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    Fintech – Investing in Sustainable Microfinance

    Since its invention in the 1970s, microfinance has helped improve livelihoods, address poverty, promote employment, and support the growth of microenterprises. Its deployment presents an appealing investment opportunity, characterised by relatively stable returns, uncorrelated with traditional asset classes and by generally low levels of volatility.
    Nevertheless, country-specific risks and credit worthiness concerns need to be integrated into the investment process. Investors in microfinance institutions need to be mindful of the processes these institutions have implemented to ensure the sustainability of their returns as well as the quality of support they provide their borrowers.

    Tim Crijns
    Portfolio Manager
    Triodos Microfinance Fund

    Microfinance is a natural channel to support the UN Sustainable Development Goals. “1.7 billion people remain without access to financial services around the globe and two-thirds of small and medium-sized businesses in developing countries have unmet financing needs. Microfinance offers people the opportunity to start a business and access education, energy, care and housing,” explains Tim Crijns fund manager of Triodos Microfinance Fund..

    Investing in Microfinance

    “Triodos Microfinance fund was launched in 2009 by Triodos Investment Management, a full subsidiary of Triodos Bank. It invests in financial institutions that provide access to finance for underserved client groups and promote access to basic needs. Many of these financial institutions use responsible financial technology to accelerate last-mile distribution to the end clients,” Crijns explains. At the end of August, the fund managed a €441 million portfolio invested across more than 40 countries in Eastern Europe, Asia, Latin America, Africa and the Middle East, mainly invested in senior debt and private equity.

    “The perception is often that it is very risky to invest in emerging markets, but you need to know where you invest in and properly understand the context,” Crijns argues. Monitoring the loan books of financial institutions, for example, provides good insight into the quality of the organisation. That is not to say that there are no risks at all, but Crijns argues there are several dynamics that mitigate these investment risks. “The uniformalisation of financial services across the world has been of some assistance with mitigating systemic risks. National central banks in emerging markets are increasingly more aligned with standard global financial practices. Basel II and Basel III requirements are being implemented everywhere,” he explains.

    “However, alignment on expectations is the crux of the matter. Local microfinance institutions have to display both the management capacity to inspire business confidence but also a genuine interest and care for their customers. That’s why we focus on long-term relationships supported by robust on the ground due diligence in all our investments” Crijns says.

    “We find that local microfinance institutions typically have reliable management capacity,” Crijns argues. “Nowadays, we find that our counterparts in emerging market institutions are generally very well educated and speak the same technical language as us. In parallel, they also speak the same language as the people on the ground in their own country. Not only do they have the financial expertise, they also understand local market dynamics better than we could ever hope to,” he adds.

    Investing from the Netherlands, Triodos Investment Management tries to close the gap by ensuring that the managers liaising with on the ground microfinance institutions are experts on these markets. “We have 20 nationalities in our investment team. So, for example, the relationships with our investments in Peru are managed by a colleague who worked for an SME bank in Peru, came to Rotterdam to do an MBA, and now works with us,” Crijns explains.

    Finding the microfinance institutions

    Investing in microfinance is different from investing in SMEs in developed countries because the physical, cultural and regulatory distance widens the data gap, according to Crijns. Given the risks and the asymmetries of information, one of the most challenging hurdles for microfinance investors can often be to find relevant partners. “Developing a network is a crucial part of overcoming this challenge. When our investment managers visit a country, they are not confined to engaging with investee institutions. They will also visit the central bank and local associations for microfinance, to create and maintain important relationships,” Crijns argues. “Having a track record is very important and can help build a reputation that bridges the gap and allows us to attract partners rather than having to search for them ourselves,” he adds.

    In the past years, Triodos Microfinance Fund’s portfolio has diversified from pure microfinance institutions towards broader financial institutions that offer larger loans to small and medium-sized enterprises. The fund has also built up an impactful financial technology (fintech) investment portfolio. “We see fintech as an important tool for greater financial inclusion, as it is instrumental in reducing operating costs, increasing efficiency, and reaching people in remote and rural areas,” Crijns explains.

    ESG Analysis for Microfinance

    According to Crijns, ESG integration into microfinance investing is not a mere box-ticking exercise. “Our analysis focuses on both negative screening as well as positive impact assessment. By doing so, we minimise exposure to polluting sectors, disreputable practices or controversial industries,” he says.

    “Based on our experiences since the early 1990s, we have built a tool that enables us to benchmark sustainability performance across all regions. The tool generates a score that provides us an estimate of the positive impact that a local microfinance institution has made. This tool covers a range of topics, including specific programs for women, the provision of financial training, the level of transparency on the terms of the loans that they provide and programs to limit environmental impact of their loans,” Crijns adds.

    Triodos Microfinance Fund’s efforts also benefit from an integrated data hub where investee companies can submit their reports in order to facilitate data collection and management. This type of digital solution simplifies the investment process tremendously and allows us to comply more easily with the requirements following new regulatory frameworks such as the EU’s Sustainable Finance Disclosures Regulations (SFDR).

    Case Study: EVs in Sri Lanka

    Triodos Microfinance Fund lent €2.5 million through a subordinated debt facility to Citizens Development Business (CDB) Finance in Sri Lanka. CDB is a Licensed Finance Company founded in 1995 which serves close to 90,000 customers and has a national network of over 70 branches. “As a subsidiary of one of the largest insurance companies in Sri Lanka its mission is to provide access to finance for the country’s underserved population, to create financial empowerment, social inclusivity and environmental consciousness,” Crijns explains.

    In its efforts to find solutions to advance the green economy, CDB has set itself the target of becoming the leader in rooftop solar and sustainable EV financing in Sri Lanka by 2025. For its vehicle leasing activities it aims to provide finance for hybrid/electric vehicles. “This is the company people reach out to if they want a loan to lease a Tuk Tuk taxi,” Crijns says.

    “As part of this plan, CDB has pushed its borrowers to start focusing on hybrid or electric Tuk Tuk taxis. It’s important to bear in mind the specific conditions on the ground when trying to pursue environmental issues. So while the focus in Sri Lanka was on electric and hybrid vehicles, for other investments in other places the clean energy focus might be different. The solution has to respond to a need that is pertinent on the ground given the journey of the local community,” the portfolio manager says.

    Case Study: Fin-Tech Solutions in South Africa

    “One of our fintech investments is in Lulalend in South Africa, an online lending platform for small businesses,” Crijns adds. Access to finance remains one of the key challenges for small and medium-sized enterprises (SMEs) in South Africa, according to Crijns. “Transaction costs, a risky environment and a lack of understanding of the SME business environment keep mainstream banks away,” he explains.

    According to Crijns, Lulalend works towards bridging this funding gap, by providing fast, affordable loans to SMEs neglected by the South African banking sector. The platform focuses on businesses with an operational track record of at least one year and an annual revenue of more than ZAR 500,000 (EUR 30,000).

    Entrepreneurs can apply online for free by filling in some basic details. Lulalend makes a lending decision in minutes and, if approved, can provide loans worth ZAR 20,000 to ZAR 1,500,000 (EUR 1,200 to EUR 92,000) within 24 hours. Clients repay in standard instalments over six months. “Lulalend is a great example of the ability of fin tech to contribute to microfinance,” Crijns adds.

    Triodos IM recently published a paper that explores the benefits and pitfalls of fintech for financial inclusion, highlights Triodos IM’s investment approach and sheds a light on Triodos IM’s next steps as impact investors in this rapidly evolving and dynamic industry.
    Fintech has the power to impact lives in a meaningful way, according to the report. Triodos IM believes that partnerships that leverage traditional banks’ scale and the innovative capabilities of fintech companies are key to promote financial inclusion.

    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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