Microfinance

Investing in financial inclusion

Accessing responsible and affordable financial services remains a challenge in the developing world, especially for underserved populations such as people who live in rural areas, women and low income households. Inclusive microfinance institutions (MFIs) help to fill this gap by providing loans and other critical services that help people and businesses invest in opportunities, manage their finances and recover from shocks. Financial services also play a critical role in enabling access to other vital services such as education, energy, water and sanitation.

We believe investing in financial inclusion is an attractive business opportunity. Microfinance investment has the potential to generate positive impact in parts of the world where it is needed the most - and attractive financial returns for investors.

Microfinance

Trill Impact's Microfinance strategy aims to advise on private credit loans to microfinance institutions (MFIs) that in turn provide financial services to individuals and micro, small, and medium enterprises (MSMEs) in Emerging & Frontier markets.

This strategy seeks to contribute to several SDGs, such as Access to Finance, Women’s Economic Opportunities, Clean Energy Access and Agriculture & Rural Development, while generating attractive diversified market-rate returns.

Why Microfinance?

Small and medium-sized enterprises (SMEs) are major engines of economic growth and broad-based job creation in developing countries – but they face high barriers to accessing the capital they need to thrive. According to the World Bank, 1.7 billion adults worldwide lack a bank account.

A microfinance investment strategy has the potential to produce double-bottom-line returns (financial and social) because it enables microentrepreneurs to earn a living for themselves while repaying investors with interest. Microfinance investments can also provide investors with a unique opportunity for portfolio diversification, with low correlation to other assets classes - and stable returns.

Sources:

World Investment Report, UNCTAD

Evaluation Office, UNDP

The Power of Clarity, LUMINIS

Vast investment needs

Developing countries face important and complex challenges around the SDGs, not least how to finance the investments needed to achieve them. The annual investment gap in developing countries is currently estimated at around US$ 4.3 trillion per year.

Majority of world's population lives in low-income households

Of this group, 500 million are however economically active. They earn their livelihoods by being self-employed or by working in microenterprises, i.e. very small businesses which may employ up to 5 people.

Unmet financing needs

Microentrepreneurs in developing countries often fail to secure the capital they need implying missed opportunities for growth because they do not have access to financial resources – e.g. loans or a safe place to hold savings. Microfinance can provide financial services to millions of low-income entrepreneurs and households primarily in developing countries.

Women often face higher barriers

It is typically harder for women around the world to access various services through mainstream institutions and there are higher barriers to formal employment and economic opportunities more broadly. Microfinance can target women entrepreneurs specifically and provide them tailored products and services.

Mitigating climate change

Microentrepreneurs in developing countries live in places that have frequent climate-related natural disasters paired with inadequate infrastructure and limited safety nets. Microfinance can play an important role in aiding the transition to a low-carbon economy, while also supporting microentrepreneurs' ability to adapt and build resilience to climate change through financing and other services.

The entrepreneurs

The businesses a microfinance investment strategy supports tend to be rather straight forward, e.g.:

A seamstress sewing by hand can take a small loan to buy a sewing machine and fabric, with which she can increase productivity and profit significantly.
A shopkeeper can borrow to buy larger quantities of stock for a lower price, thus increasing margins and revenues.
A farmer can receive credit to buy crop seeds and repay the loan at harvest with a profit.
A market trader, selling fruit during the day, can sell goods for twice or more of the price paid in the morning to a farmer.

Positive impacts of the loan

A microloan can help an entrepreneur start a new company or expand an existing company. This way they have an opportunity to generate or increase their income, which they can use to improve their personal circumstances. For example, the microentrepreneur's children can stay in school longer, the family has the means to access better healthcare, improve their accommodation or perhaps even build a small savings buffer.

These are all positive effects of microfinance, which the microentrepreneurs achieve through their own efforts.

The microloan

The microloan should be used for productive purposes, meaning to finance the business and ultimately generate income for the microentrepreneur.

The most common way these entrepreneurs utilize the microloan is to boost productivity, or increase output.

Since the microenterprises generally have large profit margins the microentrepreneur can usually generate significantly larger profits than the costs of the loan.

Other loan products

In addition to microloans, microfinance institutions may also offer other products, helping individuals with personal aspects of their lives beyond the commercial microloan, such as:

Home improvement loans for an extra room in their house to be used as a shop, educational loans, paying for e.g., school fees, school uniforms, school books, etc, or solar power loans to buy an off-grid solar power system to provide clean energy for e.g., proper lighting and mobile charging devices.

Theory of Change

Below, learn more about our view on how the Theory of Change should be applied within Microfinance to test the investment's impact delivery process before providing credits:

Input

Resources provided

Capital

Long-term debt

Culture, connections and competence

Impact strategy
Investment advisory team
Business partner input
ESG advice and requirements

Activity

Activities to drive outcomes

Microfinance Fund lends to Microfinance Institutions (MFIs)
MFIs lend to entrepreneurs and micro-, small- and medium-sized enterprises underserved by the traditional financial system

Output

Tangible result of the activity

MFI growth and increased funding sources
MFI multiplies funding to entrepreneurs
MFI expands deposits

Outcome

Positive impact proposition to people and society

Entry of new businesses and expansion of existing businesses
Jobs created and supported
Borrowers better able to prepare against risks, manage risks, and recover after unexpected events
Market-rate returns for investors

Impact

Impact objective

Microfinance institutions equipped to drive impact outcome beyond investment horizon related to the following themes:

Sustainable planet
Healthy people
Secure society

Input

Activity

Output

Outcome

Impact

Impact Rating Model

In our view, credit investments of a Microfinance strategy should meet the five dimensions of impact:

What? Enable access to responsible financial services, both expanding access to unbanked and deepen access for underbanked people.
Who? Benefit underserved individuals and businesses in Emerging & Frontier markets (women, people in rural areas, MSMEs).
How much? Reach a large number of clients with financial services that are critical for individual well-being and business growth and - enable investments that can raise incomes, create employment and help build household’s resilience to shocks.
Contribution? Amplify impact through favorable terms of funding, local currency financing, and value addition.
Risks? Monitor and mitigate risks of negative impact on the environment or on end clients stemming from misaligned practices.

Managing, measuring and reporting

Trill Impact would aim to integrate impact measurement and management throughout an entire investment process.

Social and environmental results should be assessed and tracked across an entire investment cycle.

Company-level impact and ESG analysis should be conducted through desktop research, site visits, and discussions with MFI company management.

This robust impact measurement and management system would enable Trill Impact's Microfinance strategy to select and lend to the MFIs with high potential for impact and to manage social and environmental results.

Building a diversified portfolio - step by step

A Microfinance investment strategy applying a local currency, unhedged private debt investment strategy, would potentially give investors exposure to non-typical countries and currencies with low correlation with other asset classes and attractive risk adjusted returns. At the same time, financing in local currency may benefit borrowers by removing the burden of currency risk.

Regional Allocation

The portfolio construction process starts from a regional perspective. Events like droughts and other weather-related events can impact a whole region or continent negatively so we aim to avoid excessive exposure to one geography.

Country and Currency Allocation

Factors like how well regulated the microfinance market in each country is, how mature the microfinance institutions are and finally, pricing versus risk, must be considered. This step generates the model portfolio, how an ideal portfolio is envisioned to be allocated, given country risk, currency risk, and pricing.

Microfinance Institution Assessment

This step includes performing the assessment of the individual micro and impact finance institution, where an analyze of credit worthiness as well as SDG alignment is carried out to obtain a full picture of the financial and impact potential of the investees.

The double bottom-line for investors

The end result would aim to provide exposure to a diverse set of micro and impact finance institutions, targeting attractive returns while enabling millions of individuals a chance to start, or build, a business or increase their household disposable income - in parts of the world where these opportunities are needed the most.