Jessica SCHICKS opened this session by briefly introducing the panellists, who were immediately invited to comment on the question of whether there is a future for microfinance and whether impact investing is replacing microfinance investing.
Silke BERNARD, of Linklaters LLP, explained that impact investing is continuously increasing, as it is seen as a more responsible way of doing business and as more organisations seek impact through their investments.
Jürgen HAMMER, from the Social Performance Task Force (SPTF) and Grameen Credit Agricole Foundation, stated that the goal of financial inclusion has not yet been achieved and the microfinance sector has a lot more to offer. Hammer also referred to a discussion held at the BMZ Ministry for Economic Cooperation and Development in Berlin about impact management and the connection to the Sustainable Development Goals (SDGs). He explained that financial inclusion was used as an example and reference of a sector bringing concrete answers and methodologies on impact evaluation and social performance. Microfinance is not a trend that is coming to an end.
Alex SILVA, from the specialised investment fund OMTRIX, explained that the perception that microfinance is dead often stems from its own success. Initially, microcredit was developed as a solution to the market failure of traditional banks not being able to service informal businesses and low income clients. The sector has changed dramatically since then, both in terms of products but also in terms of the players involved. Microcredit turned into microfinance, which evolved into financial inclusion. Commercial banks have started entering the sector and many microfinance players are sufficiently large and do not depend on external funding, donors or external provision of technical assistance. All these indicate that microfinance is not dead, but has evolved and has different needs than those in the past.
Sachin S VANKALAS, of LuxFLAG, stated that there are three main external factors that will shape the future of financial inclusion: 1) Digitalization and FinTech; 2) Globalization in terms of capital, information, and ideas; 3) Involuntary migration due to climate change.
The conversation then shifted towards the role of regulation in microfinance and impact investing. Bernard explained that microfinance is a forerunner when it comes to both internal and external regulation. She emphasised that regulators need to first understand a business idea and learn from its practice before they can add value to it through regulation.
This allows investors to be more confident about regulations and put more trust in the various labels they create. Vankalas talked about LuxFLAG's quality label, a certification awarded to eligible investment vehicles, usually investment funds. The objective of this label is to reassure investors that the vehicle actually invests in the responsible investments sector. There are currently four labels: Microfinance Label, Environment Label, ESG Label, and Climate Finance Label. He mentioned that many investors still believe that microfinance investment cannot offer good financial performance. Hammer stressed that focusing on social performance does not harm profitability. He explained that good social performance can in fact lead to more stable financial results through loyal and happier clients. He added that the sector has shifted from developing a methodology for social performance management standards to actually implementing them. We need to use those standards to show there is a business case for social performance. Hammer also emphasised that we may not be able to measure impact and causality between social performance and good financial results, but we can prove correlation and share best practices.
A question from the audience addressed the difficulty in distinguishing between what we define as microfinance or as impact investment. For example, both types of investment are used for financing education, healthcare, and projects related to the environment. Should we create new definitions to avoid this confusion? Vankalas explained that what matters is the investment's social performance, and not its definition or its name. Alex Silva added that even in earlier years of microfinance, many microcredit loans targeting small and medium enterprises were in fact diverted into consumption, education, healthcare or housing improvements. Those loans were still called microcredit, but were used for different purposes than what their original definition indicated. There are several overlaps between microfinance investing and impact investing. Impact investing can learn a lot from microfinance, for example when it comes to creating and using standardised methods for measuring social impact, and focusing on client centricity.
The discussion then addressed digitalisation and its impact on the microfinance sector. Silva explained that many MFIs are embracing digitalisation and FinTech as a means to decrease operational costs and increase outreach, especially in rural areas. He added that digitalisation should not be perceived as a threat, but as a challenge, as it can add value to microfinance and assist in financial inclusion. Silva emphasised that we should not, however, let technology become an end in itself and we should not forget our social mission.