“I really enjoy my job still after fifteen years,” says Marilou van Golstein Brouwers, the head of the Triodos division that runs its microfinance investments. She has been with the company since they began investing in microfinance, which was at first tried as means to promote sustainable development. “You have to tackle the divide between rich and poor if you are serious about sustainability,” she says.
“We had a different range of finance projects in developing countries originally, but realised it would be best to focus on changing the financial services sector and stick to microfinance.” As a result the Triodos Investment Management Division was created, which now runs three funds: The Triodos-Doen Foundation and Hivos-Triodos Fund Foundation which are funded in cooperation with the partner foundations and the Triodos Fair Share Fund, which attracts private investors based in the Netherlands. All the portfolios have equity as well as debt investments and together provide finance for more than 60 microfinance institutions (MFIs) around the world. As at 30 June 2007 their combined total portfolio was over EUR 100 Million.
Ms van Golstein Brouwers says her motivation is two-fold, “I connect with the different microfinance banks in the countries that we invest in and with what they are trying to achieve, but I also find it stimulating to see the effect on micro-entrepreneurs – it’s really striking how with very little means people can change their lives.”
She attributes Triodos’ success to its size, attitude and experience. “We are a small independent value-driven bank ourselves, which distinguishes us from other funds or international financial institutions (IFIs), and we have encountered some of the same problems as local banks on the ground. We’ve also been in the business for over fifteen years and clients appreciate our knowledge and experience of the sector.”
Triodos is a well-known equity investor as well as debt investor in MFIs, which again distinguishes the firm from the opposition. Ms van Golstein Brouwers sees equity investing as the most challenging, yet rewarding part of the investment process. It is far more labour intensive than providing loans, but it allows Triodos to act as a real partner through its board and shareholder activism.
Ideally Ms van Golstein Brouwers would like to have the Triodos microfinance funds made up of one-third equity investments combined with two-thirds debt investments. “Most of our funds need to generate a regular stream of income, and that is provided by debt, as only a few of our older equity investments generate a dividend.”
She intends to grow and develop the equity portfolio, ideally making three to four investments a year going forward. “It is our intention with the two funds where we can take more risk (the Triodos-Doen Foundation and Hivos-Triodos Fund Foundation) to make more investments in countries which are higher risk, for example in Afghanistan. In regions where microfinance is not developed we would also consider start-ups.”
However regulation can be an obstacle. “In North Africa and India, for example, it remains very difficult to invest directly in an MFI. That’s why we’ve chosen to be a shareholder in Bellwether Microfinance Fund in India, which as a local legal entity makes direct investments on our behalf and the behalf of the other shareholders.”
The numbers of firms that are ready to make the transformation to receive equity investing is also an issue. “There is definitely a gap between a limited number of MFIs and banks that are ready for equity investment and a much larger group of small MFIs that are wanting to get equity investment.”
“Many MFIs don’t approach the transformation process strategically – they are only looking at it from an opportunistic point of view. Each MFI needs to question what type investors they want on board, what their role will be. Is the MFI just looking for money or do they want investors to take an active role on the board, contributing in practical and technical terms? Are they looking for shareholders who share their vision, or just short term profit maximisation?”
The trend for “microfinance to develop into mainstream financial services is the way to go,” she believes, “but it will take time.” In the countries where this happens there will be less difference between microfinance banks and commercial banks. In such a scenario microfinance banks will diversify into other areas, looking to grow with their clients and provide new services, such as loans to SMEs, often using local funding provided by savings products and bond issues. At the same time commercial banks will look to microfinance as a way to expand their businesses, potentially ignoring the mission of microfinance and the effects this has on customers.
When funding is provided by foreign investors, on the other hand, through microfinance investment vehicles (MIVs), there are different issues. The pressure on many new MIVs to disburse funds is leading many to incorrectly value the risk of certain MFIs, a trend which Ms van Golstein Brouwers is concerned about.
Her evidence lies in the fact that some smaller institutions are managing to borrow at the same rates as well-established ones. In her opinion interest rates should reflect the size, experience and reputation of the specific MFI, but that the pressure to disburse is leading some MIVs to ignore these facts and fail to do proper due diligence.
Ms van Golstein Brouwers comments, “You read in the papers that microfinance is very low risk because of the good pay back rates, but that is a very simplistic statement and only part of the story. The rest is about the MFI and how it is managed and governed. That makes up a large part of the risk.”
Ms van Golstein Brouwers is confident about the industry’s ability to weather all these developments, but is adamant that in the future, “We need to keep a clear eye on why and how microfinance institutions and banks are expanding and question whether they continue to help people improve their lives.”
Amy Rennison, MicroCapital writer