lead to other challenges which may ultimately limit the impact investor’s ability to optimize for either the financial or social/environmental impact objectives they seek. Whether choosing an integrated or carve-out approach, impact investors should develop asset allocations based on risk tolerance, liquidity profile, spending needs, other financial considerations AND impact objectives.

Relationship Between Risk and Return

In a well-functioning market, risk is relative to return. A major goal of designing and managing an investment portfolio is to maximize total return while keeping overall risk at an acceptable level. With the introduction of the additional dimension of impact, investors’ perceptions and considerations of the risk and return relationship may be modified. The key is to recognize these potential shifts and ensure that the

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appropriate investment process is in place to treat each of these accordingly. For example, when adopting a financial first approach, capital market assumptions including forecasted return and risk should not be influenced by expected social and environmental impact. Inversely, the impact first investor should initiate the assessment process by validating a given investment’s ability to meaningfully impact the desired themes and then validate the characteristics of the proposed economic model. Furthermore, forecasting asset class returns, like any attempt to predict the future, is difficult. History provides the only measurable guide as to how asset classes behave under different economic environments. Unfortunately, focusing purely on the past to predict the future presents challenges when evaluating investments on both financial and impact dimensions. For example, five years ago, the long-term data on the risk-to- return ratio of real estate investments were attractive, and that has shifted. The investor should not only consider historical performance, but also current events, short- and mid-term forecasted economic activity, regulation, externalities and human psychology to formulate capital market assumptions. The relationship of risk versus return can be influenced not only by the characteristics of a given asset class exposure, but also by investment structure used to gain exposure to the asset class. For example, a senior debt investment with a large amount of subordinated debt below it has significantly reduced risk.

Measuring Financial Risk

Measuring or analyzing the risk associated with different investments enables the investor to determine the right mix of asset classes for a portfolio. Risk can be measured in a number of

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ways. One measure of risk is standard deviation, namely, how much an investment’s price varies from its mean (average) return over time. The greater the standard deviation of an asset, the higher its highs and the lower its lows will be from its mean return. When considering two securities with the same expected return, a rational choice would be to buy the one with the lower standard deviation, because it carries less risk. This decision becomes more complex when the investor is faced with social and environmental considerations. These concepts of risk are not only applicable in the context of asset allocation modeling, but in the evaluation and comparison of similar investments. This notion is what is often referred to as “risk-adjusted rate of return.” Investors, including impact investors, are wise to look at an investment’s attractiveness by measuring how much risk is involved in producing the associated return. This is generally expressed as a number or rating. Liquidity is also a major factor in risk assessment. Behavioral finance suggests some modifications to the traditional risk assessment framework described above by pointing out that psychological phenomena leave investors subject to systematic errors, which then are reflected in asset prices. The term sentiment is used to describe these errors. For instance, sentiment can cause some assets to be mispriced. Sentiment can impact the relationship between risk and realized returns. Notably, traditional measures of risk only capture the sensitivity of asset returns relative to the overall market, but not to sentiment.

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Correlation: Diversifying Asset Classes to Reduce Risk

Combining different asset classes within a portfolio is called diversification. The goal of diversification is to build a portfolio with investment classes that offer different levels of risk and react differently to market events. By doing so, the investor strives to reduce overall risk and improve overall performance. Correlation measures the strength and direction of a linear relationship between the price movements of two asset classes over time. A well-diversified portfolio consists of asset classes that are not closely correlated to each other. Historically, an example has been stocks and bonds. On the other hand, if a portfolio consists of stock asset classes that include Large Cap, Mid Cap and Small Cap stocks, it is not well diversified because historically these stocks have tended to be closely correlated. Microfinance and Correlation Impact investors can pursue investment opportunities offered by impact themes which have less correlation to traditional asset classes. By providing access to capital and community development, the microfinance industry has grown to represent approximately $30 billion in investments. As demonstrated in their 2008 study of microfinance institutions (MFIs), Nicolas Krauss and Ingo Walter of New York University found MFIs showed significantly less correlation to global market risk, for all parameters analyzed. (See www.accion.org/Page.aspx?pid=958.) In another study conducted at the University of Liechtenstein, Oliver Oehri and colleagues tested portfolio optimization scenarios by substituting 5% of a selected asset class with a microfinance debt proxy for the period January 1996 through June 2008. They concluded that adding the microfinance debt fund reduced risk for defensive and balanced portfolios, regardless of the asset class being replaced. (See www.iamfi.com/documents/OehriMFPortfolioOptimization.pdf.)

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Asset Class Framework

This monograph categorizes investments by describing their role in a diversified portfolio. We are not advocating for a definitive language or approach to asset allocation. The following asset classes (which would need to be appropriately weighted given an investor’s risk profile, spending needs, liquidity preferences and time horizon) represent the role an asset class may play in the development of a given portfolio: • Cash and Cash Alternatives represent a portfolio’s principal source of liquidity for meeting spending needs. The use of certificate of deposits and/or pledging cash accounts for guarantees alters this portion of the portfolio’s liquidity and requires appropriate adjustments. • Notes, Other Debt Obligations, Bonds, Absolute Return and Low Equity-Correlated Strategies may preserve wealth and/or generate income. The idea of low equity-correlation does not necessarily suggest exclusion of an equity investment. It is simply referring to an investment’s relationship and performance relative to the broader global equity capital market asset class. • Public Equity, Equity Long/Short and Private Equity assets serve to grow wealth through exposure to risk and strategies benefiting from global economic activity. • Real Estate, Commodities, Timber and other Real Assets can protect a given portfolio from the erosion of purchasing power brought on by inflation.

Mapping Impact Themes to Asset Classes

Once you have decided on and documented an impact thesis and themes, you must identify opportunities to express these themes

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Illustrative Landscape of Impact Themes Asset Classes Stable Assets Growth Assets

Cash / Public Fixed Income Cash Alternatives Equity

Positive & Climate Tax-Exempt Green Green Bank Deposit Negative Change Bonds Screening

Exchange Screened Corporate Energy Traded Funds Bonds (ETFs)

Unit Investment Corporate Water Trust, Closed Infrastructure Bonds End Funds

Community Community Bank Shareholder Foreclosure Repair Development CDs Proxy Voting

Micro-Cap Social Social Enterprise Listed Social Enterprises Credit Companies

Health & Wellness

Sustainable Trade Finance Smart Growth Thematic Development Guarantee / Deposit Municipal Bonds Screening Social, Environmental or Blended Impact Themes Linked Deposit / Charter School Education Guarantee Bonds

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with Asset Class Exposures Asset Classes Growth Assets Inflation Protection

Hedge Private Commodities, Timber Real Estate Funds Equity & Other Real Assets

Clean Tech CO 2 Venture Green REITs Trading Capital

Renewable Energy Efficiency Sustainable Energy Venture Capital Feedstocks

Water Water Technology Water Rights Funds Venture Capital

Microfinance Transportation — Community Habitat Institutions Debt / Smart Development Development Conservation Equity Venture Capital Funds

Small & Medium Conservation / Enterprise Ecotourism

Structured Consumer Product Public Organic Farming Venture Capital Note

Blended Debt Ranch Land, Sustainable Equity Hybrid Agriculture Timber Structures

Education Private University Green Equity Building

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in a given portfolio. The set of available impact investment options is determined by the breadth or narrowness of impact themes, geographic exposure requirements and other characteristics. It is important to consider that not all impact themes expressed through grants or other forms of philanthropy can be uniformly expressed in investible assets. We offer the preceding table as an illustrative example of how some common impact themes can be expressed across asset classes for a portfolio. When reviewing the matrix, you should note that each box represents not only a different financial risk reward characteristic, but also varying degrees of “impact” for the particular theme. This chart, of course, does not include all opportunities among exposures and themes, and as the field of impact investing expands, the opportunities across asset classes and impact themes will increase.

Applications Across Impact Themes

To illustrate, we will first examine the climate change theme as expressed in public equity screening versus private equity clean technology venture capital. An investor in a given fund or pool of large company stocks cannot account for the degree to which these companies mitigate their negative impact on climate or deliver innovative solutions to the problem. Although various methodologies exist to evaluate Environmental, Social and Governance (ESG) factors, most companies classified as Large- Cap tend to be diversified across multiple business lines. Each business group within the larger corporation may contribute to climate change by varying degrees. While the size, amount of readily available information and liquidity of a public-traded corporation may reduce financial risk, these same factors may

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make it more difficult to express a specific impact theme. In contrast, investment in clean tech venture capital may allow for greater identification and possible “purity” of the expression of the desired impact theme. A single private company or even a pool of companies comprising a venture capital fund will tend to focus their activities. This comes with the inherent additional financial risk associated with illiquid and/or early stage businesses. It is important to note that the comparison of public equity versus private equity exposure would be irrelevant to the investor who does not have the risk appetite to be exposed to either asset class. For a conservative investor desiring to address climate change, the only appropriate financial first options may be green bonds or cash deposits in green banks. If a US foundation is utilizing PRIs, it may also consider environmental impact first options, such as a note/debt obligation to organizations providing capital for low carbon technologies and services in the developing world. While the prior example contrasts impact among asset classes, this example focuses on the acceptable scope or degree of impact a given investment must have within the same asset class. When looking at water as a theme within public equities, many water funds hold General Electric (GE). Although GE is in the water business, it is estimated that water accounts for no more than 5% of its activities. However, given GE’s size, it is still one of the major players in this sector. The investor will have to determine the minimum level of acceptable direct impact. Some impact investors may be satisfied with 5%; for others it may be 25%, 50% or 100% of activities in the desired impact area. Microfinance illustrates how one theme or strategy may be represented across the continuum of financial and impact

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considerations. Although microfinance is categorized as an absolute return/low equity correlated strategy in the matrix, a microfinance strategy can range from grants to non-profits to private/public equity in fully commercial microfinance institutions. Microfinance options are so numerous that one can narrow the impact objectives to focus on particular geographies, the percentage of women served, or the type of lending offered. Many of the issues raised by the previous examples can be best addressed through a well-documented investment policy statement and through research and due diligence. As the impact investing industry has evolved, investment opportunities across asset classes and impact themes have proliferated. While many early impact investments such as affordable housing were concentrated in the debt asset class, opportunities now span most major asset classes, and there are enterprises and funds with long operating histories. To illustrate these investment opportunities, we have provided three impact investment profiles in the following chapter, a summary of additional investment profiles in the appendix and the details of these investment profiles on the web. For a description of additional impact investment opportunities in various asset classes, the interested reader may also consult Investing for Impact: Case Studies Across Asset Classes, a study recently released by Bridges Ventures and The Parthenon Group.

Developing the Investment Policy Statement

The investment policy statement serves as the operating manual for a given portfolio. It documents the portfolio’s objectives and constraints and outlines the roles and responsibilities of

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Excerpt from the RSF Social Finance’s Impact Portfolio Guidelines:

Objectives 1. Long-term principal appreciation; 2. Minimal income generation; 3. Minimal liquidity for cash disbursements or grantmaking; 4. Moderate volatility; 5. Time horizon of 3 to 7 years; and 6. Social impact % goal of 100.

Constraints Mission: RSF’s goal is for the Impact Portfolio to consist solely of mission investments. RSF applies a mission perspective to all investments made in the Impact Portfolio. Mission content typically varies by type of investment, but generally follows these guidelines: • Public Equity: Managers and funds integrate environmental, social and corporate governance criteria into the investment management process and/or are active in positive shareholder advocacy. • Private Equity: Fund investments address tangible social or environmental problems through the products and services of the companies in which they invest and the way in which they are managed. • Absolute Returns: Funds invest capital in ways that support social and environmental value. • Real Assets: Fund investments are either intrinsically sustainable assets or are in more conventional assets (e.g., real estate), managed in a sustainable manner. • Fixed Income: Managers and funds directly provide capital to projects and organizations providing social and environmental value. • Cash and Cash Equivalent: Cash deposits are made in community development and environmental banks and a mission screen is applied to other cash securities. Source: RSF Social Finance

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fiduciaries and other interested parties. Some important characteristics of a successful policy include: achievable goals and objectives; an understandable document; reasonable guidelines; consensus of all concerned parties on the policy statement; and a policy which is dynamic in nature (i.e., it is designed to be fine-tuned and updated when appropriate). By embracing the Genius of AND, the impact investor can integrate the appropriate elements of an impact investing strategy into the traditional components of an investment policy statement. The preceding example from RSF Social Finance’s Impact Portfolio demonstrates the integration of impact criteria into two key parts of the investment policy statement, namely Investment Goals & Objectives and Investment Constraints. Additional components of the investment policy statement that can benefit from the integration of your impact objectives are:

A Purpose Statement — this should include a social and/or environmental impact thesis along with guidelines on the use and purpose of impact first investments.

Roles and Responsibilities — define the ‘who,’ ‘how’ and standards for impact assessment during the investment evaluation and the ongoing performance reporting process. This is most important if external resources will be utilized in generating deal flow, due diligence, portfolio recommendations and reporting.

Asset Allocation Target/Ranges — this may include specific ranges for the availability of impact opportunities within a given asset class and necessary accommodation for desired impact first investment allocations, in particular those qualifying as PRIs for US foundations.

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Performance Benchmarks — documentation for the use of equivalent risk-adjusted commercial benchmarks for the financial first allocation. The development of standards is important for impact first investments. Examples include: equivalent commercial benchmarks with a discount factor; the use of an absolute return hurdle; or commonly available measures such as the Consumer Price Index.

Here is another example of impact investors aligning their investment policy to achieve their desired financial results AND impact objectives. The KL Felicitas Foundation has established the following investment policy by asset class:

KL Felicitas Foundation Investment Policy Guidelines

Cash, 4.00% Timber, Other Real Assets, 2.00% Notes/Debt Obligation, Real Estate, 4.00% 3.00% Bonds, 5.00% Private Equity, 15.00% Less Equity Correlated, 14.00%

US Large Cap Equity, 6.30% Equity Long/Short, 25.00% US Small/Mid Cap Equity, 3.30%

International Equity, Developed Markets, International Equity, 15.50% Emerging Markets, 3.00%

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AND set the following objective of exposure to its impact categories, targeting a 100% impact portfolio by 2012. As of August 2009, the foundation has successfully deployed 21 impact investments committing over 55% of its portfolio.

100% Social Component Other Investments Investments 80% Program-Related Investments 60% Mission-Related Investments 40%

Sustainable 20% Investments

0% 2008 2009 2010 2011 2012

Portfolio Process Overview

Having developed an impact investing strategy as outlined in the preceding chapters and having articulated a target allocation and investment policy, your next steps are portfolio construction, implementation, ongoing monitoring and adjustment to the process as needed. Although the portfolio process will be covered in further detail in other chapters, we offer the following overview of key steps.

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Investor Intent The first step is to clarify your motivation and intent as an impact investor. Is it to maximize profits with demonstrated social and/or environmental benefits? Or is the objective to seek out the optimal impact solutions for the societal and/or environmental challenges? Or is it both? Based on the answer to this question, you need to develop the pipeline of investment opportunities. Once the portfolio objectives of financial risk/return and impact are clearly defined and articulated in the investment policy statement, internal investment and/or program staff, external advisors and consultants, fund managers and/or other resources will be able to identify the appropriate opportunities.

Financial First Investors For the financial first investor, once deal flow has been generated, an appropriate quantitative and qualitative investment due diligence process should be completed. It is important that this process mirrors standards set for similar asset classes and strategies of non-impact investments. For example, the process associated with evaluating an impact certificate of deposit, which is FDIC-insured and issued by a community bank, may involve a simple comparison of rates available in the market. Due diligence may be simply accessing publicly available information on the issuing bank and calling a bank representative. On the other hand, if the investment under consideration is a highly illiquid strategy, such as private real estate, offered by a first-time fund manager, the process will be far more complex. This would most likely include several meetings with the management team, thorough financial analysis of any historical, current or projected transactions, background checks on the principals, and extensive legal review

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of the offering documents and operational assessment of the management company. If the investment fails to successfully complete the financial due diligence process, but appears to exhibit meaningful social or environmental impact, it can be directed for consideration within the impact first process. Assuming the proposed financial first investment has successfully completed the appropriate investment due diligence, an evaluation of the social and/or environmental impact should be completed. The extent of social and/or environmental impact should be articulated in the investment policy statement. You may choose to accept the impact metrics currently offered by the fund/investment, develop agreed-upon standards for reporting, or use third party tools or service providers for the impact evaluation process. If the investment fails to address and/or provide the desired impact, the investment is removed from consideration, but may be considered in the context of traditional (non-impact related) investing. For the impact investment which has successfully completed both financial and impact analysis, the next step is to consult the investment policy and determine appropriate size and timing within the context of the current portfolio holdings/asset allocation. If compliant with policy, the investment would simply proceed with an investor’s implementation protocols. If not compliant, whether due to current exposure limits, geography or other constraints, the investment would not be implemented and should be considered for future allocation. The investment could be implemented once the limiting factors have been removed and any updates to the analysis are completed.

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Impact First Investors: If you are an impact first investor, the process should begin with the evaluation of the proposed social and/or environmental impact. As discussed in Chapter 8 in more detail, many methods exist to address this. If the proposed impact investment fails this process, it should be removed from consideration. Investments satisfying the desired impact criteria move into the investment due diligence process. Once again, an appropriate level of quantitative and qualitative analysis should be conducted relative to the complexity, liquidity and risk associated with the proposed investment. Sometimes investors are quick to overlook the financial merits of an opportunity presenting compelling social and/or environmental impact. In doing so they may overlook the risk associated with a flawed economic model. This could ultimately result in the failure or the lack of scalability of the investment, negating the ability to achieve the sought-after impact. At the same time, extenuating circumstances may cause a proposed impact first investment to fail the investment due diligence process but still meet the test of creating meaningful impact. In such cases, pure philanthropic capital may be considered to fund the initiative until it is more mature and able to accommodate impact investment capital. Impact first investments satisfying the impact assessment and investment due diligence must then be considered within the framework of the investment policy. For US foundations qualifying the proposed allocation as a Program Related Investment (PRI) and counting it as a portion of the required spending, simply noting the allocation to the investment policy should suffice. This is a result of the PRI being a substitution of the foundation’s greatest risk capital — grants — something that

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would currently be captured as spending within the investment policy and portfolio-modeling framework. For investors not able to qualify the proposed investment as a PRI, compliance with the guidelines established by the investment policy should be adhered to. As before, if current constraints or portfolio holdings prevent compliance with policy, the investment will be considered for future allocation. The investment could be implemented once the limiting factors have been removed and any updates to the analysis are completed. Although not illustrated in the process diagram, you should note that impact funds, investment structures and hybrid enterprises might offer tranches that fit within financial first, impact first and philanthropic options. What may start as the exploration of an opportunity in one area may quickly find its way to another or may even be satisfied with capital from multiple funding sources. In either case the appropriate process should be applied relative to the role and purpose of the available capital. By harnessing the Genius of AND, we believe you can not only apply financial portfolio theory, but can also benefit from applying the discipline of asset allocation, investment policy statements and a rigorous, well-defined portfolio process.

9 Swensen, David, Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, New York: Free Press, 2000. 10 Given the specific treatment under US tax law of Program-Related Investments made by US foundations, PRIs may be considered a portion of the required charitable distribution rather than the asset allocation. By substituting the greatest risk capital of the foundation — that of a grant — and modifying the actual spending policy, PRIs need only be noted within the target asset allocation and portfolio investment policy.

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Chapter 6: Generating

Deal Flow

Establish Strategy Implement and Maintain Strategy

Articulate Create Define Develop Generate Analyze Evaluate Mission Impact Impact Impact Deal Deals Impact and Themes Investing Flow Values Policy

Building the Transaction Pipeline

Once you have defined your impact themes, developed your impact investment policy and an appropriate asset allocation, the challenge shifts to finding and executing impact investment

transactions. Your success will depend on your search efforts, your advisors, the ability to tap resources and the ability to build o a network of relationships. Actively pursuing investment opportunities will result in a very different universe of investment opportunities than waiting for proposals. Your co-investors may include a broad range of investors such as insurance companies, banks, pension funds, endowments and individuals. The public sector may also participate directly as a co-investor or indirectly through credit enhancement or refinancing of specific transactions. Information-sharing networks can bring important benefits by disbursing information and increasing familiarity with impact investing among potential investors. Impact investors are also forming networks such as the Global Impact Investing Network Chapter 6: Generating Deal Flow 79 MaximizingREPRINTwchart_Layout 1 7/27/10 12:41 PM Page 80

(GIIN), More for Mission and impact investment collaboratives in which impact investors share expertise and co-investment opportunities. (See www.rockpa.org/impactinvesting for a listing of resources.) While reviewing impact investment opportunities, also keep in mind that supply and demand need to co-evolve in this market. Investors need to understand how they can assist in the mentoring, incubation and acceleration of impact investment opportunities to avoid a market in which the available capital exceeds the available supply of high-quality deals.

Direct Versus Funds Strategy

The decision to make direct investments and/or to utilize funds and other types of intermediaries is a critical step in the execution of your impact investing strategy. The decision to utilize a direct and/or fund-driven approach may be a function of your impact themes and desired level of engagement in the investment process. For example, in the impact themes of affordable housing and microfinance, there is a wide range of funds through which an investor could invest. In other sectors investors may have to work to create and seed such funds or look to investment opportunities with secondary or tertiary effects related to a primary impact theme (e.g., the impact on health through a microfinance investment). The due diligence process will differ between direct investment and funds as well.

Fund Investment Selection Criteria

The Calvert Community Investment Note Through its Community Investment Note program (Notes),

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Calvert Foundation invests in non-profits with proven track records that demonstrate strong management, effective operations, good financial performance and sound capitalization. Borrowers are subject to a rigorous due diligence process. Calvert Foundation has designed Notes to be suitable for all classes of investors, from large institutions and high net-worth individuals looking to leverage a portion of their investment portfolio towards community development initiatives, to retail social investors seeking to align their investment decisions more seamlessly with their values. Notes are a taxable, low-volatility fixed-income product. Notes provide accessible capital to community development organizations around the world while offering investors a compelling blend of social and financial return; therefore they are a suitable addition to both investment portfolios and philanthropic portfolios.

RSF Donor-Advised Funds Investment Portfolios RSF’s goal is to identify and invest in the most direct opportunities available to support innovative funds, institutions and projects, reducing unnecessary levels of intermediation, while also meeting diversification, risk and return criteria. Social impact is measured by a combination of quantitative and qualitative factors with a focus on the outputs of the investments such as the number of affordable housing units financed, low- income mortgages made and environmental impacts achieved.

Current Universe of Impact Investment Funds

To aid current and prospective impact investors and their advisors with developing a framework for evaluating investments, we have

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provided an “Impact Investment Profile” template on page 84 which can be customized to evaluate impact investing opportunities. Using this form, we have included three Impact Investment Profiles in this chapter. Additional Impact Investment Profiles, which were produced over the course of our research, have been made available at www.rockpa.org/impactinvesting. The profiles featured in this chapter and the case studies in the following chapter are representative examples of the more than 100 funds and enterprises our team researched for this publication. We have evaluated and documented each example using the same criteria for social and environmental impact areas, asset classes and geographic exposures. Given the pioneering nature of the impact investing industry, some of these funds may lack the investment track record and benchmarked performance data of more traditional investment approaches. Offsetting these risks are the increasingly impressive track records of the fund managers themselves and the accumulating evidence of what works and what does not work in impact investing. Please note that we are by no means providing an exhaustive database of deal flow, nor are we offering investment advice, but rather we are seeking to show meaningful deal flow across multiple asset classes. Other efforts like the Global Impact Investing Network (GIIN) database project have embarked on creating a comprehensive database of impact investment offerings. The GIIN open access database seeks to present over 1,000 impact investment opportunities — funds and products — in a format that can be sorted, viewed and used by investors and intermediaries (see www.globalimpactinvestingnetwork.org).

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Methodology Used Impact investment opportunities have social/environmental and financial dimensions. Our template is careful to highlight both aspects of the funds and enterprises. The profile has four main parts: a table with a snapshot of the proposed impact and investment; an overview of the impact to identify the problem/need; a description of the market; and the investment’s proposed response. Furthermore, the language utilized in completing the table of the profiles has been aligned with the taxonomy developed by GIIN for their upcoming database. The final section presents basic information on the fund or investment, including the appropriate contact person. This information was obtained from the supporting documentation of profiled funds. In most instances, funds were easily categorized in a particular asset class. In some cases, however, funds made both debt and equity investments and thus had characteristics of more than one asset class. In such cases, the funds are simply noted as Multi-Asset. Although behavioral dimensions of the funds and enterprises are not addressed on the profiles, the information presented on the fund or enterprise allows a prospective investor to evaluate different behavioral elements of the investment opportunities, illustrating why certain classes of funds and enterprises have not historically received funding or attention from investors. The content in these profiles was derived from information provided by the profiled investment opportunities and our team.

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Impact Investment Profile

Template

Impact Investment

Approach: Financial First, Impact First or Asset Class: Cash, Cash Alternatives, Hybrid Guarantees, Notes/Debt Obligations, Bonds, Absolute Return/Low Equity Correlated Strategies, Public Equity, Equity Long/Short, Private Equity, Real Estate, Commodities, Timber, Other Real Assets, Multi-Asset

Theme: Social, Environmental, Blended Structure: Fund, Fund of Funds, Separate or Other Account, Security

Sector: Social — Social Enterprises, Status: Exploratory, Actively Raising, Community Development, Corporate Closed Social Responsibility Environmental — Green Technology/ Cleantech, Environmental Markets and Sustainable Real Assets, Sustainable Consumer Products

Sub-sector: Community Development — Geography: US, North America, Affordable Housing, Small Business, Latin/South America, Europe, Asia, Community Facilities, Rural Africa, Oceana, Global (Developed or Development/Agriculture, Base of the Developing) Pyramid, Microfinance, Small & Medium Enterprises Corporate Social Responsibility — ESG Analysis, Screening, Shareholder Advocacy Environmental Markets and Sustainable Real Assets — Carbon & Environmental Markets, Commodities, Conservation Finance, Water Quality & Rights Trading, Green Real Estate, Sustainable Forestry, Sustainable Agriculture Green Technology/Cleantech — Energy, Fuels & Generation, Energy Efficiency, Transportation, Water Technology, Waste Management/Recycling, Materials Science Social Enterprise — Health, Education, The Arts, Human Rights, Social Services, Digital Access/New Media, Financial Services Sustainable Consumer Products — Green Consumer Products, Alternative Healthcare, Technology & Media, Food Products/Organics

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1. Impact Overview a. Problem/Need: b. Description of the Market: c. Investment’s Response to Market:

2. Fund/Investment Information a. Manager Name: b. Location: c. Fund Name: d. Firm Assets Under Management (AUM): (asset size of parent organization) e. Strategy AUM: (asset size of particular strategy or venture) f. Strategy Description: g. Key Individuals and Backgrounds: h. Portfolio Diversification: i. Fees: j. Liquidity: k. Minimum Investment: l. Contact:

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Impact Investment Profile E+Co People & Planet Note Series

Impact Investment Approach: Impact First Asset Class: Notes/Other Debt Obligations

Theme: Blended Structure: Fund

Sector: Social Enterprises, Community Status: Actively Raising Development, Green Technology/ Cleantech

Sub-sector: Small and Medium Geography: Africa, Asia and Latin Enterprises, Energy America

1. Impact Overview a. Problem/Need: Developing markets lack enterprises that produce clean, sustainable energy, and energy demand often outpaces energy supply. Additionally, small- and medium-sized enterprises in these areas often lack access to funding to develop or scale their operations. b. Description of the Market: E+Co’s portfolio enterprises provide energy to 6.2 million people in Asia, Africa, and Latin America. E+Co seeks to scale up this effort to deliver energy to an additional 17 million people. These investments are in areas that use fossil fuels as a source of energy, which results in significant air pollution. c. Investment’s Response to Market: Investment allows for growth and development of clean energy enterprises, reducing the dependence of rural inhabitants in developing countries on fossil fuels for energy, increasing their energy supply and self-sufficiency, as well as contributing to a cleaner environment and bringing about sustainable community economic development.

2. Fund/Investment Information a. Manager Name: E+Co (www.eandco.net) b. Location: Bloomfield, NJ c. Fund Name: People + Planet Notes Series d. Firm AUM: $28.8 million as of December 31, 2008

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e. Strategy AUM: $50 million target f. Strategy Description: E+Co is issuing notes to raise capital for investments in modern energy enterprises in developing countries. E+Co seeks to establish sustainable energy businesses that serve the energy poor and create non-financial social as well as environmental benefits. The notes will be offered with an 8-year maturity, paying 3% annually. g. Key Individuals and Backgrounds: Christine Eibs Singer, Chief Executive Officer, 25 years’ experience in design, implementation of public-private partnerships, including UN Foundation REED (Rural Energy Enterprise Development) programs with UNEP, and Port Authority of NY and NJ h. Portfolio Diversification: 268 energy enterprises currently in portfolio, located in Africa (33%), Asia (40%) and Latin America (27%). Seeks an additional 300 investments by 2012. i. Fees: None j. Liquidity: Eight year maturity, depending on the note structure k. Minimum Investment: $100,000 subject to manager discretion l. Contact: Meredith Elliott, [email protected]

The information presented herein has been prepared for informational purposes only and is not an offer to buy or sell, or a solicitation of an offer to buy or sell, any security or fund interest. The offering circular of each security or the respective fund’s confidential offering memorandum contains important information concerning risks and other material aspects of the investment and must be read carefully before a decision to invest is made.

Although the information presented herein has been obtained from and is based upon sources we believe to be reliable, no representation or warranty, express or implied, is made as to the accuracy or completeness of that information. No assurance can be given that the investment objectives described herein will be achieved.

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Impact Investment Profile Neuberger Berman Socially Responsive Equity

Impact Investment Approach: Financial First Asset Class: Public Equity

Theme: Social Structure: Fund, Separate Account

Sector: Corporate Social Status: Actively Raising Responsibility

Sub-sector: ESG Analysis, Screening Geography: US

1. Impact Overview a. Problem/Need: Sustainability challenges relating to business include the depletion of natural resources, the failure of companies to adequately monitor their corporate citizenship practices, companies’ participation in industries that offer or introduce negative externalities to society and the continued efforts needed to enhance workplace diversity. b. Description of the Market: Neuberger Berman selects mid- and large-cap stocks typically traded on US exchanges. c. Investment’s Response to Market: The Fund highlights companies that best approach issues of good governance and corporate citizenship, increasing the importance of these criteria for investors, and in turn bringing about positive social change through large companies. Companies should demonstrate leadership in the areas of environmental impact, workplace practices, community relations, innovative products & design, and management practices to drive longer-term sustainability and robustness of the business strategy.

2. Fund/Investment Information a. Manager Name: Neuberger Berman (www.nb.com) b. Location: New York, NY c. Fund Name: Neuberger Berman Socially Responsive Equity d. Firm AUM: $180 billion, as of 3/31/2010 e. Strategy AUM: $3.8 billion total, $1.2 billion in the Fund as of 3/31/2010

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f. Strategy Description: An open-ended mutual fund that invests in shares of listed equity securities that meet financial as well as social criteria. The fund has a value bias, and seeks out companies with secularly advantaged growth prospects that show leadership in major areas of social impact such as the environment, workplace diversity and progressive employment practices. The fund invests mainly in common stocks of mid- to large-capitalization companies. It seeks to reduce risk by investing across many different industries. The fund looks for solid balance sheets, strong management teams with a track record of success, good cash flow, the prospect for above average earnings growth and other valuation-related factors. The fund does not invest in companies that derive revenue from gambling, alcohol, tobacco, firearms or nuclear power. g. Key Individuals and Backgrounds: Arthur Moretti, 23 years in industry, portfolio manager since 2001; Ingrid Saukaitis Dyott, 15 years in industry, portfolio manager since 2003. Mamundi Subhas, Associate Portfolio Manager. Sajjad Ladiwala, Associate Portfolio Manager. h. Portfolio Diversification: 31 listed equities as of 3/31/2010 selected from among approximately 900 mid- and large-cap stocks on listed exchanges in the US i. Fees: .78% expense ratio (institutional), 1.17% expense ratio (Class A) j. Liquidity: Daily k. Minimum Investment: NBSLX $1 million (institutional), NRAAX $1,000 (Class A) l. Contact: William Timmons, [email protected]

The information presented herein has been prepared for informational purposes only and is not an offer to buy or sell, or a solicitation of an offer to buy or sell, any security or fund interest. The offering circular of each security or the respective fund’s confidential offering memorandum contains important information concerning risks and other material aspects of the investment and must be read carefully before a decision to invest is made.

Although the information presented herein has been obtained from and is based upon sources we believe to be reliable, no representation or warranty, express or implied, is made as to the accuracy or completeness of that information. No assurance can be given that the investment objectives described herein will be achieved.

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Impact Investment Profile Zouk Cleantech Europe II

Impact Investment Approach: Financial First Asset Class: Private Equity

Theme: Environmental Structure: Fund

Sector: Green Technology/Cleantech Status: Actively Raising

Sub-sector: Multiple Geography: Europe

1. Impact Overview a. Problem/Need: The effects of climate change continue to impact the environment, global population growth continues to fuel increased energy demand, natural resource depletion threatens conventional energy supply, and impending governmental regulations and incentives encourage investment in sustainable energy production. b. Description of the Market: As the early adopter, Europe is an entrenched, fast-developing market with long-term regulations. Europe has also outpaced other regions (61 billion euros, over 40% of global total in 2008). Limited competition for deals, tight pricing discipline and large localized markets offer a strong private equity environment. c. Investments Response to Market: Fund to provide growth equity and active support to technology companies in alternative & renewable energy, resource efficiency and environmental services technology filling an established and increasing demand in Europe.

2. Fund/Investment Information a. Manager Name: Zouk Ventures (www.zouk.com) b. Location: London, UK c. Fund Name: Cleantech Europe II, LP d. Firm AUM: 190 million euros across three funds (excl. Cleantech Europe II) e. Strategy AUM: Cleantech Europe II is targeting 200 million euros in LP commitments

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f. Strategy Description: Cleantech Europe II is a private equity fund that will invest primarily in European, expansion stage clean-tech companies with commercially proven technology. Zouk will actively manage its portfolio companies, leveraging its proven track record of providing strategic, business development and financial structuring support. g. Key Individuals and Backgrounds: Zouk has been building businesses since 1999, with the partners working together for an average of six years. Samer Salty, CEO and co-founder, Boards: Solarcentury and Orb Energy, formerly JPMorgan M&A and PE; Felix von Schubert, partner and co-founder, Boards: Sulfurcell Solartechnik, Nanotron Technologies, The CarbonNeutral Company and Zooplus, formerly JPMorgan, M&A and PE; Alois Flatz, partner, Board: SiC Processing, former head of research at SAM, founder of Dow Jones Sustainability Index; Anthony Fox, Board: Trilliant, ex CEO Kingfisher E-Commerce Plc and a handful of business- building roles across Asia and the Middle East h. Portfolio Diversification: Target of 10-15 investments i. Fees: 2.5% (of total commitment) management fee from first closing for five years, then declining 0.25% per year, plus 20% carried interest over an 8% hurdle rate j. Liquidity: Fund has eight-year life, plus two one-year extensions k. Minimum Investment: 5 million euros, subject to manager discretion l. Contact: Philip Tomlin, [email protected]

The information presented herein has been prepared for informational purposes only and is not an offer to buy or sell, or a solicitation of an offer to buy or sell, any security or fund interest. The offering circular of each security or the respective fund’s confidential offering memorandum contains important information concerning risks and other material aspects of the investment and must be read carefully before a decision to invest is made.

Although the information presented herein has been obtained from and is based upon sources we believe to be reliable, no representation or warranty, express or implied, is made as to the accuracy or completeness of that information. No assurance can be given that the investment objectives described herein will be achieved.

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UNEP FI’s Environmental and Social Responsibility Observatory The United Nations Environment Programme Finance Initiative (UNEP FI) is a strategic public-private partnership between UNEP and the global financial sector. UNEP FI works with over 180 banks, insurers and investment firms, and a range of partner organizations to understand the impacts of environmental, social and governance issues on financial performance and sustainable development. Through a comprehensive work program encompassing research, training and region-specific activities, UNEP FI carries out its mission to identify, promote and realize the adoption of best environmental and sustainability practices at all levels of financial institution operations.

In support of its efforts, UNEP FI has embarked on the development of a case study database — the Environmental and Social Responsibility Observatory (ESRO). ESRO will be an innovative online database for financial analysts, investors and lenders looking for case studies at the intersection of commercial finance, investment and sustainability. Ranging across geographies, industries and sustainability issues, these case studies can demonstrate the financial benefits of appropriate environmental and social risk management in financial decision-making. The database should prove to be a helpful tool for impact investors as they evaluate a landscape of historical transactions, identify experienced players and source new opportunities. For additional information, visit www.unepfi.org.

Generating deal flow is an ongoing and evolving process. Investment managers, product designers, intermediaries and often impact investors themselves are continually developing offerings to harness the scale and power of capital markets to deliver solutions to the social and environmental challenges faced by society. These efforts are not only underway

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in the boardrooms of the traditional financial or philanthropic centers, but are occurring at the grassroots level throughout the developing world, where many of the desired “impact” objectives are felt in real time. This results in deal sourcing being a global effort as impact investors seek opportunities to satisfy their desired levels of financial return AND social/ environmental impact.

Impact Investing Conferences Impact investors seeking investment opportunities, thoughtful leadership, peer learning and collaboration benefit from a growing number of dedicated conferences and events. Examples which have demonstrated repeatedly the ability to convene audiences and offer insights and opportunities across the spectrum of impact investing include: • PRI Makers Network National Conference (www.primakers.net/conference) • Take Action! Impact Investing Conference Series (www.takeactionforimpact.com) • TBLI Conference (www.tbliconference.com) • SOCAP Annual Conference (www.socialcapitalmarkets.net)

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Chapter 7:

Analyzing Deals

Establish Strategy Implement and Maintain Strategy

Articulate Create Define Develop Generate Analyze Evaluate Mission Impact Impact Impact Deal Deals Impact and Themes Investing Flow Values Policy

Due Diligence of Impact Investments

Due diligence is your organization’s research and investigation of impact investment opportunities. A first step in this process is to answer threshold questions such as: • What is the impact investment thesis for this opportunity and how does it further specific impact goals? d• Is this a financial first or impact first investment? • Who are the principals involved in the investment? • Does the transaction leverage other sources of capital? • What are the impact and financial risks and how are they distributed? • Will this investment enable a project to happen that otherwise would not? • Are there behavioral finance aspects you should consider? • Does the investment raise reputation or policy issues? • Where would this transaction fit in your overall asset allocation?

After an initial review, you and/or your financial advisor will complete a full review of the financial statements or offering

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documents and other relevant organizational materials as well as project-specific documentation such as projections and business plans. For some impact investment opportunities, it is possible to purchase “off-the-shelf” financial analysis from third party providers. Keep in mind that structured investments such as project financings, loan funds or investment in private equity funds will require a more customized financial analysis. A clear assessment of the quality of the management team is a key element of the due diligence. When investing in an intermediary, it is necessary to assess the fund manager’s ability to find portfolio companies and projects that fit your impact and investment goals. You may look to a fund manager’s previous track record with placing and exiting investments as one indicator of future success. In general, financial advisors and other investment intermediaries will be more comfortable assessing the financial risk of the investment. The due diligence process for impact investments also needs to consider potential “impact risks” and their mitigation. Careful consideration of the mission-alignment of the management is crucial. So too is attention to the governance structure of the fund or company and how it will inform the inevitable trade-offs that successful impact investments encounter between opportunities for financial gain and impact. For direct investments, this additional due diligence can add substantial transaction costs. The deeper engagement by investment principals which this approach necessitates should be seen as more than simply an increase in research costs. Engagement with the management team often provides additional motivation and reward for the impact investor as well as for the investment. Options are also available to reduce transaction costs, most notably by investing through an established intermediary that aggregates investors’ capital, such

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as the case of the Triodos Sustainable Trade Fund described below.

Investment Processes

Calvert Foundation: Because the Calvert Community Investment Note is a debt instrument, Calvert Foundation’s due diligence is based on an intensive credit underwriting that examines the applicant’s credit quality, considering organizational history and mission, management and board, operating capacity, asset quality, and capitalization, among other criteria. This due diligence is performed by a team of outside analysts and is supported by an experienced in-house team. The foundation performs annual due diligence on all of its borrowers in order to remain fully apprised of their financial positions and operating conditions. Quarterly financial statements are required of all borrowers. For borrowers on the Watch List, additional monitoring is performed. Based on the due diligence process, Calvert Foundation allocates a specific risk-rating category to each investment to determine the loan loss provision associated with that investment. Specific loan loss reserve requirements have been established for each internal risk tranche in the portfolio. Calvert Foundation’s Board Investment Committee carefully monitors repayment history and actual experience to ensure the overall portfolio is performing and reserved appropriately. Individual positions are constantly reviewed for creditworthiness against the above guidelines and for the social impact the loans are creating.

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KL Felicitas Foundation: At KL Felicitas, the investment process follows a clear flow chart identifying the critical path action items and responsibility among the trustees and their advisors. The process varies depending on the type of impact investing (Sustainability Investments, Mission-Related Investments, Program-Related Investments and Social Component Investments). You can find detailed process descriptions at www.klfelicitasfoundation.org. KL Felicitas’ MRI Evaluator tool is designed to work in conjunction with a formal investment due diligence process. It allows a foundation to assess, document and define roles for evaluating any given investment opportunity in the areas of: • Investment structure, portfolio implications and financial performance reporting; • Alignment with Mission or Purpose; and • Establishing Mission ‘Impact’ criteria.

Impact investors may be as detailed as they like in documenting responses to the Evaluator tool questions. A scoring system is included for each question, allowing the impact investor to establish a more objective framework for evaluating impact investments. It is important to document a pass or fail scale for scoring results. KL Felicitas uses a very simple scoring system of -1, 0, and +1 to determine if a given investment is compliant, neutral, or not compliant with the various guidelines and objectives as expressed in the questions of the Evaluator tool.

RSF Social Finance’s Core Lending Investment Process: Loan inquiries are initially vetted by RSF’s relationship managers and, once qualified, the due diligence is prepared. This work includes traditional loan underwriting, but also

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evaluates the social entrepreneur’s intention for beginning the business, potential exit strategies, and plans for improving production and supply chains from a social impact perspective. The Credit Committee reviews first the intention(s) of the entrepreneur and the social impact to ensure alignment with RSF’s values and strategic plan, and then the underwriting is reviewed. If approved, RSF has a board-approved Loan Authorities Matrix for obtaining the required signatures for closing. Day-to-day management of loan clients is the responsibility of the individual relationship managers.

Pico Bonito Investment Process

KL Felicitas’ investment in Pico Bonito followed these steps: • The Kleissners visited one of EcoLogic’s projects in Guatemala and were impressed by the organization’s approach and results. • When one of EcoLogic’s founders alerted the Kleissners of an investment opportunity in a ‘spin-off’ called Pico Bonito, the Kleissners were interested in learning more. • Initial high level due diligence with the founders of Pico Bonito indicated that this could be a Mission-Related Investment (financial first investment), as the overall goals of Pico Bonito were very much in alignment with the mission of the foundation. The Kleissners asked their investment advisor to complete appropriate financial due diligence. • The financial due diligence resulted in a recommendation to re- evaluate this possible investment as a Program-Related Investment or impact first investment. • Based on the rest of the due diligence process, the board approved a Program-Related Investment into Pico Bonito as well as a grant to EcoLogic.

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Due Diligence Case Studies

At the core of the due diligence process is the analysis of the underlying impact investment business models and risks. We have included the Triodos Sustainable Trade Fund (TSTF) and the Indian healthcare social enterprise Dial 1298 for Ambulance in order to provide a deeper understanding of impact first business models and the aspects of due diligence an impact investor might undertake. In each case we have outlined the organization’s mission, the problem they are addressing, their business model and the challenges and opportunities they face. TSTF is a guarantee fund providing financing to fair trade producers around the world. Dial 1298 for Ambulance is an operating social enterprise. If your impact investment is made through a fund, the underlying social enterprises in the fund’s portfolio will also have to be analyzed because your desired social and environmental impacts are created at the enterprise level. We have selected Dial 1298 for Ambulance to demonstrate the components of a social enterprise investment opportunity.

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Triodos Sustainable Trade Fund — C A S E S T U D Y

Background Brief Triodos Sustainable Trade Fund (TSTF) provides trade financing for certified fair trade and organic (CFT/O) producers. The fund provides developing world CFT/O farmers and farmer cooperatives willing to adopt more sustainable methods with a cash flow bridge loan from the start of the harvest season to the receipt of revenue from exported goods. These loans are collateralized by the receivables under the export contracts. Investors can participate by either providing a guarantee or a subordinated loan. TSTF is a special purpose fund of Triodos Bank, a leading sustainable bank in Europe. TSTF grew out of Triodos Bank’s prior efforts in microfinance and trade finance for producers in developing countries.

Mission Triodos Bank’s mission is to help create a society that promotes people’s quality of life and that has human dignity at its core; to enable individuals, institutions and businesses to use money more consciously in ways that benefit people and the environment and promote sustainable development; and to offer its customers sustainable financial products and high quality service.

Problem and/or Need The most significant challenge commonly faced by farming industry participants is the bridging of cash flow from the start of the harvest season to receipt of revenue from exported goods. Farmers and cooperatives often lack the capacity to adequately train and manage farmers and employees. They often also have limited access to international and/or domestic capital markets, and lack the knowledge required to address increasing demands for their goods. From 2005 to 2006, there was a 41% increase in consumer expenditures on fair-trade certified products, according to the Fairtrade Labelling Organizations (FLO) — with cocoa, coffee and tea demand leading growth figures. The nations served by TSTF are

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Triodos Sustainable Trade Fund — C A S E S T U D Y cont.

underdeveloped as defined by the OECD. Often, they have significant obstacles to foreign investment, including underdeveloped or inadequate banking and securities industry regulations, unstable or high levels of inflation and significant foreign currency risk.

TSTF’s opportunity exists because developing countries are and have been underserved by traditional financial capital markets. In industrialized countries, it is typical for merchants to obtain trade financing to provide cash flow before and in anticipation of sales of their goods. In developing countries, there is often no such financing available, nor is there any price guarantee once the selling/exporting season begins.

Business Model The Investors The Triodos Sustainable Trade Fund has raised 8 million euros of guarantees and is actively seeking to raise additional subordinated loans. Investors in the fund place euro-based deposits (minimum of 250,000 euros) with Triodos Bank (TB), which currently pays between 2% and 3%. The deposits are then pledged and provided as guarantees for the bank thereby leveraging the funds by a factor of three. The bank then lends these enhanced proceeds to the Triodos Sustainable Trade Fund. Due to the low profitability of such a trade finance portfolio and the inability of TSTF to offer a reasonable risk- adjusted return to its investors, the Fund is structured as a not-for- profit foundation.

The Fund makes a gross margin of around 2.5% and a net margin of around 1% on the loans disbursed to borrowers. The fund is also subject to a 2.5% fund management fee on loans disbursed to Triodos Investment Management BV. The costs are passed on to the Fund’s clients as an administration fee.

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Investors Interest Deposits Guarantee

Triodos Sustainable 3x Leverage on Deposits Triodos Bank NV Trade Fund Loan

& Fees & Interest Fund Management Fees

Loans Triodos Investment Management BV

Farmer cooperatives & specialized sourcing companies

In the event of default by underlying borrowers to the TSTF, the losses are shared by and charged to the pledged deposits (guarantors) held by Triodos Bank. Over the past five years, according to Triodos, only two losses have been reported, amounting to less than 1% of the average amount of loans disbursed. It is important to note that although Triodos Bank provides three times leverage to the TSTF, investors’ capital at risk is equal only to the amount of their deposit.

The performance (likelihood of default) of guarantees is uncorrelated to other securities, as its interest payments are dependent on successful harvests in emerging markets. The risks therein are isolated from capital markets in industrialized countries, and as such the security provides portfolio diversification.

The Borrower The start of the loan period coincides with the start of the harvesting season and may continue until the last shipment of the exported products. Usually the loan duration is between 6 and 12 months.

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Triodos Sustainable Trade Fund — C A S E S T U D Y cont.

Amounts financed depend on the cash-flow needs of the exporting company and are based on a percentage of the value of the export contracts. For fresh crops this percentage is generally no more than 40%. For less vulnerable produce, such as coffee and cocoa, this percentage can be as high as 60%.

Triodos Sustainable Trade Fund charges a floating interest rate, consisting of the 1-month Euribor or Libor rate, plus a client specific interest spread. The loan is generally denominated in the currency of the export contract, typically either in euros or US dollars. After all conditions stipulated in the loan agreement are fulfilled, the loan amount is either disbursed in full or in tranches. Collateral beyond the receivables related to the export contracts is usually not required.

When payment under the export contract becomes due, the buyer transfers his payments into a Triodos bank account. Triodos withholds a certain percentage of these payments as repayment of the loan and transfers the remaining amount into the account of the exporting company.

Social & Environmental Impact According to Triodos Investment Management’s (TIM) metrics, guarantees supporting the TSTF have a multiplier effect in terms of their impact on exporting contract value financed, sales revenue generated by farmers and premium income earned by farmers. TIM projects that every euro pledged as a guarantee will result in three euros disbursed as loans, five euros worth of sales generated by farmers, and 0.4 euro of premium income earned annually by farmers. The result is that farmers’ premium income will amount to 40% of guarantee amounts. As such, a 500,000 euro guarantee will result in approximately 200,000 euros of premium income to farmers, benefiting approximately 5,000 farmer households, 25,000 family members, and sustaining approximately 12,000 hectares of certified organic land.

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Challenges and Opportunities The activities of the Triodos Sustainable Trade Fund, as with any trade finance investment strategy, are exposed to multiple risks. Triodos analyzes the risk associated with production, non-delivery, debtor, trade dispute and defaulting buyer, to name a few, in constructing their loan portfolio.

The guarantors are exposed to this risk, inherent in farming in developing countries, through TSTF as an intermediary. In the event of a natural disaster or a poor crop yield, exports to merchants will be reduced, and in turn their payments to TSTF will be reduced, and the losses charged pro rata to guarantors. Although this risk is uncorrelated with other market-related risks to which guarantors will be normally exposed, this “export risk” can be significant. Triodos has successfully mitigated these challenges due to their extensive experience and successful track record in the areas of microfinance and trade finance, as demonstrated by their management of Hivos- Triodos Fund, Triodos Doen Foundation and the Triodos Fair Share Fund. Over the past five years, according to Triodos, only two losses have been reported, amounting to less than 1% of the average amount of loans disbursed.

Guarantees with Triodos Sustainable Trade Fund represent exposure to an illiquid cash allocation. All deposits are euro-denominated, which offers an element of foreign exchange risk and/or exposure for non-EU investors. Although the investment does pay a fair cash return, it does not offer an appropriate risk-adjusted rate of return for traditional investors, as guarantors are not compensated beyond the interest rate on their deposit for the risks inherent in the fund. In addition, the return received in any given year is subject to any deductions from offset loans or operating losses generated by Triodos Sustainable Trade Fund.

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Triodos Sustainable Trade Fund — C A S E S T U D Y cont.

Conclusion For the impact investor seeking to maximize the social and environmental benefits of supporting trade finance for fair trade certified and organic goods, the Triodos Sustainable Trade Fund offers a compelling investment opportunity. Additionally, US foundations may consider qualifying, if appropriate, an allocation to the fund as a Program-Related Investment due to the fund’s impact first focus.

The information presented herein has been prepared for informational purposes only and is not an offer to buy or sell, or a solicitation of an offer to buy or sell, any security or fund interest. The offering circular of each security or the respective fund’s confidential offering memorandum contains important information concerning risks and other material aspects of the investment and must be read carefully before a decision to invest is made.

Although the information presented herein has been obtained from and is based upon sources we believe to be reliable, no representation or warranty, express or implied, is made as to the accuracy or completeness of that information. No assurance can be given that the investment objectives described herein will be achieved.

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Dial 1298 for Ambulance — C A S E S T U D Y

Background Brief Dial 1298 for Ambulance (Dial 1298) provides a private, reliable, round-the-clock emergency ambulance response for residents in select cities within India. It utilizes a tiered pricing, cross-subsidy model to ensure access for all regardless of ability to pay. Based on the success of its Mumbai initiative, Dial 1298’s principals have begun rolling out service to the top 10 cities with populations over one million within India.

Vision and Mission Dial 1298’s vision is “to assist saving human lives by becoming the leading network of life support ambulances in India.” Dial 1298’s mission is threefold: provide the best quality life support ambulance service as fast as possible to the patient; meet the emergency medical service needs by providing an easy to remember phone number; and provide self-employment for those with a passion to save lives.

Problem and/or Need In India, there are more than 37 cities with one million plus population and 35 of these cities have no organized emergency medical services (EMS). Seventy-two percent of these city dwellers are estimated to have the capacity to pay for emergency medical services if available. Based on research conducted by Dial 1298, Mumbai has approximately 60,000 emergency cases per month (2,000 cases per day), 10% of which are served by ambulances. In addition, around 16,000 planned medical transfers occur on a daily basis, of which only 5% are through ambulance services. Of this potential market, Dial 1298 receives on average 50 calls a day. Other ambulance service providers in Mumbai include Nulife, Life Jet, and Ambucare. The remaining (almost 90%) of ambulance services are provided by single ambulance owners, hospitals, NGOs and government agencies.

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Mumbai, location of Dial 1298’s first rollout, is a city of 16 million people, yet it historically lacked any reliable ambulance or emergency medical response service. Private cars, autorickshaws, taxis or van “ambulances” with no medical equipment or trained technicians were typically used to take patients to a hospital. Without the benefit of medical personnel, these ambulances often end up functioning only as hearses. The poor suffer disproportionately from the lack of these services because they face greater transportation challenges and are less able to pay. Prior to Dial 1298, the concept of single number calling for an ambulance service was nonexistent. Also, the response time for other services was typically very high; these services were not professionally managed; and there were no communication links between the ambulances and the hospitals.

Historically and constitutionally, the provision of public health care is the state governments’ responsibility. However, EMS is excluded from both the preventive care and hospital care divisions within the health care system and is grouped under Disaster Management (Department of Revenue). Thus, EMS is currently not a priority service for the government. Additionally, ambulance service is not currently covered under health insurance plans.

Business Model Dial 1298 for Ambulance proposes to address the need of emergency medical services in the top 10 cities in India by building a fleet of ambulances managed by a 24/7 call center that will respond faster to emergency calls, cost less than the competition and provide a cleaner, better equipped and better managed service. Dial 1298 offers two types of ambulances: Basic Life Support and Advanced Life Support. All ambulances are completely equipped (suction machine, resuscitation kit, oxygen and an inventory of emergency medicine). The Advanced Life Support ambulances also offer defibrillator, ECG, cardiac monitor and portable ventilator. All ambulances are crewed with a paramedic, driver and a helper trained

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by programs certified by the American Heart Association and New York Presbyterian Hospital.

Tiered Pricing Cross-Subsidy Model Dial 1298’s business model is based on tiered pricing with cross- subsidies. Some customers pay less than the marginal cost of producing these goods or services, while other customers pay higher than the marginal cost.11 A portion of the revenues generated from selling goods or services to customers able to pay the full price are used to subsidize those unable to cover any or part of the full cost of service. Dial 1298 employs a sliding price scale: wealthier customers, selecting the more expensive hospitals, pay the full rate for an ambulance ride, while the poor receive a deep discount — up to 50% off — or free service.

Dial 1298’s business model targets a ratio of paid to free ambulance trips of 80 to 20. There are two classes of free transport: the transfer of road traffic accident victims to the nearest hospital and the transfer of mass casualty victims (terrorist acts, train accidents, etc.). Currently, although 20% is the upper ceiling of free or subsidized services in their business model, these types of calls equate to approximately 15% of all trips.

Growth Plans Based on the successful rollout in Mumbai, Dial 1298 plans to scale across India by first establishing a presence in Kerala. Individuals and corporations have begun to donate ambulances to Dial 1298 as they see that this is a truly efficient and accountable way of providing life-saving emergency services to the poor. Dial 1298’s model has the potential to be replicated not only in other Indian cities, but also around the world.

Dial 1298 is now being asked to bid on and is winning government contracts, something that did not exist when the firm was founded

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three years ago. These contracts add a new revenue stream to Dial 1298 over and above the user fee and donations from corporate sponsors for the purchase of ambulances.

Growth drivers relevant to the success of the Dial 1298 model include: increasing consumer awareness resulting in a need for a wide range of high quality emergency medical care; growth of communication technology and infrastructure; and entry of private health insurance companies to change the face of healthcare service.

Revenue drivers include: trips per day per ambulance; price charged per trip; and proportion of emergency services to basic services.

Cost Drivers include: fuel, which constitutes more than 9% of revenues; depreciation, which forms a significant part of overall costs and is presently at about 60% of total revenues (however depreciation cost will reduce to 11% of total revenues by 2011–12 as most of the capital expenses will be fully amortized); and payroll — ambulance-related salaries will account for about 21% of total revenues by 2011–12 (currently about 28%).

Financial Returns Revenues were $1.98 million in 2008 and are expected to reach $3.3 million in 2009 and $ 3.8 million in 2010.12 The financing dynamics for Dial 1298 involves purchasing the ambulances through the use of $1.5 million in equity obtained in 2007 from Acumen Fund, a non-profit global venture fund and one of their key investors. Acumen Fund has a significant, minority equity position in Ziqitza Health Care Limited, parent company of Dial 1298. Dial 1298 is working on a second round of funding. Acumen Fund will invest additional funds to maintain its holdings. New investors are expected to hold a minority interest and Dial 1298’s founders are expected to hold less than 50% of the company.

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Social Returns While the service may need subsidies or budgetary support in rural areas, Dial 1298 appears to be fully capable of addressing the emergency medical services market needs in urban India, especially in the top 20 cities in India. As 20% of the services of Dial 1298 are estimated to be offered free of cost or at subsidized rates, this investment provides an opportunity to extend quality healthcare to a significant portion of the urban poor in India (estimated to be 5.2 to 8.7 million people in Mumbai alone). The rollout of a high-quality, affordable life-saving ambulance network in Mumbai should create a great deal of value for consumers in terms of providing adequate health care in a timely, sustainable and cost-efficient manner.

Challenges and Opportunities Maintaining the projected customer mix will be a challenge. Dial 1298 is vulnerable if there is a precipitous drop in the percentage of fully-paid services, but the use of paid sponsors can potentially reduce this impact of a drop in paying customers. Raising capital to expand its operations may be a challenge if Dial 1298 seeks to raise capital from sources that view the lost revenues associated with the tiered pricing cross-subsidy model as reducing the prospective profitability of the company. Another possible challenge is competition that might target the higher-income portion of Dial 1298’s customer base.

A major challenge ahead is education of the customer base. Even with efficient systems in place, Dial 1298 needs to educate people of all income levels about their services and the advantages of using an ambulance. The company is developing marketing campaigns to raise awareness about the importance of calling an ambulance in an emergency and effecting behavioral changes in the populace (e.g., “Save a life! Make way for an ambulance!”). Making Dial 1298’s telephone number easier to recall during emergencies is also a high priority.

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Finally, there are myriad marketing challenges stemming from the tiered pricing cross-subsidy model, such as selling the same level of service to different customer segments at different prices. Normally, an organization confronted with these challenges would identify different marketing campaigns for these different customer groups. However, this is difficult for an early-stage company with sparse resources.

Conclusion Dial 1298 has successfully implemented its tiered pricing, cross- subsidy business model. It has mitigated a number of the risks and challenges delineated above through its successful efforts to receive donated capital for ambulance acquisition, and through winning government contracts. At this writing, Dial 1298 is expanding its services to other Indian urban cities.

The information presented herein has been prepared for informational purposes only and is not an offer to buy or sell, or a solicitation of an offer to buy or sell, any security or fund interest. The offering circular of each security or the respective fund’s confidential offering memorandum contains important information concerning risks and other material aspects of the investment and must be read carefully before a decision to invest is made.

Although the information presented herein has been obtained from and is based upon sources we believe to be reliable, no representation or warranty, express or implied, is made as to the accuracy or completeness of that information. No assurance can be given that the investment objectives described herein will be achieved.

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Behavioral Finance Reflections

As previously discussed, the behavioral approach emphasizes investors’ reliance on heuristics, or rules of thumb, because they do not act in a fully rational manner. Some key issues impact investors should consider when researching an impact investment include: understanding their own heuristics; being able to separate their own bias from the facts as presented; and being able to gauge if the facts as presented are fully transparent.

In the case of Triodos and Dial 1298, two investors seeing the same set of facts might come to two different conclusions. One investor might see the impact metrics as representing the best possible case, while a second investor might feel the metrics are depicting only an average scenario. What one investor may see as an opportunity in an emerging market, another may see as too high a risk to warrant an investment.

Is there a market failure stemming from representativeness bias in the Triodos and Dial 1298 business models? One could make the case that representativeness bias explains the existence of both market opportunities. This bias could also stem from excessive reliance on stereotyping, for instance, leading to a general belief that poor people are unwilling or unable to repay debt or cover ambulance fees.

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11 See the University of Michigan’s case study on Subsidies in Base-of-the-Pyramid Ventures, which includes a section on Dial 1298 for Ambulance: http://www.globalens.com/casedetail.aspx?cid=1428767 12 Dollar figures based on an exchange rate of 48 INR to 1 USD.

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Chapter 8:

Evaluating Impact

Establish Strategy Implement and Maintain Strategy

Articulate Create Define Develop Generate Analyze Evaluate Mission Impact Impact Impact Deal Deals Impact and Themes Investing Flow Values Policy

Defining and Measuring Impact

As an impact investor, you are seeking the best opportunities for achieving impact within specific impact themes. With this goal in mind, how can you capture the impact of your investments and use this knowledge to drive your future strategy and ainvestment decisions? Impact investors who are philanthropists will understand the challenges of measuring the impact of their grantmaking and recognize that similar challenges will exist with measuring the social and/or environmental benefits of impact investing. To better understand how your impact investments are creating social and/or environmental impact, it is essential to be very clear about measurement. A key notion is to differentiate outputs from outcomes. Outputs are results you can measure or assess directly. For example, outputs for a homeownership program would include the number of housing units built or renovated. Outcomes are the ultimate changes that we are trying to make in the world. For the home-ownership program, an outcome might be increased wealth and quality of life for low- income earners. It can sometimes be difficult to evaluate

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whether an outcome has been achieved. Nevertheless, an organization should define its desired outcomes and work to determine how the measurable outputs correlate to those outcomes. Impact is the next link in the chain. Impact is that portion of the total outcome occurring as a result of the activity, above and beyond a predicted outcome. The following Impact Value Chain was developed as part of the Rockefeller Foundation’s Double Bottom Line Project:13

Source: Clark, Catherine, William Rosenzweig, David Long, and Sara Olsen, Double Bottom Line Project Report: Assessing Social Impact in Double Bottom Line Ventures, the Rockefeller Foundation, 2004.

At present, most impact investors focus on the first order derivative output of their work. This not only makes the task of measurement and reporting more feasible, it also preempts speculative and contentious debate on real causes and

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effects. While impact should be measurable based on clear outcome metrics and comparable across social enterprises, we should be aware of the challenges of aggregating outputs across impact themes and overemphasizing impact themes which generate easily quantifiable outputs compared to more qualitative themes.14 Impact investors seek to create impact assessment systems relevant to their missions while also trying to create reporting that can be compared to other investors’ performance. On the financial side, setting clear benchmarks for each asset class is standard practice. Establishing the appropriate benchmarks on the impact side is not yet standardized.

Core Beliefs for Impact Assessment

Given the complexity of impact assessment, it is useful to approach this with some core beliefs. The following was developed as part of a recent McKinsey & Co Discussion Paper.15 It focuses on foundations, but the principles apply to other impact investors as well: • Hear the constituent voice; • Exercise rigor within reason; • Assess not for assessment’s sake; • Design assessment and strategy together; • Don’t let assessment sit on a shelf; • Collaborate, don’t dictate; • Build off and build up; • Borrow, don’t reinvent; and • Foster learning culture.

RSF Social Finance approaches the question of social impact through a holistic framework derived from the Balanced Scorecard methodology. This approach provides a roadmap for

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Beartooth Capital

Beartooth Capital is a private real estate fund investing in the ranch land market to generate strong financial returns through the restoration and protection of ecologically important land. The fund focuses its work on ranch properties in the western US, working in partnership with conservation organizations and others to acquire ranches and create value through habitat restoration, land protection and ecologically appropriate, limited development. Threatened ranchland is typically protected through conservation, but conservation groups have limited resources and cannot access the capital markets. Beartooth Capital utilizes private capital to protect ecologically important ranchland, furthering the efforts of the conservation movement.

Beartooth regularly communicates investment performance and metrics related to its sustainability thesis to its investors. In their 2008 investor report, they state that they have returned approximately 27% of the capital called from investors to date, while selling less than 7% of the land the fund acquired AND: • Followed through on their stated mission of making investments to generate competitive risk-adjusted returns for investors while achieving real conservation results; • Protected more than 9,250 acres of the ~15,000 acres acquired to date through conservation easements or sale to conservation partners; and • Replanted and restored more than 40 miles of creek and river by planting thousands of willows, cottonwoods and river birch and rehabilitating thousands of acres of upland habitat through rest, managed grazing and reseeding. Source: Beartooth Capital

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instilling explicit, values-based strategies and evaluation at every layer of the organization, from day-to-day business execution to client relationships to its contributions to the overall field of social finance. In terms of measuring the social impact of its lending and investment programs, RSF uses a combination of quantitative and qualitative factors with a focus on the outputs of investments such as the number of affordable housing units financed, low-income mortgages made and environmental projects initiated. To assist prospective investors, The Calvert Foundation has created a Social Return on Investment (SROI) Calculator Tool which is available on its website. The tool allows investors to better understand potential social return on investment based on data Calvert Foundation has collected from numerous organizations in the field. For each sector, Calvert Foundation converts a potential impact investment amount into the corresponding housing units created or improved, microenterprises created, jobs created or small businesses created. The statistics are calculated based on Calvert Foundation’s activities in the previous year. Calvert Foundation also tells investors to keep the following in mind when using the tool: “Most importantly, certain program orientations, regional/country differences and other factors make it difficult to compare results of SROI calculations from group to group, region to region or social impact sector to social impact sector. It’s a classic apples to oranges situation in many cases. We must keep in mind that the relative cost of creating a living wage job in San Francisco is very different from the cost of creating one in Bolivia. Likewise, if programs in one area spend a lot of resources on counseling because it is deemed necessary for the success of clients, and another region does not find it as necessary for this provision of

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One Family’s Approach to Microfinance and Impact

The Opus Foundation is a family foundation whose mission is to enable people to better sustain themselves, their families and communities through education and employment. The family became interested in microfinance when they made a grant to the International Rescue Committee to foster self-help and enterprise among refugees. The recipient NGO continued to send grant reports after the first year, since it had been able to recycle the original funding through the repayment it received from refugee microcredit borrowers. Intrigued by the possibility of making loans rather than grants, Opus approached the Calvert Foundation and invested in a Community Investment Note directed to international microfinance institutions in countries of interest to them as well as community development organizations where the family had businesses. When the family was considering how to leverage the foundation’s philanthropic activities through impact investing, it discovered its values were clearly in alignment with those of the Calvert Foundation: • Mutuality: Investing relationship creates mutual respect; • Enterprise: Harnesses power of enterprise; • Accountability: Values measurable outcomes; • Self-reliance: ‘Beneficiaries’ transform their own lives; • Self-respect: Process fosters self-confidence and dignity; • Sustainable: Capital is returned and recycled.

Through the Community Investment Note, Opus received impact reports based on data from the microfinance institutions. Opus has also directly commissioned evaluations and developed relevant social indicators to assess the impact of their portfolio of microfinance debt and equity investments. When Opus wanted to expand their support of microfinance to include equity investments in start-up MFIs, Calvert Foundation was able to share its due diligence analysis thereby mitigating the risk of this investment. The family has since co-invested in Jamaica with several local businesses and other double bottom line investors in the start-up of a now successful microfinance institution.

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social service, it can present problems in comparing social returns based on the capital amount required to produce those returns. The basic version of this tool calculates among bundles of community development organizations working in sectors or regions, so as not to lend itself to comparing one group to another.”

Creating Structural Change for Measuring Impact

New systems and metrics are important for investors evaluating social and/or environmental investment options and tracking the financial and non-financial returns. The absence of standards has implications across the investment cycle: • Potential investees (e.g., small business owners in emerging markets, clean energy companies, microfinance institutions and larger companies seeking deliberate positive social or environmental impact) do not have a clear, consistent, broadly acknowledged way to measure and communicate social impact and associated returns to potential investors; • Intermediaries who make and facilitate new investments (e.g., social investment funds, private equity, foundations) face challenges in screening potential investees to maximize social impact of invested capital and measuring the social and environmental impact and performance at the portfolio level — requiring significant efforts to research and communicate non-financial performance; and • Investors (e.g., foundations, private investors, institutional investors, et al) have little data with which to assess and compare performance of various funds and investees; apples to apples comparison of financial and non-financial performance lacks the standardization, transparency and rigor available for more traditional investment measures. Chapter 8: Evaluating Impact 121 MaximizingREPRINTwchart_Layout 1 7/27/10 12:41 PM Page 122

There are a number of initiatives under way to address the infrastructural gaps for impact assessment. In this regard, the Impact Reporting and Investment Standards (IRIS) initiative of the Global Impact Investing Network seeks to move toward standardizing the measurement and reporting of social and/or environmental impact investment. Developed by a group of leading impact investors (with support from Deloitte and Touche, PriceWaterhouseCoopers, Google.org and B Lab) and piloted with investment funds and companies around the world, the IRIS standards seek to establish uniform definitions of terms for social impact reporting (just as the GAAP standards do for financial reporting) and to equip fund managers and direct investees to adopt these standards. IRIS will also aggregate social performance data and release benchmarking reports that enable impact investors to compare investments against their peers — a capacity that proved central in the growth of mainstream venture capital and private equity. The field of impact measurement remains very much in flux with much innovation and a lack of industry-wide standards. However, impact investors are currently deploying meaningful approaches. We anticipate that impact evaluation will continue to be an area of rapid consolidation and progress.

13 For additional research on impact measurement, please see the San Francisco Federal Reserve Community Investment Review, Summer 2009 (http://www.frbsf.org/publications/community/review/vol5_issue2/index.html). 14 See Kramer, Mark and Sarah Cooch, Investing for Impact, FSG Social Impact, Boston, 2006 for an analysis of impact measurement — particularly the integration of qualtitative measurements. 15 “McKinsey’s Approach to Learning for Social Impact,” McKinsey & Co., Discussion Paper, Draft June 2009.

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Conclusion: Coming Full Circle Using the Impact Investing Cycle

Establish Strategy Implement and Maintain Strategy

Articulate Create Define Develop Generate Analyze Evaluate Mission Impact Impact Impact Deal Deals Impact and Themes Investing Flow Values Policy

We hope our monograph has inspired you to move beyond the Tyranny of OR and apply the Genius of AND. Impact investing

has emerged as a viable and growing discipline — across asset classes and impact themes. All types of capital can and must play wa central role in moving impact investing forward. Many high

net-worth individuals and foundations are putting their investment dollars where their values are with great results.

However, at the end of the day, a significant share of institutional capital must move in this direction to enable this nascent movement to become mainstream. But it is not just

about capital. If impact investing is to truly have an impact, it should be about systemic change, new ways of deploying capital, and capacity building of the players on both sides of the

equation. What responsibility do impact investors have in solving this problem?

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Rigor Matters

Impact investing is not charity. It requires and demands every bit of the same disciplined approach currently being applied to traditional investing if it is to succeed. Adding social and/or environmental criteria to existing rigorous investment evaluations may actually improve the quality and output of investments. Investors no longer need to assume that a discount be taken on their returns in order to align their investments with their impact objectives. Aligning investments with impact AND utilizing a disciplined approach is achievable.

Investment Management Best Practice

Impact investing can be done within the established parameters of investment management best practice. Impact focused financial advisors, intermediaries, investor networks and collaboratives are emerging in greater numbers. In light of the market turmoil of 2008, investments with a double or triple bottom line may be the antidote to growing mistrust in the market place and perhaps part of a new ‘best practice’ paradigm. While the impact investment market remains fragmented, we expect the market to grow dramatically as large asset managers enter the impact investing space. These managers will be driven not only by clients who are increasingly demanding social and/or environmental metrics as part of their investment strategies, but also by their own values and the realization that impact investing makes good investment sense.

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Impact Investment Opportunities Abound

Investment-grade impact investments are experiencing rapid growth. Global intermediaries are playing a key role in building demand for capital. These same organizations, with the help of information technology, are helping to create more fluid and transparent markets.

Approaches Are Diverse

Impact investments are bringing creative, diverse opportunities to the market. They are tapping into new markets with innovative goods and services, leveraging both social and investment capital, and providing a double or even triple bottom line return. As demonstrated by our case studies and investment profiles, impact investors continue to define their impact themes across a wide range of issue areas and theories of change without clear standardization. While this diversity can slow the development of standardized products, it provides the opportunity for impact investors to approach problem solving from a number of directions.

Money Isn’t Everything

Supply and demand for capital ideally need to grow in tandem. Investors can and should play an important role in assisting the mentoring, incubation and acceleration of impact investment opportunities. Without a ‘shoulder to shoulder’ approach, we risk either a market where the product outpaces the investment

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capital or capital is competing for product. And without open channels between all interested parties, we risk missing important innovation that could help move impact investing from the sidelines into the mainstream investment market.

Understand Inefficient Markets and Use Impact Investing to Address Market Failures

Impact investing benefits greatly from consideration of behavioral finance — not only in the assessment of investment opportunities but also in its evolution. Awareness of behavioral finance augments our understanding of inefficient markets, providing a subjective lens through which we can further evaluate a typically analytic process. Historically, impact investing has suffered from overconfidence on the part of the impact investing community, but also lack of confidence from the traditional investment community. Finding an appropriate middle ground will help move this field forward. Representative bias is difficult to tease out, but doing so can help the investment professionals provide more objective analysis. Acknowledging that perceptions of trust, honesty and morality are significant factors influencing our investment decision- making will go a long way to co-create and sustain this brave new world.

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Take Action

And this brave new world is imperfect at best. Impact investors acknowledge this, but aren’t reticent to continue experimenting, measuring and investing. And with good reason. Impact investing, for all its challenges, may ultimately prove to be the most prudent form of investing.

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Appendix 1: Impact Investment Profile Summary

The following is a list of impact investments profiles available at www.rockpa.org/impactinvesting, which were prepared in conjunction with this monograph. They are meant to serve as an illustrative example of impact investments available in the market place today and by no means represent a comprehensive list of the industry. Furthermore, additional profiles will be added online as they are completed. Please visit the site periodically for updated information.

Access Capital Living Forest Communities Acumen Capital Markets Los Angeles Community Investment American River Ventures Fund II Initiative Ariya Capital Lyme Forest Fund III C Change Transformative Energy Minlam Microfinance Africa Fund and Materials Fund NCB Capital Impact China Energy Efficiency Fund Neuberger Berman Socially Climate Change Property Fund Responsive Equity Community Capital Management Pico Bonito Contact Fund Planet Habitat DWM Microfinance Fund I Rose Smart Growth Investment Fund E+Co People Planet Note Root Capital EcoEnterprises Fund II Self-Help Federal Credit Union EKO — Green Carbon Vehicle ShoreBank Capacity Plus Loan Program Essex Investments GEOS Fund Social Stock Exchange GreenSpace Developments Southern Bancorp Greenwood Global Tree Farm Fund Summit Water Equity Fund Healthpoint Services Global SAM Sustainable Water Strategy Highwater Global Fund USRG Power and Biofuels Fund III I3 Fund Verama Agroforestry Project IGNIA Fund WaterCredit Initiative IMPAX Environmental Markets XPV Water Growth Equity Fund Innosight Ventures Fund Zouk Cleantech Europe II Living Cities Catalyst Fund

See important disclaimer information on inside back cover.

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Appendix 2: Selected Bibliography

For our comprehensive bibliography please visit www.rockpa.org/impactinvesting

Anderson, Miranda and David Gardiner, Managing the Risks and Opportunities of Climate Change: a Practical Toolkit for Corporate Leaders, Boston, MA CERES, 2006. Akerlof, George A. and Robert J. Shiller, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, Princeton: Princeton University Press, 2009. Bayon, Ricardo, Amanda Hawn, and Katherine Hamilton, Voluntary Carbon Markets: An International Business Guide to What They Are and How They Work, 2nd ed., London: Earthscan, 2009. Belsky, Gary and Thomas Gilovich, Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics, New York: Simon & Schuster, 1999. Bernholz, Lucy and Lisa Richter, Equity Advancing Equity: How Community Philanthropy Can Build Racial and Social Equity through Mission Investing, Blueprint Research & Design and GPS Capital Partners LLC, September 2009. Bishop, Matthew and Michael Green, Philanthrocapitalism: How the Rich Can Save the World, Bloomsbury Press, 2008. Bolton, Margaret, Foundations and Social Investment: Making Money Work Harder, London: Esmée Fairbairn Foundation, October 2005. Bugg-Levine, Antony, “Impact Investing Bold Models to Drive Development at Scale,” Beyond Profit, Intellecap, May/June, pg 17-21, 2009.

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Carlson, Neil, Assessing and Managing PRI Risk: Nothing Ventured, Nothing Gained, New York: GrantCraft Guides, 2008. Cooch, Sarah, Mark Kramer, Fi Cheng, Adeeb Mahmud, Ben Marx, and Matthew Rehrig, Compounding Impact: Mission Investing by US Foundations, Boston, MA: FSG Social Impact Advisors, 2007. Deringer, Freshfields Bruckhaus, Legal Framework for the Integration of Environmental, Social and Governance Issues into Institutional Investment, UNEP Financial Initiative, 2005. Dietel, William M., Mission Stewardship: Aligning Programs, Investments, and Administration to Achieve Impact, New York: The F.B. Heron Foundation, 2007. Elkington, John, and Pamela Hartigan, The Power of Unreasonable People: How Social Entrepreneurs Create Markets That Change the World, New York: Harvard Business School, 2008. Emerson, Jed and Joshua Spitzer, Blended Value Investing: Capital Opportunities for Social and Environmental Impact, World Economic Forum, 2006. Emerson, Jed, Joshua Spitzer and Jacob Harold, Blended Value Investing: Innovations in Real Estate, Oxford: Skoll Centre for Social Entrepreneurship, 2007. Godeke, Steven, and Doug Bauer, Philanthropy’s New Passing Gear: Mission-Related Investing — A Policy and Implementation Guide for Foundation Trustees, Rockefeller Philanthropy Advisors, 2008.

Hammond, Allen L., William J. Kramer, Robert S. Katz, Julia T. Tran, and Courtland Walker, The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid, New York: World Resources Institute and International Finance Corporation/World Bank Group, 2007. Humphreys, Joshua, The Mission in the Marketplace: How Responsible Investing Can Strengthen the Fiduciary Oversight of Foundation Endowments and Enhance Philanthropic Missions, Washington, DC: Social Investment Forum Foundation, 2007. Hawken, Paul, Amory Lovins, and Hunter L Lovins, Natural Capitalism: Creating the Next Industrial Revolution, New York: Back Bay Book, 2000.

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Kiernan, Matthew J., Investing in a Sustainable World: Why GREEN Is the New Color of Money on Wall Street, New York: AMACOM / American Management Association, 2009. Krosinsky, Cary (editor) and Nick Robbins (editor), Sustainable Investing: The Art of Long Term Performance, Earthscan Ltd., 2008. LaVoie, Valerie and David Wood, Handbook on Climate-Related Investing Across Asset Classes, Institute for Responsible Investment at the Boston College Center for Corporate Citizenship, 2009. Passoff, Michael, Proxy Preview 2009: Helping Foundations Align Mission and Investment, As You Sow, San Francisco, 2009. Segerfeldt, Fredrik, Water for Sale, How Business and the Markets Can Resolve the World’s Water Crisis, Washington, DC, The Cato Institute, 2005. Shefrin, Hersh, A Behavioral Approach to Asset Pricing, Burlington: Elsevier Inc, 2005. Shefrin, Hersh, Beyond Greed and Fear, Understanding Behavioral Finance and the Psychology of Investing, Oxford: Oxford University Press, 2002. Stetson, Anne, and Mark Kramer. Risk, Return and Social Impact: Demystifying the Law of Mission Investing by US Foundations, FSG Social Impact Advisors, October 2008. A Toolkit for Foundations and Individual Investors: Harnessing Your Investments to Help Solve the Climate Crisis, CERES, Investor Network on Climate Risk and Environmental Grantmakers Association, 2008.

Wood, David and Belinda Hoff, Handbook on Responsible Investment Across Asset Classes, The Institute of Responsible Investing at the Boston College Center for Corporate Citizenship, 2007. Yunus, Muhammad, Creating a World Without Poverty — Social Business and the Future of Capitalism, New York: PublicAffairs, 2008.

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About the Authors STEVEN GODEKE Principal, Godeke Consulting

Steven Godeke is an independent investment advisor who works with foundations, corporations and non-profit organizations to integrate their financial and philanthropic goals. Steven advises his clients on the creation and execution of impact investment strategies across asset classes and program areas. His services include due diligence, structuring and negotiation of impact investments and portfolio performance measurement. Steven is co-author of Philanthropy’s New Passing Gear: Mission-Related Investing — A Policy and Implementation Guide for Foundation Trustees, published in 2008 by Rockefeller Philanthropy Advisors, where he is an Affiliated Consultant. Steven is an adjunct professor at New York University’s Center for Global Affairs where he currently teaches a course in Microfinance and Social Entrepreneurship. Prior to establishing his own firm, Steven worked for twelve years in corporate and project finance with Deutsche Bank where he structured debt and equity products and advised corporate clients in the natural resources, telecommunications, media and real estate industries. Steven grew up on a family farm in Southern Indiana and attended Purdue University where he received a B.S. in Management and a B.A. in German. He studied as a Fulbright Scholar at the University of Cologne and earned an M.P.A. from Harvard University.

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RAUL POMARES Managing Director, Springcreek Advisors, LLC

Raúl Pomares is a Managing Director of Springcreek Advisors, where he serves as the principal investment advisor to select family offices, foundations and endowments. Prior to joining Springcreek, Raúl served as a Portfolio Manager with Guggenheim Investment Advisors, where he developed integrated multi-manager portfolios for institutional and high net worth clients. In particular, Raúl applied his expertise across a broad range of impact investment themes to create an integrated manager research and portfolio construction methodology for investors. Before joining Guggenheim Partners in 2006, Raúl co-founded a boutique wealth management firm where he directed client services. He has also served as an investment advisor, international private banker and consultant on behalf of global financial institutions and private investors. Raúl is an internationally recognized speaker and contributor to numerous publications on innovative investment solutions for return-oriented investors seeking measurable impact. He serves as Mentor – Capital Markets, for “The Global Social Benefit Incubator (GSBI™), the signature program of Santa Clara University’s Center for Science, Technology and Society. Raúl received his degree in international business management from the University of San Francisco.

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ALBERT V. BRUNO William T. Cleary Professor, Leavey School of Business, Santa Clara University

Albert V. Bruno is the William T. Cleary Professor at the Leavey School of Business at Santa Clara University, where he has held a variety of administrative positions as well as founding the Center for Innovation & Entrepreneurship, and co-founding the Global Social Benefit Incubator. Professor Bruno, who earned a Ph.D. at the Krannert School at Purdue University, has taught at Harvard University as a visiting research scholar, Sup de co, Rouen, France, and at the Naval Postgraduate School. In 1982, Professor Bruno was one of 13 recipients in the US of the Leavey Foundation Award. In the same year, he was honored with the Glenn Klimek Professorship at Santa Clara, which he held for 16 years. His many articles, research publications and book chapters have been published in a diverse set of business journals and periodicals. His book, The Market Value Process: Bridging Customer and Shareholder Value, was republished in German in 1998.

PATRICK GUERRA Founder and Principal, Lions Peak LLC Co-Founder, Global Social Benefit Incubator, Santa Clara University

Patrick Guerra has served in senior management information technology, manufacturing, distribution, product management and business development roles with Hewlett Packard, AMD, PSB, Ariba and SpinCircuit, where he was President and CEO. Pat’s experience includes early stage business formation and the rapid scaling of technology-based ventures. He has served on

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numerous academic and early-stage company boards of advisors. Pat has also served as the Executive Director, Center for Innovation and Entrepreneurship at Santa Clara University, where he co-founded the Global Social Benefit Incubator. Pat holds a B.Sc. in Economics and a M.B.A. in Operations Management and Information Systems from Santa Clara University, where he is an adjunct member of the faculty in Entrepreneurship. Pat has done groundbreaking work with Ashoka, the Skoll and Rockefeller Foundations, and Acumen in support of the scaling and sustainability of Social Enterprises. Most recently, he has developed the Social Enterprise Innovation Network — a purpose driven network designed to enhance the absorptive capacity for capital of global social entrepreneurial ventures. He continues his commercial entrepreneurial pursuits as an investor and consultant to early stage technology companies as a member of the Band of Angels.

CHARLY KLEISSNER, PH.D. Co-Founder, KL Felicitas Foundation

Dr. Charly Kleissner is a philanthropic entrepreneur utilizing his high technology background in his venture philanthropy. He is co-founder of the KL Felicitas Foundation and the Social- Impact initiative, helping social entrepreneurs worldwide to accelerate and increase their social impact. Dr. Kleissner serves on the Advisory Board of multiple not-for-profit companies like the Acumen Fund, Global Social Benefit Incubator and The Global Philanthropy Forum. He is also an advisor to multiple social venture capital funds, like MicroVest and Acumen Capital Market.

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Dr. Kleissner earned his M.S. and Ph.D. in Computer Science from the University of Technology, Vienna and has over twenty years of experience as a senior technology executive in Silicon Valley working for Ariba Inc., NeXT Software Inc., Digital Equipment Corp. and Hewlett-Packard Company. Dr. Kleissner is now focusing on breaking down the barrier between the for-profit sector and the not-for-profit sector by creating and supporting social enterprises as hybrid business structures, insisting that both vehicles can be effective for achieving social change.

HERSH SHEFRIN Mario L. Belotti Professor of Finance, Santa Clara University

Hersh Shefrin is the Mario L. Belotti Professor of Finance at Santa Clara University. His book Beyond Greed and Fear provides a comprehensive approach to behavioral finance, and in 2009 was recognized by J.P. Morgan Chase as one of the top ten books published since 2000. Among Professor Shefrin’s other works are A Behavioral Approach to Asset Pricing, Behavioral Corporate Finance and Ending the Management Illusion. According to a 2003 article that appeared in the American Economic Review, he is one of the top 15 economic theorists to have influenced empirical work. His work is in the all-time top ten downloads from the Social Science Research Network. He received his Ph.D. from the London School of Economics in 1974. He holds an honorary doctorate from the University of Oulu, Finland, and is an honorary guest professor at Central-South University in Changsha, China. Professor Shefrin is frequently interviewed by the media on financial matters.

136 About the Authors An Ordinance to protect the women Self Help Groups from exploitation by the Micro Finance Institutions in the State of Andhra Pradesh and for the matters connected therewith or incidental thereto

Whereas, Government of Andhra Pradesh has facilitated organization of the below poverty line households into self help groups (SHGs) for the purpose of their economic advancement by achieving financial inclusion through linking with the banking network; Whereas these SHGs are being exploited by private Micro Finance Institutions (MFIs) through usurious interest rates and coercive means of recovery resulting in their impoverishment & in some cases leading to suicides, it is expedient to make provisions for protecting the interests of the SHGs, by regulating the money leading transactions by the money lending MFIs and to achieve greater transparency in such transactions in the State of Andhra Pradesh; And whereas, the Legislature of the State is not now in session and the Governor of Andhra Pradesh is satisfied that circumstances exists which render it necessary for him to take immediate action; Now, therefore, in exercise of the powers conferred by clause (1) of Article 213 of the Constitution of India, the Governor hereby promulgates the following Ordinance:-

Short title, 1. (1) This Ordinance may be called the Andhra Pradesh Micro extent and Finance Institutions (regulation of money lending) Ordinance, 2010. commencem (2) It extends to the whole of the State of Andhra Pradesh. ent (3) It shall come into force at once. (4) It shall apply to Micro Finance Institutions whether they had come into existence before or after the commencement of this Ordinance.

Definitions 2. In this Ordinance, unless the context otherwise requires -

(a) ‘Self Help Group (SHG)’ means a group of women formed on principles of self help and registered as such with the Society for Elimination of Rural Poverty (SERP) in the rural areas or Mission for Elimination of Urban Poverty in Municipal areas (MEPMA) in urban areas.

(b) ‘Society for Elimination of Rural Poverty (SERP)’ is a Society formed by Government for the purpose of implementing pro-poor initiatives and thereby eliminating poverty in rural areas.

(c) Society under ‘Mission for eliminating poverty in municipal areas (MEPMA)’ is a Society formed by Government for the purpose of implementing pro-poor initiatives and thereby eliminating poverty in urban areas.

1 (d) ‘Micro finance institution (MFI)’ means any person, partnership Firm, group of persons, including a Company registered under the provisions of the Companies Act 1956, a Non-Banking Finance Company as defined under section 58-A of the Reserve Bank of India Act 1934, a Society registered under the A.P. Cooperative Societies Act 1964, or the A.P. Societies Registration Act 2001 and the like, in whichever manner formed and by whatever name called, whose principal or incidental activity is to lend money or offer financial support of whatsoever nature to the low income population.

(e) ‘Government’ means the State Government of Andhra Pradesh.

(f) 'SHG bank linkage' means provision of credit for the SHGs by the commercial banks based on a micro credit plan prepared by the SHGs for carrying out economic activities.

(g) 'Interest' for the purposes of the terms defined under the provisions of this Ordinance would mean a return on the amount lent by the MFI to a SHG.

(g) 'Loan' means an advance whether of money or in kind given to the borrowing SHG at interest, whether given before the commencement of this Act or after such commencement and includes advance, discount, money paid for or on account of or paid on behalf of or at the request of any person, or any account whatsoever, and every agreement (whatever its terms or form may be) which is in substance or effect a loan of money or in kind given to an SHG and further includes, an agreement relating to the repayment of any such loan.

(i) ‘Notification’ means a notification published in the Andhra Pradesh Gazette and the word ‘notified’ shall be construed accordingly.

(j) ‘Prescribed’ means prescribed by Rules made under this Ordinance.

(k) 'Registering Authority' means the Project Director District Rural Development Agency for the rural areas and Project Director MEPMA for urban areas; or any other person appointed by the District Collector to perform the functions of a registering authority under this Ordinance for such District.

(l) 'Registration' means registration granted to a MFI under this Ordinance.

(m) “SHG Member” means a registered member of a SHG who intends to avail a loan through such SHG.

(n) Words used but not defined in this Ordinance, shall have the same meaning assigned under the relevant Acts.

Registration 3. (1) All MFIs operating in the State of Andhra Pradesh as on the

2 of MFIs date of the commencement of this Ordinance, shall within thirty days from the date of commencement of this Ordinance, apply for Registration before the Registering Authority of the district specifying therein the villages or towns in which they have been operating or propose to operate, the rate of interest being charged or proposed to be charged, system of conducting due diligence and system of effecting recovery and list of persons authorized for conducting the activity of lending or recovery of money which has been lent. (2) No MFIs, operating at the commencement of this Ordinance or intending to start the business of lending money to SHGs, after the commencement of this Ordinance, shall grant any loans or recover any loans without obtaining registration under this Ordinance from the Registering Authority. (3) The Registering Authority shall conduct verification of the details furnished by the MFI and accord registration in such manner as may be prescribed for operation of MFIs for a period of one year, after obtaining a written undertaking from the MFI that it shall always act in conformity with the provisions of this Ordinance. (4) Where the MFI applies for renewal of registration, an application for that purpose shall be filed by the MFI 60 days before the expiry of the period of one year referred to in sub-section (3) and the Registering Authority shall decide either to grant renewal or refuse renewal of registration within 15 days before the date of expiry of registration, after due verification of the performance of the MFIs in the field level and after hearing objections, if any, from the general public regarding extension of Registration.

Register of 4. (1) Every registering authority shall maintain for the area under MFIs its jurisdiction registers of all MFIs having valid registration in such form as may be prescribed.

(2) The registers maintained under sub-section (1) shall be published in such manner and at such intervals as may be prescribed.

MFIs to 5. (1) The Registering Authority may, at any time, either suo obtain moto or upon receipt of complaints by SHGs or its members or by registration members of the public cancel the registration of an MFI after assigning sufficient reasons for such cancellation. Provided that no order of cancellation of the Registration shall be passed without issuing notice to the MFI intimating the facts upon which the prima-facie decision to cancel the registration has been taken and the MFI shall be afforded a reasonable opportunity to show cause against such notice. Explanation: For the purposes of sub-section (1), conviction of a MFI for an offence of violation of any of the provisions of this Ordinance shall be sufficient cause for suspension or cancellation of its registration. (2) Pending enquiry under sub-section (1), the Registering Authority may, for sufficient reasons to be recorded, suspend the Registration

3 of an MFI.

Member of 6. No member of an SHG shall be a member of more than one SHG, SHG not to provided that where a member has, at the commencement of this be member Ordinance, become a member of more than one SHG, she shall have of more than the option to retain the membership of one SHG and to terminate one SHG her membership in other SHGs and for that purpose, she shall issue a notice to such SHGs about her option to terminate her membership, settle and pay the amount payable to the MFIs which had lent monies to such SHGs, within a period of 3 months from the date of commencement of this Ordinance.

MFIs not to 7. No MFI shall seek any security from a borrower by way of pawn, seek security pledge or other security for the loan. for loan Provided that any such security obtained from a borrower before the commencement of this Ordinance shall forthwith stand released in favour of the borrower.

Display of 8. (1) All MFIs shall display the rates of interest charged by them in rates of a conspicuous place in their premises in bold letters visible to the interest members of the public. charged by (2) No MFI shall charge any other amount from the borrower except MFIs any charge prescribed in the Rules for submission of an application for grant of a loan.

Maximum 9. (1) No MFI shall recover from the borrower towards interest in amount of respect of any loans advanced by it, whether before or after interest commencement of this Ordinance, an amount in excess of the recoverable principal amount. on loans and (2) All loans in respect of which an MFI has realized from the discharge of borrower, whether before or after commencement of this Ordinance, loans in an amount equal to twice the amount of the principal, shall stand certain cases discharged and the borrower shall be entitled to obtain refund and the MFI shall be bound to refund the excess amount paid by the borrower.

Prior 10. (1) No MFI shall extend a further loan to a SHG or its members, approval for where the SHG has an outstanding loan from a Bank unless the MFI grant of obtains the prior approval in writing in such manner as may be further loans prescribed from the Registering Authority after making an to SHGs or application seeking such approval. their (2) The Registering Authority while considering such application from members an MFI seeking approval as aforesaid, shall secure the following information in writing from the MFI in regard to every member of SHG namely, i) Name of the Borrower ii) name of the SHG iii) bank from which loan has been obtained by the SHG

4 iv) date of the loan granted by the bank v) amount paid to the SHG by the bank vi) amount due from the SHG vii) fresh amount of loan sought by the SHG from the MFI viii) terms of repayment proposed by the MFI ix) details of due diligence including the capacity of the SHG for repayment and x) such other details as may be prescribed by Rules made under this Ordinance. (3) The Registering Authority shall, not later than fifteen days from the date of filing of such application for approval under subsection (2), cause an enquiry into the contents of the application and shall grant approval for further loan unless the Registering Authority is satisfied that the SHG and its members have passed a resolution that they have understood the conditions of the loan and terms of repayment and unless the Registering Authority is also satisfied that such further loan would generate additional income to the SHG and its members, needed for servicing the debt. (4) No MFI shall grant loan to a member of SHG during the subsistence of two previous loans irrespective of the source of the previous two loans.

Duty of MFIs 11. (1) All borrowings by a member of an SHG from an MFI shall to maintain be contracted in the manner, form and format prescribed under the accounts and Ordinance. furnish (2) Every MFI shall keep and maintain a cash book, a ledger and copies such other books of account in such form and in such manner as may be prescribed. (3) Every MFI shall - (a) Deliver or cause to be delivered, to the borrower within seven days from the date on which a loan is made, a statement in the prescribed form showing in clear and distinct terms the amount and date of the loan and of its maturity, the name and address of the functionary of the MFI and the effective rate of interest charged. (b) Upon repayment of a loan in full, the MFI shall obtain an indelible mark on every paper signed by the borrower with words indicating such repayment and provide copies thereof to the borrower. (4) No MFI shall receive any payment from a borrower on account of any loan without giving him a duly signed receipt for the payment. (5) An MFI shall, on a demand in writing by the borrower, supply a copy of any document relating to a loan obtained by him, or if the borrower so requires, to any person specified in that behalf in the demand.

5 Provided that in respect of loans given prior to the commencement of this Ordinance, it shall be obligatory for the lender to specify if any security was accepted from the borrower. (6) All tranches of repayment shall be made by the group at the office of the Gram Panchayat only. (7) MFI shall not deploy any agents for recovery nor shall use any other coercive action either by itself or by its agents for recovery of money from the borrower; and any form of coercive recovery including but not limited to visiting the house of the borrower shall, apart being punishable under the provisions of the Ordinance, empower the Registering Authority to suspend or cancel the license of such an MFI as provided in Section 5.

Submissions 12. Every MFI shall submit a Monthly Statement to the Registering of monthly Authority before 10 th day of every month giving therein the list of statement borrowers, the loan given to each and the interest rate charged on by MFIs the repayment made.

Power to 13. (1) The Registering Authority or any officer authorised by him require in this behalf may, to verify whether the business of the MFI is being production of carried on in accordance with the provisions of this Ordinance, enter records or the premises of the MFI office or of any person who in his opinion is documents carrying on the business of lending and call upon him to produce any and power of record or document relating to such business and every such MFI entry, shall allow such inspection and produce such record or document. inspection (2) The Registering Authority may, for the purposes of sub-section and seizure (1), search the premises and seize any record and document as may be necessary and the record or document seized shall be retained only for such period as may be necessary for the purposes of examination, prosecution or other legal action. Provided that the provisions of Sections 100 and 102 of the Code of Criminal Procedure, 1973 shall, so far as may be, apply to such search and seizure. (3) The registering authority or the other officer referred to in sub- section (1) shall also have power to summon and examine the MFI or any person who in his opinion is in a position to furnish relevant information.

Complaints 14. Any SHG or its members or any member of the public can file a complaint regarding violation of the provision of this Ordinance by a MFI before the Registering Authority and the said Authority shall enquire into the same after giving a reasonable opportunity to the MFI to show cause and pass such orders as it may deem fit including an order under section 5 of the Ordinance.

6 Settlement of 15. (1) For the protection of debtors and for the settlement of Disputes disputes of civil nature between the SHG or its members on the one hand and the MFI on the other hand or between the members of the SHG and the SHG, in relation to the loans granted under this Ordinance to the SHG or its members, the State Government after consultation with the High Court, and by notification, - (a) Shall, as soon as may be after the commencement of this Ordinance, establish for every district in the State a Fast-Track Court; (b) May establish Fast-Track Court for such other areas in the State, as it may deem necessary. (2) The Government shall, after consultation with the High Court of Andhra Pradesh specify, by notification, the local limits of the area to which the jurisdiction of a Fast-Track Court shall extend and may, at any time, increase, reduce or alter such limits. (3) The cases that may be filed before the fast-Track Court shall be disposed of within a period of three months. (4) The decree of the Fast Track Courts shall be liable to be executed in accordance with the procedure under the Code of the Civil Procedure 1908.

Penalty for 16. (1) All persons who are connected with and responsible for the coercive day-to-day control, business and management of a MFI including the actions MFIs Partners, Directors and the employees who resort to any type of coercive measures against the SHGs or its members of their family members shall be liable for punishment of imprisonment which may extend up to a period of three years or with fine which may extend to one lakh rupees or with both. Explanation:- For the purposes of this section, “coercive action” by an MFI against the SHGs or its members of their family members include the following - (a) obstructing or using violence to, insulting or intimidating the borrower or his family members, or (b) persistently following the borrower or his family member from place to place or interfering with any property owned or used by him or depriving him of, or hindering him in, the use of any such property (c) frequenting the house or other place where such other person resides or works, or carries on business, or happens to be, or (d) doing any act calculated to annoy or intimidate such person or the members of his family, or (e) moving or acting in a manner which causes or is calculated to cause alarm or danger to the person or property of such other person (f) seeking to remove forcibly any document from the borrower which entitles the borrower to a benefit under any

7 Government programme. Provided that a person who frequents the house or place referred to in clause (c) in order merely to obtain or communicate information shall not be deemed to be using coercive action. (2) The MFI or the persons who use coercive actions as stated in sub section (1) shall be prosecuted in accordance with the provisions of this Ordinance. (3) The provisions of the Code of Criminal Procedure, 1973, shall, so far as may be, apply to the proceedings before a Fast Track Court, and for the purpose of the said provisions, a Fast Track Court shall be deemed to be a Magistrate.

Penalty for 17. All persons who are connected with and responsible for the carrying on day-to-day control, business and management of a MFI including the business Partners and Directors of such MFI which carries on the business of without providing loans either without obtaining registration of the MFI from registration the Registering Authority under Section 3 of the Ordinance, shall be liable for punishment with imprisonment for a term which may extend to three years and with fine which may extend to rupees one lakh.

Penalty for 18. If any person contravenes any provision other than Section 3 contraventio of this Ordinance, he shall be punishable with imprisonment for a n of the period of six months or with fine which may extend to ten thousand provisions of rupees or with both. the Ordinance

Every officer 19. Every officer of the Government and every person acting to be public under the provisions of this Ordinance shall be deemed to be a public servant servant within the meaning of section 21 of the Indian Penal Code.

Bar of certain 20. (1) No suit, prosecution or other proceedings shall lie against proceedings. any officer or employee of the Government for any act done or purporting to be done under this Ordinance, without the previous sanction of the Government. (2) No suit, prosecution or other legal proceedings shall be instituted against any person for anything which is, in good faith, done or intended to be done under this Ordinance or the rules made thereunder.

Power to 21. If any difficulty arises in giving effect to the provisions of this remove Ordinance, the Government may, by notification, remove difficulties difficulties. by orders not inconsistent with the provisions of this Ordinance, but which appear to them to be necessary or expedient to remove such difficulty.

Power to 22. The Government may, from time to time, issue such orders, give instructions and directions not inconsistent with the provisions of this directions Ordinance and the rules made thereunder to the officers for the

8 proper administration of the Ordinance, and such officers and all other persons employed in the enforcement of the Ordinance, shall comply with such orders, instructions and directions.

Power to 23. (1) The State Government may, by notification, make rules for make rules carrying out the purposes of this Ordinance. (2) Every rule made under this Ordinance shall, immediately after it is made, be laid before the Legislature of the State, if it is in session and if it is not in session, in the session immediately following for a total period of fourteen days which may be comprised in one session or in two successive sessions and if, before the expiration of the session in which it is so laid or the session immediately following the Legislature agrees in making any modification in the rule or in the annulment of the rule, the rule shall, from the date on which the modification or annulment is notified, have effect only in such modified form or shall stand annulled as the case may be so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that rule.

Annual 24. The Government shall prepare an annual report on the Report on administration of this Ordinance and the same shall be placed before the the State Legislature. administratio n of the Ordinance

9 STATEMENT OF OBJECTS AND REASONS

The Government of Andhra Pradesh has made rapid strides in the field of financial inclusion of the rural & urban poor by organising women self help groups (SHGs); and linking them with the banks for meeting their credit needs.

Of late, many individuals and entities have come up styling themselves as Micro Finance Institutions and are giving loans to SHGs at very high or usurious rates of interest and are using inhuman coercive methods for recovery of the loans. This has even resulted in suicides by many rural poor who have obtained loans from such individuals or entities.

In the larger public interest and to protect the poor from exploitation, and to regulate the lending of monies to the SHGs by the MFIs, the Government intends to bring into force a law containing the various provisions stated in this Bill in order to check the illegal acts of these MFIs.

This Bill seeks to give effect to the above decision.

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ISLAMIC MICROFINANCE IN THE MIDST OF ARMED CONFLICT

by Janiece Brown Spitzmueller

The poor of the Islamic world have the same need for microcredit as a poverty reduction tool as do non- Muslim poor. The Muslim poor, however, face unique challenges due to the role of culture and religion in financial transactions. Likewise, the poor in conflict-afflicted nations could, under certain circumstances, benefit from microfinance as a poverty reduction tool as can the poor in stable nations. There too, in the conflict-afflicted land, exists a challenge. It arises from a culture of dependency as a result of decades of humanitarian aid. Combined, these challenges, although surmountable, require modifying the Grameen Model for effective sector development in microfinance. With the Republic of The Sudan as backdrop, this paper examines some of those challenges and offers a guide for identifying potentially sustainable investment opportunities that provide social impact.

INTRODUCTION

When the Sudanese government dubbed 2008 “The Year of Microfinance in Sudan,”1 the

Islamic Development Bank (IDB) had already begun addressing the unique challenges of making the poor in the Islamic world receptive to microfinance. “The needs of the poor in Islamic countries are no different from the poor in other societies except that these are conditioned and influenced by their faith and culture in a significant way…Micro-credit as offered by conventional microfinance institutions (MFIs) in Muslim countries violates the fundamental prohibition of riba that the Islamic Shariah mandates.”2 Shari’a (aka Sharia, Shaiah), used interchangeably in the western world to mean Islamic law,3 prohibits the use of interest (riba) on loans. While the IDB recognizes and endorses international best practices regarding MFIs, it seeks diverse approaches to resolve the particular sensitivities of the Muslim poor.

The Republic of The Sudan (Sudan) is ruled by an Islamic-oriented government4 and has been plagued by civil war since its independence in 1956 “when joint British-Egyptian rule over the country ended.”5 The conflicts are rooted in the legacy of colonialism where the British traditionally exploited ethnic and religious differences for control. Conflict has left the country with “famine-related effects [resulting] in more than four million people displaced [and] in the western region of Darfur [with] nearly two million people displaced.”6 In January 2005, the

Comprehensive Peace Agreement (CPA) between The Government of The Republic of The

1 First National Consultative Forum on Microfinance, Microfinance Best Practices in Conflict-Afflicted Countries- Challenges and Opportunities for Sudan, 12 to 14 November 2007, Forum Report, p.5 2 Islamic Research and Training Institute, Islamic Development Bank, Framework and Strategies for Development of Islamic Microfinance Services, 27 May 2007, p. 21 3 Feldman, Noah, “Why Shariah?” New York Times, 16 March 2008, http://www.nytimes.com/2008/03/16/magazine/16Shariah-t.html 4 Central Intelligence Agency, The World Factbook, https://www.cia.gov/library/publications/the-world- factbook/geos/su.html 5 BBC new, Sudan country Profile, 9 October 2010, http://news.bbc.co.uk/2/hi/africa/country_profiles/820864.stm 6 Ibid.

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Sudan and The Sudan People’s liberation Movement/Sudan People’s Liberation Army, was signed to “provide a model for good governance in [and] guarantee lasting peace, security for all, justice and equality in the Sudan.”7 The CPA also makes provisions for: a dual banking system:

Islamic oriented in the north; and conventional in the south, and a referendum for southern succession in 2011.8 Yet since 2009, UN peacekeeping troops struggle to stabilize the country, and conflict in the Sudan has spilled over into neighboring Chad.9.

With a history of longstanding internal conflict as backdrop, developing a sustainable

Islamic microfinance sector that appeals to conservative Muslims is a challenge that requires a unique approach. Major issues include the influence of domestic conflict on social norms, as foreign aid has instilled in civilians a culture of dependency. In addition, Islam plays a distinct role in financial transactions where interest is prohibited, which is the means of profit making and the basis for sustainability in conventional microfinance.

THE CHALLENGE OF DOMESTIC CONFLICT AND THE CULTURE OF DEPENDENCY

The essential conditions for microfinance are political and population stability, economic activity and a cash economy.10 Microfinance is not meant for use as a means for conflict resolution, but rather countries

“must offer a reasonable degree of security and safety for clients and microfinance institutions (MFIs) to carry out their activities. In the Democratic Republic of Congo, USAID and CIDA focused microfinance efforts on pockets of stability [because maintaining] timely loan recovery is difficult with mobile populations. Most programs focus on residents, internally displaced people, and returnees, [and] allows clients to take advantage of economic opportunities—it does not create them.”11

7 The Comprehensive Peace Agreement between The Government of the Republic of the Sudan and the Sudan People’s Liberation Army, January 2005, p. 10 8 In January 2011, the South Sudanese overwhelmingly voted to secede from the North. A discussion on the resulting economic and social implications are beyond the scope of this paper. 9 Central Intelligence Agency, The World Factbook, https://www.cia.gov/library/publications/the-world- factbook/geos/su.html 10 Consultative Group to Assist the Poor, Supporting Microfinance in Conflict-Afflicted Areas, Donor Brief No. 24, December 2004, http://www.cgap.org/gm/document-1.9.2362/DonorBrief_21.pdf 11 Ibid. p. 1

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In addition to stability, Sudan faces the burden of reversing the culture of dependency arising from foreign aid donations dispensed during it’s the conflicts. “If you look at twenty years of civil war…look at somebody who was 5 years old when the civil war started, right now he should be about 30 years. This person grew up relying entirely on relief…that mindset is something we need to [address and] is the biggest challenge-the dependence syndrome being removed from their minds.”12 The security concern inherent in a conflict situations, lends itself to foreign aid. Due to lengthy civil war in Sudan, foreign aid has produced generations of civilians oriented to the concept of dependency, which is the antithesis of self-sufficiency.

SHARI’A AND THE CHALLENGE OF RELIGIOUS CULTURE

Another major challenge to orienting conservative Muslims to accepting microfinance is adherence to Shari’a. “[The] geographic distribution of the poor encompasses a sizeable Muslim population [which] sounds like a simple recipe for economic success, [however] the Islamic microfinance industry has yet to demonstrate if can provide financial products that meet this demand and adhere to Shari’a.”13 The search for a sustainable microfinance methodology continues.

“Islamic microfinance represents the confluence of two rapidly growing industries: microfinance and Islamic finance. It has the potential to not only respond to unmet demand but also to combine the Islamic social principle of caring for the less fortunate with microfinance’s power to provide financial access to the poor. Unlocking this potential could be the key to providing financial access to millions of Muslim poor who currently reject microfinance products that do not comply with Islamic law. Islamic microfinance is still in its infancy, and business models are just emerging.”14

12 Morgan, Crystal Murphy, Tabula Rasa? Conceptions of Microfinance in Juba, Sudan, IMTFI Researchers Conference, University of California, Irvine, p. 9 13 Abdullah, Mohammed, Where does Islamic Microfinance Come In?, CGAP, 20 April 2010, http://microfinance.cgap.org/2010/04/20/where-does-islamic-microfinance-come-in/ 14 Karim, Nimrah, et al., Islamic Microfinance: An Emerging Market Niche, CGAP, August 2008, http://www.cgap.org/p/site/c/template.rc/1.9.5029/

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Although the IDB has yet to develop a sustainable Shari’a-compliant microfinance sector, experts in Shari’a have proposed options that incorporate Islamic banking and conventional economic concepts. Shari’a-compliant financing may be provided as “a means for social development banks to lend to poorer clientele…through murabaha-structured micro-loans and …the aid of restricted mudarabah lending.”15 This arrangement would allow partners/banks-sellers to form a partnership (murabaha) with partner/borrowers-buyers. The partners/banks-sellers loan money and the partner/borrowers-buyers manage the money in a

Shari’a-compliant commercial enterprise. The funds are repaid at a markup that is disclosed by the seller to the buyer. The payment illustrates mudarabah, which with murabaha makes these transactions Shari’a-compliant. “In Islamic banking, financiers are required to share borrowers’ risks, meaning that depositors are treated more like shareholders, earning a portion of profits.

Financing leas resemble lease-to-own arrangement, layaway plans, joint purchase and sales agreements, or partnerships.”16

CONSIDERATIONS FOR DETERMINING THE ECONOMIC FEASIBILITY OF ISLAMIC MICROFINANCE INVESTMENTS

Concerning Conflict-Afflicted Nations: Identifying Pockets of Stability

Newly independent low-income countries face “a risk of civil war of about 14% in any five year period.”17 Once a country reaches the ten-year milestone of peace and stability, it is more likely to remain stable,18 thereby attracting foreign investment conducive to economic development. To maximize the likelihood of realizing successful implementation of an Islamic microfinance sector throughout the Sudan, loans ought to be targeted in areas with the longest

15 Microfinance: Toward a Sustainable Islamic Finance Model: A short report, Islamic Microfinance Symposium, Harvard Law School, 18 April 2008 16 Arnold, Wayne, “Islamic Banking Rises on Oil Wealth, Drawing Non-Muslims,” New York Times, 22 November 2007, http://www.nytimes.com/2007/11/22/business/worldbusiness/22iht-islamic.1.8432662.html?_r=1 17 Collier, Paul, The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It, Oxford University Press, 2007, p. 20 (In addition, MNCs are known to support rebel uprisings. p. 21.) 18 Ibid. at 27

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history of local political and population stability. Shari’a-compliant economic activities in targeted areas are essential elements of Islamic microfinance development. For reasons discussed below, business owners engaged in Shari’a-compliant commerce in stable areas should be the first recruits for loans.

In the meantime, in addition to establishing the legal framework in which to conduct the

Islamic microfinance sector, it is essential for the Sudanese government to prepare other civilians in stable areas for participation in their own economic development. Through public-private partnerships, for example, cash transfer programs whereby funds are conditioned on behavior conducive to rising out of poverty19 would, in addition to facilitating trust in the government, serve as a bridge to microfinance participation. As program participants rise out of poverty and transcend the culture of dependency, some will apply their skills to graduate into microfinance.

Others will use their skills to enter the mainstream economy. Time and stability, however, are essential to reversing the culture of dependency, and in conflict-afflict areas Islamic microfinance is a long-term investment strategy. The time required to improve a people’s social status is consistent with the milestone for determining a post-conflict nation’s probability for lasting stability. Both could be used for measuring social impact.

Concerning Islamic Microfinance: Modifying the Grameen Model

Since the mindset required for successful business ownership is antithetical to the culture of dependency, business owners operating small Shari’a-compliant enterprises in targeted stable

19 Rosenberg, Tina. A Payoff Out of Poverty?, New York Times, 19 December 2008, http://www.nytimes.com/2008/12/21/magazine/21cash-t.html?%2334;a payoff out of poverty=&sq=&st=nyt&%2334;=&scp=2&pagewanted=all (Conditional behaviors in the cash transfer program included visits to health clinics, sending children to school, planning for the future. The community saw significant improvement in circumstances within a decade. I propose that conditions be based on or similar to the principles that MFI borrowers establish for themselves.)

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areas are the most promising candidates for loans. Crucial to cost-effectiveness in the short-term and sector development over the long-term is participation of a broader population.

“Central to [microfinance] is riba, the charging or payment of interest, banned under Islamic law. Clever twists on standard financial products like credit cards, savings accounts, mortgages, loans, and even trust funds bypass the interest business model. A 2008 report by the General Council for Islamic Banks and Financial Institutions estimates the Islamic banking industry to stand at $442 billion. Even big name banks such as Citigroup, HSBC, and Deutsche Bank are developing Islamic banking sectors to cater to the demand. The industry is small in comparison to the global market, but may grow as some non-Muslims are turning to sharia-compliant services.”20

These clever twists illustrate the process by which Muslims are re-incorporating conventional finance methods into the Islamic system.21 A feasibility study to ascertain whether an Islamic

MFI in the Sudan would be sustainable calls for a preliminary assessment of geographic stability and population readiness:

How long has the area been stable and physically secure? How long has the population been stable? What is the average length of time that members of the targeted community reside in the area? Are there international companies known to fund rebel movements in the area? What is the readiness of the targeted population for participation in microfinance lending? Do Shari’a-compliant commercial enterprises exist in the targeted area?

Modifying the Grameen Model22 is necessary for microfinance to appeal to the most conservative Muslims. Adapting murabaha where MFI investors pool their money for use by established entrepreneurs engaged in Shari’a-compliant enterprises, reduces a major risk associated with conflict-afflicted countries: population movement that negatively impacts repayment. Further risk management strategies are in keeping with the Grameen Model: loans

20 Johnson, Toni, et al., “Islam: Governing Under Sharia,” Council on Foreign Relations, Updated 10 November 2010, http://www.cfr.org/publication/8034/islam.html 21 Arnold, Wayne, “Islamic Banking Rises on Oil Wealth, Drawing Non-Muslims,” New York Times, 22 November 2007, http://www.nytimes.com/2007/11/22/business/worldbusiness/22iht-islamic.1.8432662.html?_r=1 (Muslims began believing that all interest was as bad after Egypt lost control of the Suez Canal to the British as a result of mounting foreign debt) 22 Yunus, Mohammad, Creating a World Without Poverty, Public Affairs, 2007 7

distributed among self help groups of up to five established business owners with only two borrowers receiving loans at a time. In order to mimic a Shari’a-compliant model, MFIs should partner with a local social development bank where members are required to deposit their share of profits realized from murabaha. Weekly mudarabah would keep borrowers focused on the repayment while they simultaneously realize income and further reduce risk of default.

Furthermore, since Shari’a requires MFIs to share risks with borrowers, murabaha further reduces the risk of default.

Borrower-developed principles oriented towards enhanced self-sufficiency that are inherently aligned with improving well-being while respecting religious culture would be measured by improved social status and civic involvement. Although an impending referendum might soon divide the country, whether to invest in the north or south might not have significant implications if all other pertinent criteria are met. Islamic finance has universal appeal. How well Islamic microfinance sector expands among Muslim borrowers is contingent upon how well it is aligned with Shari’a. This concept could be measured by tracking the percentage of Muslim borrowers over time.

CONCLUSION

Islamic microfinance is an emerging market. Islamic microfinance in a conflict-afflicted nation brings to the sector a special set of circumstances that should not be ignored in feasibility studies. Investors in this sector should approach it as a long-term buy-and-hold strategy, and apply a modified Grameen Model when considering the prospects for sustainability and measuring social impact. The Grameen Model focuses on the poorest of the poor for microloans.

Longstanding conflict in the Sudan has given rise to a culture of dependence that renders

targeting the poorest of the poor economically infeasible for early sector development. The time

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it takes to reverse that mindset would prolong the time for an Islamic microfinance investment fund to reach sustainability. Therefore, from an investment perspective, micro-loans should be made to the most stable of the poorest of established small business owners with Shari’a- compliant enterprises. Borrowers sharing in profits under the murabaha business model would improve their living conditions and form the basis by which to measure social impact. Other measures of social impact would include: whether the time required to improve a people’s social status is consistent with the Sudan’s probability for lasting stability; social status and civic involvement; and the percentage of Muslim borrowers benefitting from Islamic microfinance over time. Although microfinance is not a tool for conflict resolution, the social impact arising therefrom could advance the goals of good governance, peace, stability and equality articulated in the CPA.

Developing a Shari’a-compliant microfinance sector in Sudan is a feasible economic endeavor. Although conventional interest rates are considered usurious in the Muslim world,

Islamic microfinance would make up in volume for the lower cost of mudarabah. The attraction of Islamic microfinance to non-Muslins would make this otherwise more costly sector competitive and facilitate sustainability. Therefore, Islamic microfinance loan programs should include strategies for targeting non-Muslims. Overtime, as the Islamic world continues to gradually incorporate conventional financial principles into Islamic finance, Islamic MFIs will realize exponential growth. Investors, however, would be wise to consider it a long-term investment strategy.

Janiece Brown Spitzmueller is a supervising attorney for a government agency. She is co-chair of the NYSBA International Committee on Africa and a member of the NYCLA Board of Directors. Ms. Brown Spitzmueller received her law degree from Boston University and studied

Global Affairs at New York University.

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CITED WORKS

First National Consultative Forum on Microfinance, Microfinance Best Practices in Conflict-Afflicted Countries-Challenges and Opportunities for Sudan, 12 to 14 November 2007, Forum Report

Islamic Research and Training Institute, Islamic Development Bank, Framework and Strategies for Development of Islamic Microfinance Services, 27 May 2007

Feldman, Noah, “Why Shariah?” New York Times, 16 March 2008, http://www.nytimes.com/2008/03/16/magazine/16Shariah-t.html

Central Intelligence Agency, The World Factbook, https://www.cia.gov/library/publications/the-world-factbook/geos/su.html

BBC new, Sudan country Profile, 9 October 2010, http://news.bbc.co.uk/2/hi/africa/country_profiles/820864.stm

The Comprehensive Peace Agreement between The Government of the Republic of the Sudan and the Sudan People’s Liberation Army, January 2005

Consultative Group to Assist the Poor, Supporting Microfinance in Conflict-Afflicted Areas, Donor Brief No. 24, December 2004, http://www.cgap.org/gm/document-1.9.2362/DonorBrief_21.pdf

Morgan, Crystal Murphy, Tabula Rasa? Conceptions of Microfinance in Juba, Sudan, IMTFI Researchers Conference, University of California, Irvine

Abdullah, Mohammed, Where does Islamic Microfinance Come In?, CGAP, 20 April 2010, http://microfinance.cgap.org/2010/04/20/where-does-islamic-microfinance-come-in/

Karim, Nimrah, et al., Islamic Microfinance: An Emerging Market Niche, CGAP, August 2008, http://www.cgap.org/p/site/c/template.rc/1.9.5029/

Microfinance: Toward a Sustainable Islamic Finance Model: A short report, Islamic Microfinance Symposium, Harvard Law School, 18 April 2008

Arnold, Wayne, “Islamic Banking Rises on Oil Wealth, Drawing Non-Muslims,” New York Times, 22 November 2007, http://www.nytimes.com/2007/11/22/business/worldbusiness/22iht- islamic.1.8432662.html?_r=1

Rosenberg, Tina. A Payoff Out of Poverty?, New York Times, 19 December 2008, http://www.nytimes.com/2008/12/21/magazine/21cash-t.html?%2334;a payoff out of poverty=&sq=&st=nyt&%2334;=&scp=2&pagewanted=all

Johnson, Toni, et al., “Islam: Governing Under Sharia,” Council on Foreign Relations, Updated 10 November 2010, http://www.cfr.org/publication/8034/islam.html

Collier, Paul, The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It, Oxford University Press, 2007

Yunus, Mohammad, Creating a World Without Poverty, Public Affairs, 2007

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MICROFINANCE FOCUS, MAY 05, 2011:

EMPLOYING THE front of a government expressed several YOUTH OF THE building. Mr. Bouazizi demands, one of which REVOLUTION- A NEW died from his burns was a demand for MODEL FOR eighteen days later. economic democracy. In MICROFINANCE IN a region where THE NORTH AFRICA A lifetime of frustration economic progress and and sadness culminated job-creation have not By Carli Pierson in that one act of self- kept pace with the immolation. Mr. growing population, TREMENDOUS SACRIFICE, Bouazizi’s sacrifice unemployment rates for TREMENDOUS MESSAGE resounded with youth Generation Y are throughout the Arab Muhammad Bouazizi, incredibly high. In Egypt world. The people the young Tunisian man alone, one quarter of erupted. The who lit himself on fire in people under 30 are demonstrations that front of a town municipal unemployed. followed swept across building, was a College graduates don’t North Africa. Young struggling fruit vendor have adequate outlets people were able to who was trying to grow for their skills. They clearly disseminate their his small business. With cannot even start their political messages and the money he earned own businesses unless simultaneously, plan through his small they are already logistics for the protests venture, he was wealthy, because state through social media supporting numerous law has high minimum networking sites like family members, and start-up capital Facebook and Twitter. paying for his sister’s requirements for new This is a direct result of businesses. college education. the demographic that Entrepreneurs like Mr. was organizing the Throughout the Middle Bouazizi face countless protests: young, tech East, big business and bribes to pay and savvy and educated. the state are for all seemingly arbitrary laws practical purposes, one to navigate, such as the A DEMAND FOR ECONOMIC entity. The government law that the young man DEMOCRACY allows large companies violated when the to monopolize entire policewoman slapped Demonstrators across industries, while in him for selling his fruit in the Middle East return corporations line

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MICROFINANCE FOCUS, MAY 05, 2011: the pockets of state government, that is poverty. Solid interest officials. Small business meant to intimidate the paying savings accounts is inevitably stifled. Nobel Peace Prize that allow clients to winner and keep him out make deposits are A BAD RAP FOR of the Bangladeshi crucial to the success of MICROFINANCE political scene. clients in micro-lending Nevertheless, the programs. Microfinance institutions allegations against Dr. (“MFIs”) are getting a Yunus compounded with MICROFINANCE IN THE bad rap lately. India the suicides have put a MIDDLE EAST- A NEW experienced a veritable serious, if not MODEL “microfinance crisis” in irreversible dent in the 2010 when unregulated Microfinance is relatively general reputation of lending lead nearly new to the Middle East, microfinance. 15,000 borrowers to and the region’s needs commit suicide when While the series of for microfinance are not they were unable to pay suicides in India were a being met. With large their mounting debt. direct result of populations of educated Making things worse, unregulated lending to young people there is the founder of Grameen poor and extremely poor enormous potential for a Bank was fired from the people, it must be noted venture capital type microfinance institution that there are high approach to traditional he founded nearly 30 functioning models that microfinance. years ago. Considered are not driving MFIs should take by many as the “father borrowers to take their advantage of the Middle of microfinance”, Dr. lives in desperation. A Eastern culture in the Yunus has a worldwide delicate line must be broader sense by celebrity following, and drawn between charging capitalizing on the many vehemently enough interest to keep importance of defend the integrity of MFI’s economically self- community relationships his work. Proponents of sustaining, while to identify successful Dr. Yunus are calling the avoiding charging so clients and ensure loan move by Bangladesh’s much interest that repayment. For Prime Minister a borrowers are unable to example, through a calculated political move repay their loans and series of community by the Bangladeshi move upward out of

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MICROFINANCE FOCUS, MAY 05, 2011: exercises, MFIs could young tech-savvy sort through potential entrepreneurs could borrowers according to thrive and contribute to their reputation in the the overall progress of community for financial their country. In fact, a responsibility, large portion of the intelligence and startups would likely be motivation. MFIs could technology, social media also require prospective and other online clients to submit businesses. Now that business plans. Finally, would be something to through group Tweet about. guarantees and community lending ---Disclaimer: The models (where views expressed in this borrowers meet to share article are of the author their experiences and and do not necessarily encourage reflect the views of accountability), the Microfinance Focus. assurance of repayment becomes more likely and thus less speculative.

With a centuries old culture of commerce, and large percentage of educated people under the age of 35, the Middle East is ripe for microfinance opportunities of a different nature. If young people had access to small loans and basic small business training,

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Microfinance Focus May 4, 2011

SWISS CAPACITY- and small businesses. partnership (PPDP) in BUILDING FACILITY The goal of the initiative April, 2011. The SCBF LAUNCHES is to enable up to 50 will initially be MICROFINANCE AND financial intermediaries sponsored by these MICROINSURANCE over the next five years founding partners who CREDIT FACILITY FOR to give an additional are all represented in DEVELOPING 360,000 poor the steering committee. COUNTRIES households (and their SCBF will launch the approximately 1,800,000 first projects in the The Swiss Capacity- family members) access coming weeks. Projects Building Facility for to financial services, and partners will be Income and allowing them to selected according to Employment Generation strengthen their the SCBF’s pre-defined recently launched a economic potential, criteria of good facility that will connect build up physical and governance and client capacity-builders and financial assets, protect protection principles. social investors in their families through Switzerland with housing, health and Approximately 2.7 billion financial intermediaries education, and improve people worldwide do not in developing countries, resilience to economic have access to formal helping them to scale up shocks. financial services. The their outreach to poor development and people and small The Swiss Agency for delivery of services businesses. Development and offered by financial Cooperation (SDC), intermediaries to The SCBF will provide Credit Suisse, FIDES underserved customer capacity building to Financial Systems segments generates assist financial Development Services income and intermediaries, such as AG, Swisscontact, employment. Financial insurance companies, Swiss microfinance intermediaries face two microfinance banks, and holding, and Zurich key constraints in savings and commercial Financial Services expanding their banks, in developing Group, forged the SCBF outreach to this segment countries, to expand as a public-private of the population of their services and development maintaining skilled outreach to poor people

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Microfinance Focus May 4, 2011 management and staff; and mobilizing investor funding to maintain and grow their institutions.

The SCBF addresses these constraints and contributes to the development of responsible microfinance industry. In addition, based on the role that Switzerland’s financial centre plays in microfinance, the SCBF aims indirectly at linking social investors with financial intermediaries to finance the latter’s pro-poor business expansion.

FIDES will manage the SCBF with the support of Swisscontact and under the supervision of the SCBF Steering Committee.

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Faculty Biographies Global Law Week Microfinance New York State Bar Association May 11, 2011

Anita Bernstein

Anita Bernstein, who holds the Anita and Stuart Subotnick professorship at Brooklyn Law School, is an author of numerous books and articles in the fields of torts, legal ethics, comparative law, and feminist jurisprudence. She earned a B.A. from Queens College and a J.D. at Yale Law School; her awards include the first Fulbright scholarship in European Union affairs given to a law professor. She is a member of the American Law Institute and a past chair of the Association of American Law Schools Executive Committee on Torts and Compensation Systems.

Prior to joining Brooklyn Law School, Bernstein was the Sam Nunn Professor of Law at Emory University School of Law, the Wallace Stevens Professor of Law at New York Law School, and the Norman & Edna Freehling Scholar and Professor of Law at Chicago-Kent College of Law. She also served as a visiting professor at Michigan Law School, Cornell Law School, and the University of Iowa College of Law, where she was the Mason Ladd Distinguished Visiting Professor of Law. Before her academic career, Bernstein practiced with Debevoise & Plimpton and was a law clerk to Judge Jack Weinstein of the U.S. District Court for the Eastern District of New York.

Bernstein’s scholarship on microfinance has broached the possibility of distributing reparations for human rights violations in the form of shares in microfinance institutions. Her chapter in The Gender of Reparations (Cambridge University Press: Ruth Rubio Marín ed., 2009) explored the idea in a feminist context, as part of an initiative of the International Center for Transitional Justice. Her article in the University of Pennsylvania Journal of International Law found a mandate for microfinance-based reparations in international human rights law. Her most recent publication on reparations and microfinance, co-authored with sociologist Hans Dieter Seibel and published this year in the Cornell International Law Journal, outlined a plan of action for this program. Bernstein’s current microfinance-related research examines alternative approaches to the regulation and supervision of MFIs.

Janiece Brown-Spitzmueller

Chair, Africa Committee, International Section New York State Bar Association Nonprofit; Legal Services industry December 2010 – Present (6 months)

Member, Board of Directors New York County Lawyers' Association Nonprofit Organization Management industry 2006 – Present (5 years)

Member, Board of Directors Manhattan Youth Recreation and Resource, Inc. Nonprofit Organization Management industry April 2004 – Present (7 years 2 months)

Supervising Attorney NYC Department of Housing Preservation & Develpoment Law Practice industry December 2001 – Present Responsible for litigating complex cases of significant financial, procedural and policy consequences. 08/2007-Present, Supervising Attorney, Special Litigation Unit Oversee enforcement of the NYC Safe Housing Act • Manage the operations and administration of a nascent unit of high-profile cases; • Provide leadership, direction and supervision to legal and clerical staff; • Establish office protocols and procedures to ensure that the Unit meets its litigation objectives and conforms to agency standards. 12/2001-07/2007, Senior Staff Attorney, Lead Litigation Unit Enforced the NYC Childhood Lead Poisoning Prevention Act • Prepared, argued, and tried lead-paint hazard cases in housing court; • Prepared and argued motions; • Assisted with training junior attorneys.

Hearing Officer NYC Department of Education Government Agency; Education Management industry October 1997 – December 2001 (4 years 3 months) Responsible for administrative proceedings of quasi-criminal matters, producing fact-finding decisions and disposition recommendations. • Conducted pre-hearing conferences and presided at evidentiary hearings in a manner similar to bench trials; • Ruled on motions and the admissibility of evidence, and took other relevant actions including direct and cross-examination of witnesses; • Wrote decisions and made dispositional recommendations, stating conclusions based on fact established by the evidence.

Adjunct Lecturer Metropolitan College of New York Educational Institution; Higher Education industry January 1996 – July 1998 Education Boston University School of Law Juris Doctor

Charles “Chuck” Day has served as a Director at Opportunity International since 2004. Headquartered in Oak Brook, Illinois, Opportunity International is the world’s largest faith-based microfinance organization, providing impoverished entrepreneurs in the Developing World with small business loans, business training, savings and insurance.

Since joining Opportunity, Chuck has traveled to Asia and Latin America with American families who wish to experience the impact of microfinance on Developing World economies first-hand.

An attorney with over 25 years experience, Chuck advises members of the Opportunity family on all facets of estate planning, tax planning and charitable gift planning. Chuck’s expertise on charitable giving is not limited to gifts for Opportunity International, as he assists Opportunity’s donors with gifts to all charitable organizations. In addition, he also manages Opportunity’s Donor Advised Fund and assists charitable investors with Opportunity’s Loan Guarantee Fund, a private placement Fund which provides collateral support to microloan programs in the Developing World.

Chuck began his legal career in private practice in Chicago, and ultimately founded his own general practice firm. He left private practice in 1992 to focus exclusively on estate planning and charitable gift planning for the non-profit sector.

Chuck is a graduate of Drake University (1980) and the Drake University Law School (1983). He has taught charitable gift planning at DePaul University, Chicago, and is a former Board Member of the Chicago Council on Planned Giving.

Chuck and his wife live in Winfield, Illinois, with their two children and their “third child”, their Yellow Labrador Retriever.

Steven Godeke

STEVEN GODEKE is an independent financial advisor who works with foundations, corporations, and non-profit organizations to integrate their investment and philanthropic goals. He advises organizations and individuals on the creation and execution of mission-related investment strategies across asset classes and program areas.

His clients include The Rockefeller Foundation, The Robin Hood Foundation, The Conference Board, The F.B. Heron Foundation, The World Economic Forum and corporate clients in the financial services and pharmaceutical industries. Steven is also an adjunct professor at New York University where he currently teaches a course in Microfinance and Social Entrepreneurship.

Prior to establishing his own firm, Steven worked for twelve years in corporate and project finance with Deutsche Bank. He attended Purdue University where he received a B.S. in Management and a B.A. in German. He studied as a Fulbright Scholar in Cologne and has an M.P.A from Harvard University.

Denise Scotto

During her distinguished career, Denise Scotto, Esq. has represented law firms, governments, businesses, non-profits, NGOs, and individual clients. She is admitted to practice law in the courts of the State of New York and the District of Columbia, and advises clients on a wide range of matters, from Legal Analysis to Advocacy Strategy, Policy Development, Conflict Resolution, the United Nations System and Cross-Cultural Cooperation. Ms. Scotto is known for her thought leadership in communicating complex concepts easily through her dynamic presentations.

As a Trial Specialist handling cases related to civil rights, labor and employment law and negligence, Ms. Scotto started her career as an attorney in the Office of the Corporation Counsel of the City of New York. She represented the City of New York, its various agencies, including the Board of Education, the Health and Hospitals Corporation as well as City employees at all phases of trial and at the appellate level. She later worked as in- house Special Trial Counsel for Nationwide & Wassau insurance companies where she tried high-profile cases and supervised outside counsel.

Ms. Scotto’s legal skills and management background served the United Nations Department for Economic & Social Affairs. Her responsibilities included acting as a liaison with UN Secretariat Departments, UN specialized agencies, governments and all sectors of civil society. She organized high-level panels and special events, and was actively involved in inter-governmental processes, in helping to define UN treaties, resolutions and outcome documents. She has influenced the development of government policies, national and local legislation and education relating to civic participation and engagement.