By SVMN Volunteer Monica Oyarzun
On April 17, 2013, SVMN had the honor and privilege of welcoming Michael Schlein, President and CEO of ACCION, to discuss the organization’s history along with its strategies for future economic and social impact among base of the pyramid (BoP) populations. During this discussion, Schlein emphasized the themes of hope, opportunity, and empowerment that are the essence of ACCION’s work.
He shared stories from meeting with microfinance clients – a woman in Haiti who explained to Schlein that financial inclusion to her meant hope and that because she was able to access a loan she was given a way to move forward and rebuild. Another woman expressed the fear she felt when she took her first loan, uncertain of the consequences if she were unable to repay her debt. This same woman then spoke of the pride and empowerment she felt upon receiving her second loan, as she understood that this was not charity but instead an opportunity she deserved.
Client stories such as these are so important, as it was for them that ACCION as an organization first came to be. In 1961, ACCION was founded as a grassroots community development organization in Venezuela, where the main goal was to empower and inspire members of the community to create changes around the issues that were most important to them. As Schlein puts it, they wanted to help people help themselves. The model was successful and ACCION expanded throughout the rest of Latin America, mainly through philanthropy work until they offered their first microloans in 1973.
Microfinance has continued to grow from this point, with ACCION playing a critical part in its successes. In 1992, they helped create BancoSol in Bolivia as the first ever commercially regulated Microfinance Institution (MFI), and others soon followed suit. To date, ACCION has helped establish 63 MFI’s in 22 countries across 4 continents in an effort to create a financially inclusive world, and the microfinance industry currently reaches 200 million customers.
Now that microfinance has become an established industry, ACCION is working to improve it, and find ways to increase the efficiency of MFI’s. This goal makes up the first part of their current strategy: to build the next generation of financial institutions. Change has come slowly to the industry, with the bulk of MFI’s still operating on a one-to-one model – that is, one lending officer per client. ACCION has started a pilot program in Colombia where they are working in lending teams and exploring new innovations. Through these efforts, Schlein believes they can improve the efficiency of the microlending process by as much as 40%.
Additionally, they are striving to reach an even greater portion of BoP populations, to create a world that is entirely financially inclusive. Schlein believes the solution to this challenge lies in finding ways to harness the power of capital markets. Although ACCION is a non-profit, it has been run as a for-profit in order to tap these capital markets. In 1999, they made their first investment for 1 million USD to Compartamos, a financial institution in Mexico whose public offering later offered large returns. Since then, they have continued seeking investment opportunities to further advance and support the efforts made around financial inclusion.
This leads to the second part of ACCION’s current strategy: Impact Investing, or pushing beyond microfinance. Recently, impact investing has been getting more publicity, as firms have popped up that are specifically focused on investing for social and environmental impact, and not just financial return.
Microfinance played a huge part in shifting the way people view the poor. In the past, we saw aid work as the primary solution, but now we are able to view the base of the pyramid as a market, offering opportunity and a tremendous source for innovation and product development. We have realized that businesses focused on social innovations and returns do not necessarily mean a sacrifice in profits. On the contrary, we can have big social impact AND strong financial returns.
Through two new investment funds, Frontier Investments Group and Venture Lab, ACCION is hoping to accelerate the future of social impact with early stage and seed capital. While both are focused first and foremost on breakthrough innovation to serve the entrepreneurial poor, Frontier Investments searches for contracts that are seeking scale and have already established some traction and revenues, while Venture Lab invests in pre-revenue businesses in order to help build a pipeline for the whole investment industry.
Venture Lab is a 10 million dollar fund, with individual investments ranging from $100,000 – $500,000. In addition to offering financial support, they also provide business counsel and other tools to help entrepreneurs successfully launch and develop their businesses. Current investments include Payclip, which is a plug-in for smart phones that allows merchants in Mexico to accept credit card payments, similar to Square in the United States. It is important because much of government support for the poor is offered through cards, but most merchants are currently cash based and thus the cards are ineffective. Payclip offers a solution to this problem that is both cost effective and has the potential for high social impact.
Frontier Investments Group also offers both financial and non-financial support to their investees, but works with more established businesses that are ready to scale, and typically invests between $1-3 million per contract. Current investments include Tiaxa, a Chilean company that has started to make loans via mobile phones. They offer “nano-loans” to prepaid customers based on how well they have historically paid their phone bills. Loans are available through both balance advances and emergency advances, and the funds are recovered when the customer tops up their account again.
The third and final focus of ACCION’s current strategy lies in building an industry with high standards. Traditionally, microfinance was developed as a nonprofit industry, but as businesses realized the potential for profit that existed in microloans, for-profit MFI’s began to emerge. Schlein emphasized that while this essentially denotes a success in the industry, as we create and expand upon a viable solution for poverty alleviation, it also presents the need for consumer protection and appropriate standards, to ensure people remain focused on the mission and do not stray from it in favor of profits.
In 2008, with part of the returns from their investment in Compartamos, ACCION launched the Center for Financial Inclusion, from which the Smart Campaign was later developed. The Smart Campaign details 7 Client Protection Principles to ensure borrowers’ best interests are kept as a priority, and protects over 60 million microfinance customers through pledges made by hundreds of MFI’s. Once MFI’s commit to the principles, however, methods are needed to ensure compliance. Currently, the Smart Campaign is using external raters to certify adherence to the principles and has developed a Client Protection Certification that, if successful, will truly raise the standards of consumer protection worldwide.
While there are around 10,000 MFI’s worldwide, the majority of microfinance clients are served by a few hundred leading MFI’s. The Smart Campaign aims to certify as many of these MFI’s as possible, as this would cover the majority of clients while holding the MFI’s up as very visible examples to the entire industry. If we can get to a point where certification is required in order to work with BoP populations, or where investors will only offer capital to certified institutions, then smaller MFI’s will follow suit so as to adhere to the standards set in the industry.
After detailing these three strategies, Schlein opened up the conversation to questions. Audience response prompted more detailed discussion around impact assessment methods, financing for small to medium-sized enterprises (SME’s), and what challenges ACCION and the microfinance industry are facing today.
As the impact investing industry develops, the need for appropriate measurement methods grows. There are currently many measurement tools in place to assess social impact and return, but as the industry is new a single standard has yet to be created. Additionally, since it is easier to assess financial performance than impact, it is easy to lean on those measurements.
To this concern, Schlein referred to the terms Return on Equity, Return on Assets and Return on Investment. While these are all commonly accepted in the business world, it took 100 years to make them so. Social measurement is no different. It takes work and time to establish a standard, but it shouldn’t be long before social returns are reported alongside financial returns and accurate methods are in place to highlight them.
The audience also referenced the “missing middle,” highlighting the fact that SME’s struggle to access capital as much as microbusinesses but are too big for microfinance or even consideration from ACCION’s new investment funds. Interestingly enough, much of ACCION’s portfolio is in fact made up of SME’s, depending on the geographic location. The entire US portfolio consists of SME’s businesses, as does the bulk of ACCION’s Chinese portfolio.
After becoming one of only 3 international microfinance operators to get a license to work in China, ACCION learned just how different the market is there as compared to the other regions in which they work. Because savings rates among the Chinese are actually quite high, and because of the one-child policy, people have little need to borrow small amounts for business enterprises. Instead, they turn to personal savings or that of their parents or grandparents. Thus, it is for larger financing needs that customers will turn to financial institutions, creating a market that is similar to that in the US.
Additionally, 40% of ACCION’s portfolio in Peru, Bolivia and Colombia is made up of SME’s. The bulk of these are actually businesses that started with microloans, but then grew to the next level. Really, this shows improvement and success in the industry, as micro-entrepreneurs are able to outgrow MFI’s, but it presents a challenge to ACCION as an organization since they are not equipped to service large loans. These customers are extremely loyal to ACCION and they do not want to move on to big banks, but ACCION still needs to learn more about working with larger, more mature enterprises in order to better service or graduate them into other, more appropriate products.
Finally, Schlein identifies two major challenges he sees for ACCION and the microfinance industry. The first centers around impact investing, and the “hype” that exists currently about investing for more than just financial returns. There is a strong need to get this right, to find good investments that create social impact but are also successful businesses, so that people won’t abandon impact investing after a failed investment. Even after ACCION created their investment funds, they realized that many businesses aren’t yet ready for investors, and are trying to be cognizant of this and not move too quickly.
Schlein’s second concern brings us back to the client stories, and how to effectively tell them in order to reach audiences about the impact microfinance can have. When we work in or are actively involved in this industry, it is easy to understand the benefits it offers to BoP populations. There is still a large population, however, that has never even heard of microfinance. By telling the right story, we can appeal to more people and establish greater global awareness, ultimately creating a financially inclusive world.