Participants in the discussion:

• Andrea Barschdorf-Hager, Managing Director of CARE Österreich

• Andrea Hagmann, Managing Board Member of Oikocredit Austria

• Philipp Müller, CEO BlueOrchard Finance AG – Impact Investment Managers

• Waltraud Probst, Fund Manager at Raiffeisen KAG

Dieter Aigner: Ms Hagmann, microloans are considered an important instrument with which to lead women out of poverty and empower them as small and micro-entrepreneurs. Could you briefly describe what this involves and what Oikocredit does?

Andrea Hagmann: Oikocredit assists people who cannot get loans at commercial banks because they cannot provide any collateral, among other issues, and are therefore not viewed as creditworthy. The focus is on the so-called working poor in developing countries. These are people who currently perform some type of work, but do not have sufficient income to support their families and themselves. They consequently live on the verge of poverty. A small crisis would be enough to threaten their existence. Of course, we cannot reach these people from our headquarters in Amsterdam, but rather via our local partner organisations: NGOs, banks, and microfinance institutions that are chosen very carefully with regard to their objectives and customer groups. This means that they need to share our goals of job retention and job creation. Yet they also need to focus on disadvantaged customer groups such as women or small-scale farmers. We finance these partner institutions, and they in turn advise and assist our end customers locally. The loan amounts start at only a few dollars. Oikocredit is active in 33 countries and works together with more than 500 partner institutions. The project financing currently totals around 900 million euros.

Aigner: At the start of the millennium, microloans were strongly supported by development banks as well, and in 2006, Bengali economist Muhammad Yunus was awarded the Nobel Peace Prize for this business model. However, there is also criticism. Why?

Hagmann: Microfinance has been around for a very long time. We only need to think of the original idea behind Raiffeisen, which, like microfinance, assists people in helping themselves. The topic became popular in the 1970s and 1980s. At the time, people were euphoric at having discovered an instrument that could really eliminate poverty. The year 2005 was then proclaimed to be the International Year of Microcredit, and Muhammad Yunus received the Nobel Prize a year later. And then the first drawbacks appeared: There were problems with excessive debt, which even drove some people to commit suicide, particularly in India. That was when the realisation dawned that one had to bid farewell to the original goals of ending poverty and take a closer look at what microfinance can really achieve.

Aigner: And what is that, precisely?

Hagmann: Providing people with access to financing which they would not have obtained otherwise. This can open up entirely new prospects for people. Because not only do the local institutions make the funds available, they also provide empowerment in terms of advising and assisting the client. It’s also about financial literacy, in other words, understanding what it means to take out a loan. Ideally, loans enable people to take control of their own lives and thus achieve a certain degree of independence. By the way, 86% of financing from Oikocredit goes to women and their business ideas because, as we have seen, the road towards financial independence is very hard and very difficult for women – not only in developing and emerging countries, but also there in particular. By supporting these women through special financial products, assisting and advising them, drawing up a business plan with them, and creating networks that give rise to new collaborations, we significantly improve the real-life situation of the women and help them become more self-determined. And besides this, it has also been proven that most of the women do not spend the money that they earn on themselves, but rather on food, health care, and an education for their children, which in turn has a positive effect on society.

Aigner: Ms Barschdorf-Hager, CARE also has its own programmes in the area of microfinance. However, the financial means behind these are raised by the people locally. How does this work?

Andrea Barschdorf-Hager: With these programmes, CARE is helping the poorest of the poor. According to the World Bank’s definition, these are people who have less than 1.90 US dollars at their disposal per day. CARE designs projects at a local level that are financed by microloans in order to help these people and make them more independent financially. If these projects pass feasibility studies and due diligence checks, then they can be realised. Small savings groups – so-called village savings and loan groups – are subsequently formed right there where the projects are implemented. This happens with the assistance and advice of our local teams or through partner organisations. The members of each small savings group then regularly contribute very small amounts – we are talking about 10 or 20 cents here – towards the community assets. Microloans are then taken out from these joint savings; 10% interest is paid on these on average, and they need to be paid back again. The entire community then benefits from the repayments and the interest.

Aigner: How high is the proportion of women in these small savings groups and how high is the repayment ratio?

Barschdorf-Hager: The proportion of women is about 85% on average worldwide. About a quarter of these are young women. The remarkable thing about these projects is that no money whatsoever comes from outside and that the members of the savings groups themselves are responsible for the management of the money. Usually, two or three trustworthy people who can read and write are chosen to manage the money. CARE provides a kind of business consulting on-site; this also serves to establish which business ideas make sense. Then, for instance, they buy a sheep, sell milk, and get wool as well. The repayment ratio is between 85% and 100%. Assistance is also provided here. If there are any difficulties, the community finds the solution. This means that the solidarity within the community is also strengthened. That is a further aspect. Worldwide, we have 8.5 million people in 59 countries in these kinds of small savings groups. Their annual turnover is 500 million US dollars. We have made it our goal to get 50 million people into such groups by the year 2030. We have seen that these savings groups are a very effective instrument.

Aigner: Is there also success in improving the situation of the women over the long term as regards their position in society? Or do the loans create new forms of dependency as critics like to argue?

Barschdorf-Hager: An example: Jordan is a highly developed country economically speaking in comparison to many other countries in which we are active. Some 20% of the women there have a job. However, only 2% of these 20% have a say in what happens to their income. All of the microfinance institutions aspire to combine human rights aspects with economic empowerment – irrespective of the size of the loans. In this case, it means bringing the message across that if one earns money, one can also decide what happens to it. To achieve this within the traditional structures in which we are active is a challenge. Yet this plays an important part in the empowerment I alluded to before. The number of those living in absolute poverty has decreased by more than 36% since 1980. Around 85% of small savings groups are still in existence after five years. In Rwanda, we measured that 43% of participating women set up a small business within three years which they use to contribute significantly towards the household income, allowing them to send their kids to school. And here is another number, from Uganda: Household income increased by 60% within three years when one of the household members was part of a village savings and loan group. The local people develop their social and economic skills on their own.

Aigner: Mr Müller, your company, BlueOrchard, manages a variety of impact funds that invest locally in microfinance institutions. How does one succeed in incorporating such a complex topic into investment products?

Philipp Müller: We manage numerous microfinance funds in the area of private debt. This includes the world’s largest and oldest commercial microfinance fund, which has now reached a volume of more than two billion US dollars. In order to operate in a legitimate and trustworthy manner, we have staff in local offices, for instance in Latin America and Africa. Furthermore, we have close ties to multinational organisations. It is important to follow a highly professional portfolio management approach. One needs a much higher level of diversification than in other portfolios. Through our flagship fund, clients invest in more than 150 microfinance institutions in more than 50 countries.

Aigner: That’s very broad diversification, indeed.

Müller: Even though it may seem like over-diversification, that is, of course, not the case. For if one wants to actively limit the exposure of an investment, different instruments are available in order to meet the liquidity needs of the fund, such as different loan structures and different maturities. There are also loans with adapted repayment rates that can be amortised. This ensures that one can service the liquidity needs of the fund at any time. Naturally, it also helps that we developed our portfolio years ago.

Aigner: You mentioned that you also have staff in the respective countries?

Müller: Yes, we basically have three large teams. There is the investment team, which selects our investment partners in these countries and also remains in constant contact with them. It is responsible for sourcing the investments. Our analysis team systematically checks the quality of the counterparties as well as the impact by means of indicators. It acts like a rating agency. The third team, risk management, assesses the various risks. This team is also very well acquainted with the local regulatory guidelines. Last year, we invested more than 1.4 billion US dollars in Emerging Markets. The transaction size ranges from around 5 to 7.5 million US dollars. We very intentionally work with local microfinance institutions and conduct on-site diligence. This means that we go to the branches of these institutions that are furthest away from their headquarters, and then ask, for instance, how microloans are explained, what the relevant documentation looks like, and what assistance is provided to the borrowers.

Aigner: Which microfinance institutions are worthy of consideration for investment?

Müller: They can be very small institutions, NGOs, but also medium-sized tier-1 or tier-2 microfinance institutions. Here, we usually work together with development banks and have specific impact portfolios. However, we also invest in large, established institutions, especially through our retail fund. It is important to us to channel capital into these countries and to help the people there to use their own strength to lift themselves out of poverty. This kind of financial inclusion is a very important tool. Yet it is not a cure-all, of course. It is one tool in a toolbox; but it is an extremely important one.

Aigner: What significance does impact investing have for the international asset management industry?

Waltraud Probst: Sustainable investment has been given a massive boost in recent years. At the end of 2021, 42% of all investments in Europe were sustainable as defined by Articles 8 and 9 of the Disclosure Regulation. Growth is still slower in the case of pure impact investments, and is currently driven more by environmental criteria than by social or governance topics. There is still a lot of catching up to do with regard to these two aspects. Despite this, it is very important to invest in impact, and not only promote ESG integration. This makes a considerable difference, because reports that provide information on the impact that microfinance has on the respective recipients are only created if the impact concept plays a role.

Aigner: Measuring the impact and presenting it in a credible manner is a challenge, yet it is essential for investors.

Probst: Yes, we need indicators for productivity and for the impact chain, in other words, for the effects on families, villages, and countries. It is very important to us investors to be presented with this information in a coherent manner. Although there is already a great deal of reporting, it still needs to be fine-tuned in this regard. Where the environmental effects of impact investing are concerned, one can, for instance, state very clearly the reduction in carbon emissions or how many houses can be heated in the respective country. It would be very nice if we could also obtain similarly clear facts and figures in the area of microfinance investments, so as to get a clearer picture of its impact. We find ourselves in highly industrialised surroundings. Many people are not even aware how difficult it is to get a loan in many parts of the world, especially for women.

Aigner: How can one measure the impact, which very obviously does exist? And which obstacles does one face in practice?

Hagmann: Measuring the impact is most definitely a very important topic, because investors would like to know what happens to their money, and rightly so. Oikocredit investors do not expect maximum returns on their investment; they are much more concerned about the social gains. We are very serious about this topic and publish an impact report every year that contains meaningful indicators. What we may not forget, however, is that the impact of the small organisations needs to be measured locally. Obtaining this data from micro-clients requires a great deal of effort from all involved parties. This can become very detailed, and we should reflect very well on how much can really be measured in terms of impact and in which cases reporting makes sense.

Barschdorf-Hager: Our investors expect comprehensive quantitative and qualitative reporting from us. The focus was on quantitative measurements in the past, and this is still incredibly important today as well. They provide information about questions such as how many people can I reach? How quickly can one provide emergency care to how many displaced people? But qualitative indicators are also increasingly being included; these are naturally very difficult to measure, because this actually involves social science investigations. That also requires colleagues with relevant qualifications so that the surveys can be carried out with the desired level of quality. It also requires recipients of microloans to be prepared to talk about whether and to what extent their families’ lives have been impacted, usually after a hard day’s work. And that applies to the women, the men, and the children. Whether they send their kids to school. How long their children have been in school for, etc.

Aigner: Let us have a look at the topic from the other side. Transparency must certainly play an important role for your clients?

Müller: Impact investors expect transparent communication with regard to the investment process and the impact managing processes. They ultimately want to know what impact has been achieved. We provide professional investors, such as pension funds, insurance companies, and development banks, as well as other multilateral organisations, with very deep insights into our investment process through due diligence checks, and it is not uncommon for representatives to come into our local offices so as to get a good picture of the operations on-site. Once a year, we publish our impact report, which provides information on the impact we have achieved: the number of end customers we have reached, the SMEs we have financed, the jobs we have preserved and created, and much more. We follow the principle of measuring objective criteria through quantifiable data. The data quality is very, very important in our view.

Aigner: As a general question for everyone, what impetus does the microfinance industry need in your opinion?

Hagmann: I believe that innovation and further development are especially important. Oikocredit, for instance, wants to tackle problems not only at the individual level, but also at the collective level, with its new strategy. This is intended to strengthen the resilience against crises at the community level as well. On the topic of education, Oikocredit only recently set up a plan to finance schooling in lower-income areas in Africa. This was done together with Opportunity, an expert on the subject of education. The project supports schools and parents of schoolchildren with loans and advice. In this way, the children’s education can be ensured in their immediate vicinity.

Barschdorf-Hager: We must pursue the Sustainable Development Goals on a much wider scale if we intend to reach the 17 goals by 2030. This applies not only to the southern hemisphere, but to us all, also in Europe. In terms of transparency, it is important not to simply divert financial flows without any conditions attached, but rather to combine this with upholding human rights. There should be no compromise here, neither by the EU, nor at a state level.

Probst: As a professional investor, I would like to see more attention being paid to social gains. For this, we need an improved data situation, based on scientific facts. Only then can we divert capital flows into appropriate investments. It is vital for the social development, political development, and for global development how many economic opportunities are available to women and men, to individual smaller regions, to larger regions, and to entire continents.

Müller: My wish would be to practise impact investments in a much more widespread manner. Many of these asset classes are very specialised and private investors do not yet have the desired access to these investments. A lot could still be achieved in this area.