Investing in the World's Poor Taking Microfinance to the Next Level
Part 2: A Vast Network
BlueOrchard is among only a handful of new equity funds aimed specifically at microfinance. And it's not stopping there. The company will continue its debt financing program in parallel, and de Schrevel is also launching a $20 million Geneva-based investment fund, called Bamboo Finance Oasis Fund, that aims to boost young companies working on ideas that could help bring clean water, energy, education, health, housing, and insurance to people living below poverty level.
The notion is to forge a link with microcredit institutions whenever possible, leveraging their access to customers as a means of distributing new products tailored for the poorest of the poor. Indeed, says de Schrevel, one of the greatest values of microfinance outfits lies in their networks. "They have the capacity to reach out to millions of people who have never been touched by any distribution channels," he says. "In the beginning it was about lending and then collecting savings. In the future, it could be debit cards, credit cards, microinsurance. A whole range of financial products needs to be defined."
At the same time, de Schrevel believes it may be possible to combine financial services with products geared toward the poorest of the poor. One company Oasis may invest in has developed a $20 lantern powered by miniature solar panels that would last 25 years or more with no maintenance. Such a product might be distributed for sale through microfinance institutions that cater mostly to people without electricity, he says.
No Longer a "Mono Product"
Clearly, today's service offerings are just the beginning. CGAP estimates some 3 billion people of working age lack access to basic financial services. Some of the gap is closed by state-owned agricultural, development, and postal banks; member-owned collectives; savings banks; and low-capital local banks, which serve hundreds of millions of people ignored by commercial banks and other financiers.
These so-called alternative financial institutions, or AFIs, offer services -- from savings to remittances to insurance -- that are generally outside the purview of traditional microlending institutions. That AFI savings accounts outnumber loans by four to one affirms the growing need for such services, argues CGAP. It estimates that some two-thirds of small loans and microloans come from AFIs.
Yet, CGAP estimates that even with as many as 750 million accounts on their books, these institutions, combined with smaller, nongovernmental microfinance institutions, serve only one-sixth of the potential microfinance market. All the more reason to help microfinance institutions "move from a mono product to progressively offering a spread of banking services," says Martin Velasco, a well-known European business angel and a member of BlueOrchard Private Equity Fund's executive board.
Up to the Challenge
Littlefield cautions that private equity funds targeting microfinance lenders will face a number of challenges. For one thing, the legal structure of many such institutions prevents outside equity investments. What's more, it's tricky to establish fair valuations and exiting from the investments can be difficult.
De Schrevel is unfazed. When making loans from its debt vehicle, BlueOrchard isn't able to exert any influence over strategies of the microfinance institutions it lends to. But with its new private equity arm, which will acquire minority stakes of 15 percent to 30 percent, BlueOrchard can play a more active governance role, sharing its international experience, information, networks, and knowledge.
Already, the new equity fund is helping three separate South American microfinance institutions set up cross-border operations, de Schrevel says. "As an equity investor we will become shareholders, and our influence will become much stronger." And though the fund is structured as a traditional private equity vehicle, the investment horizon will be much longer, he says.
"We are at the beginning of a huge wave," de Schrevel says. "Market development at the bottom of the pyramid is very sustainable and will have dramatic social impact."
- Part 1: Taking Microfinance to the Next Level
- Part 2: A Vast Network