The macro advantages of microfinance

Triodos Microfinance Fund focuses purely on financial inclusion in emerging markets. Who are the beneficiaries?
Crijns: “The microfinance institutions in our portfolio currently have outstanding loans to 12.5 million people. Most of the money goes to entrepreneurs to start or expand a business. It could be used to purchase a new sewing machine for a workshop in India or to buy some more cows for a farmer in Kenya.”

What kind of loan amounts are we talking about?
Crijns: “The average loan is around EUR 2,000. In India and Africa, it's a few hundred euros, while in Latin America and Eastern Europe the amounts are usually higher.

Why should investors from a wealthy country like the Netherlands finance microloans in predominantly low-income countries?
Crijns: “The money is immediately put to good use. It helps people who would otherwise be unable to obtain financing. In a broader sense, microfinance is also referred to as financial inclusion: financing for people who are excluded from the banking system. Ninety percent of people with a microcredit loan indicate that their quality of life has improved because their children can go to school, for instance.

What's more, the investment risks are low. The microfinance institutions we work with ensure that people are able to repay their loans, just like a Dutch bank would. And we keep a close eye on microfinance institutions to make sure they don't make excessive profits by charging exorbitant interest rates.”

Is microcredit a modern version of traditional development aid?
Crijns: “Not at all. Instead of providing top-down aid, we’re giving people the means to improve their own situation. It's all about personal control and entrepreneurship. A microcredit loan is a commercial loan that has to be repaid. This is not a vertical relationship between lender and recipient, but a horizontal one. It is an equal relationship based on trust in the other person's entrepreneurial spirit.”

Who benefits most from financial inclusion?
Crijns: "Mainly women in rural areas. More than 70% of our loans go to female end-customers. The repayment rate for women is also better than that for men.”

What is the default rate on microloans?
Crijns: “Around 95% of microcredit loans are repaid. Microfinance institutions also have strong buffers. The biggest risk is the country risk, such as the outbreak of war. As a fund manager, it’s important for me to spread country risks as much as possible, which in our case is across around 40 countries.

In 2022, for example, we had investments in Ukraine. As this was less than 1% of the fund, it did not lead to any major losses at fund level.”

How are microloans disbursed? Does Triodos IM work with other organisations?
Crijns: “We invest in microfinance institutions, providing them with loans of between 1 million and 10 million euros. In some cases, we take a stake in the share capital.

We have the necessary local expertise in-house to assess the microfinance institutions. For example, we have a colleague who worked at a bank in Peru for 10 years and then obtained an MBA from Erasmus University. They now work for us and can assess the local context. We also make regular on-site visits, including for due diligence purposes.”

Can you provide two specific examples of investments made possible by financing from the fund?
Crijns: “We have been investing in Centenary Bank in Uganda for a long time. It started as a microfinance project in the 1990s and has since grown into one of the largest financial institutions in the country, while still maintaining its focus on microfinance.

Another example is Garantia in Mexico, which provides loans to rural medical clinics to purchase medical equipment.”

Historically, it has mainly been private individuals who invest in microfinance. Is there any interest from institutional investors?
Crijns: “Interest from institutional investors is clearly growing. For these parties, it is interesting that microfinance has little correlation with other investments. It improves the robustness of their portfolios without compromising the final return. In 2008, everything went down, but microfinance continued to yield positive returns. This was also the case in 2022, when not only share prices but also bond prices fell."

"But there is another reason for pension funds to focus more on microfinance. The new pension system offers more scope for individual participants. If pension participants want to promote social impact, a pension fund should be equipped to facilitate that."

How important is financial inclusion in the broader framework of impact investing?
Crijns: “Every euro that goes to a microfinance client is purely positive impact.”

What about the returns that investors could expect from your fund?
Crijns: “Over the years, returns have averaged between 3% and 5%, after deduction of costs. This has been fairly stable. Currently, there is a slight dip in returns because the euro has risen sharply against the US dollar and many other currencies since President Trump’s 'Liberation Day' on 2 April. This is hurting returns. We hedge many currency risks, but not all, because currency risks usually even out over time.”

How do you see the fund's prospects?
Crijns: “The demand for microfinance will continue to grow. More than 1.5 billion people worldwide have little or no access to financial institutions. There will be no shortage of demand for loans.

But I also expect further growth on the supply side. The mere fact that microfinance enhances diversification and spread in investment portfolios should lead to more capital.”

If everyone suddenly wants to invest in microcredit, is there enough room for that?
Crijns: “There are plenty of projects, but we must ensure that lending is done responsibly, even as its popularity increases. Loans should only be granted to people who can afford to repay them. That’s in the best interest of everyone, both borrowers and lenders.”

With EUR 850 million in assets under management, Triodos IM's financial inclusion funds currently invest in more than 90 institutions across 42 countries. Read more about Triodos Microfinance Fund.

This interview was previously published (in Dutch) on IEX Profs.

Disclaimer
This is a marketing communication. Please refer to the prospectus and the KID of Triodos Microfinance Fund before making any final investment decisions. An overview of the investor’s rights can be found in the prospectus here. The value of your investment can fluctuate because of the investment policy. Triodos Microfinance Fund is managed by Triodos Investment Management. Triodos Investment Management holds a licence as alternative investment fund manager and UCITS and is under the supervision of the Dutch Authority Financial Markets and the De Nederlandsche Bank. An overview of risks related to an investment in the fund can be found in the KID and the prospectus.

When investing in the fund, please take into account all the characteristics and/or objectives of the promoted fund as described in its prospectus. Further, please take notice of the sustainability aspects of the fund as found here. Past performance does not predict future returns.