Dirk Elsen, Director of Emerging Markets at Triodos Investment Management, introduces our vision paper on inclusive finance and discusses how the microfinance strategy has evolved to address the global challenge of serving the ‘unbanked.’
According to the World Bank, 2 billion people still lack access to financial services. How has the Emerging Markets microfinance strategy evolved to address this global challenge?
"When we entered the microfinance market in the mid 1990s, it was saturated by NGOs in all different forms. We came in as a values-driven commercial fund manager and helped open the segment to other types of funding and since, as it has gained more interest, it’s developed into a 100 billion dollar market.
Additionally, we have also emphasised that this is not only about microcredit because if you examine the need, you’ll see that credit isn’t the only source of relief. The best product to serve anyone, including the ‘underserved’ is a broad suite of financial services that can address their needs, including savings products, insurance and payment services. We have consistently been an advocate of responsible practices and a breadth of financial products.
We see microfinance institutions and banks as agents of change and as an investor, we want to play a role as a catalyst to enable these financial institutions to expand their scope to include renewable energy and sustainable agriculture."
How do we, at Triodos Investment Management, further our contributions to the inclusive finance sector?
We can further our contributions by continuing to emphasise responsible practices. For one, executive remuneration at microfinance institutions has received more attention.
We’ve introduced a new version of our sustainability measurement system, where we assess and monitor environmental, social, and governance aspects. The governance piece brings in elements such as executive remuneration.
We also are focusing on driving scale by going beyond microfinance and expanding into the segment for small- and medium-sized enterprises. This segment, which is crucial to a country’s economy, has limited access to organised financial services and is therefore often referred to as the ‘missing middle’.
We also want to help drive financial innovation through financial technology because one of the key drivers to reaching those 2 billion people is ensuring they have access. Most do not have access to a brick and mortar location, but can access finance through technology."
What were some of our highlights from 2015?
"In addition to growing our assets under management from around EUR 600 million to over EUR 750 million; when I look back, I think about our increase in equity investments. We now have equity positions in 25 institutions, which allow us to bring our knowledge and expertise in inclusive finance and sustainable banking to the table.
What I also find interesting is that we continue to invest across the risk and return spectrum in inclusive finance. For instance, our investment in Dawn Microfinance in Myanmar was high on the risk spectrum because it’s an equity investment in a startup organisation. But when you look at the other end of the spectrum, you’ll find our largest equity investment yet in BancoSol in Bolivia, one of the country’s two largest microfinance institutions which has grown to be one of the top microfinance banks in Latin America over the past 20 years."
What have been some of the challenges in 2015?
"We’ve seen unprecedented volatility in the markets in which we operate and that’s clearly connected to geopolitical developments, such as the falling oil prices and the devaluation of the Russian Ruble. If you also look at currency movements, we’ve seen phenomenal devaluation in certain markets that make it very challenging to operate in. It has a big impact on the investor returns in our funds.
From all different corners, there have been challenges and between low interest environments, currency movements, and volatility, it hasn’t been easy. But through this, it has made us aware that we have to continue to manage and strengthen our country and FOREX exposures.
Considering some of the challenges, is the point – at the end of the day – to eliminate poverty?
"It’s an interesting question to ask, but we’re putting the bar too high by saying that microfinance is the silver bullet to poverty alleviation. There’s no single development that I’ve heard of that has the potential to solely lift people out of poverty. Poverty is too systemic and complicated to rely on one source of alleviation. But if you look at how we present our vision on inclusive finance, we focus on making financial services available to everyone in order to make them more resilient and to pursue avenues of life they were unable to choose."