Imagine you start working in a new company: You show interest for your new employer’s mission. You ask yourself “What are the main aspects of my new job?” And your first step is certainly to identify all the features of your new company which distinguish it from the other institutions operating in the same sector. That seems as easy as pie, …especially when you know the sector in which you are working.
So, let’s start with this tough question first: Where do we stand?
Instead of an answer, let’s see what the company’s homepage where I am presently working as a trainee states:
A bridge between microfinance and the capital markets
BlueOrchard Finance is a Swiss company specialising in the management of microfinance investment products.
Ok. Our sphere of action is clearly the microfinance sector (otherwise I wouldn’t post here, right?…), but aren’t we trying to “strictly adhere to the investment policies and guidelines” in order to attract international capital? On the other hand, you could call us a “Fund Manager Company” like all the others which are inherent to all big international banks, except that we pay particular attention to the social impact of our investments.
Let me discuss this second view because it is a fundamental aspect of my work. In my first days I was in charge of a project aiming at the search of new clients, i.e. Microfinance Institutions (MFIs) needing financial resources. I don’t know how many MFIs there are in the whole wide world and nobody could give me reliable numbers, but there’s a big market potential for sure. Actually, BlueOrchard manages a number of funds totalling several hundred million dollars. And every week, during a credit committee session, our analysts propose how much money for how long and under which conditions should be lent to which MFIs. That is a kind of sacred meeting where my colleagues present and discuss credit projects, thrashing out the level of interest rate payments, scrutinizing the creditworthiness of the MFI and drawing the others’ attention to its more or less alarming financial figures. All elements are thrown onto a scale that it is never perfectly stable and where many different factors can change the balance.
It is an instructive lesson to attend such a committee when you should help to find new clients because you learn the main lines of reasoning which determine if a MFI is a valid potential client or not. But this is only the practical side of the coin and doesn’t tell you anything about how to justify the thresholds of our quantitative criteria in terms of financial sustainability. Which are the characteristics of the successful MFIs? How can you distinguish “good” clients from those who don’t pay your loan back?
These questions are definitely not innate to the microfinance sector; however, I think, they play an essential role for the progress of commercial funding in microfinance because private investors aspire to financial returns when placing funds. Return on assets, portfolio at risk, write-off ratio and compañeros are still (and rightly) considered as the best proxies for future profits.
However, this is not everything microfinance is about and while searching for new clients, I came once more across the concept of the “homo oeconomicus”: one of the main arguments we use to attract new financiers is to call their attention on the so-called second dimension of microfinance investments: the social impact. This represents nothing less than a breach with classical economic ideas since it negates the self-seeking agent who only worries about financial gains as long as they are hers. While the typical investor faces a trade-off between the expected yield and the risk of an asset (and thanks to Markowitz we also know how to ease this conflict by using diversification), a socially sensitive agent also has an interest in taking the social return of an investment into account. But how to measure this second dimension? How will you know how much poverty an MFI alleviates? Is it correlated with the financial yield? Hasn’t it got its own, additional risk dimension?