Micro-finance: do good and turn a profit

African man carrying a solar panel © Getty Images
Lending a hand just got easier

Ethical investment is pretty mainstream these days – most big fund managers provide socially responsible investing (SRI) and environmental, social and governance (ESG) funds. However, the underlying investments are usually in established businesses, listed on the stock exchange. What if you want to invest in a more direct fashion, and in more specific projects? There are options out there for more adventurous ethical investors. These investors might want to invest in a private business that is trying to make a difference on the ground, perhaps in the developing world. And they are happy using a bond-like structure – using credit – with a defined return and repayment of principal (green bonds fall into this category, for example).

The ultimate example of this is the “micro-finance” movement. The idea is that you lend money to a micro-finance institution that in turn lends the money to ordinary folk (frequently women) in the developing world for practical projects that generate returns for investors. Investors hope to get back all of their money plus a return – net returns of around 2% a year aren’t uncommon.

The only trouble is that while micro-finance does score highly in terms of “impact”, it is often not so much crowd-based as “command-and-control” in style. In other words, it’s usually a credit institution making the actual lending decisions and you invest via their pool of funds. It works, and is hugely popular among ordinary investors on the continent, but it’s still not as direct as some ethical investors might like.

Now, however, we have the crowd revolution and the rise of alternative finance and peer-to-peer (P2P) lending. In the Netherlands, this has given rise to companies such as Lendahand, which provide a marketplace for investing in individual projects for a defined return, usually via some form of bond. Over here in the UK, Ethex provides a similar marketplace for investors to back individual projects with real impact.

One of the most interesting areas in this sector is renewable energy. Drive around dusty market towns in the remote areas of Uganda and Kenya and you’ll see masses of advertisements for solar energy providers such as M-Kopa. M-Kopa’s business model is ingenious and proven: lend money to a family (or a business) so that they can buy a solar panel to provide electricity. Repayments are usually arranged via mobile phones (M-Kopa’s backers helped set up the hugely successful mobile-payments firm M-Pesa) over one to three years, and include enough interest to make it worthwhile for investors. Default levels are low and payback for the clients is almost instantaneous.

So, why not marry micro-finance, the crowd, and renewable energy into one product? That’s the idea behind a relatively new website called Lendahand, a joint venture between the Dutch platform and Ethex. The platform is working with local providers such as SolarNow in Uganda as part of its Energise Africa initiative to provide finance for solar panels. This is done via unsecured bonds that pay out 5%-6% a year for a period of between one and three years, with interest usually paid every six months (along with some of the debt, which is amortised as it is repaid).

With these slightly higher returns – compared with traditional micro-finance – default risks are also slightly higher, but hopefully the net returns will still appeal to most investors. You can also invest via an innovative finance Isa, which means the return is tax free. The platform is currently only on its third bond, looking for £100,000, but I think it’s the germ of a great idea – my hunch is that the risk will be much lower than traditional high-yield credit and you’ll also make a difference to people’s lives.

In the news this week…

Bitcoin continues to hit record highs, fuelling fears that the cryptocurrency bubble is about to burst. This week, it shot past the $10,000 mark, a 1,200% increase in the past 12 months – this time last year, one bitcoin was worth just $750. Spread-betting firm IG Index, which allows traders to place leveraged bets on bitcoin via contracts for difference, has suspended some of its bitcoin derivatives, reports the Financial Times. “We have strict internal hedging limits on certain exotic products… to determine how much of the underlying asset we are exposed to,” IG CEO Peter Hetherington told the FT. “Where we get close to reaching those limits, we stop taking new positions.”

New Zealand’s financial regulator, the FMA, has warned investors not to put any money into an initial coin offering run by 19-year-old entrepreneur Ashutosh Sharma. Sharma is hoping to raise $NZ220m (£113.4m)for his “SMG Cash” digital currency, which will be used to pay for goods on his e-commerce website “Sell My Good”. However, an investigation by the Weekend Herald newspaper reveals that “traffic and economic activity on his site has been inflated by a factor of 10,000”. The FMA said it had raised concerns, but had “not received a satisfactory response” from Sharma. Responding to the FMA warning, Sharma said there were “obviously certain ways around that. We could incorporate in a South Pacific country and route the money there,” reports the Herald.

Funding Circle, the UK’s biggest peer-to-peer lender by value of loans, has opened its innovative finance Isa to existing investors. It is projecting a return of up to 7.5% from lending to small businesses via its “balanced lending” option; investors who plump for the “conservative option” should be rewarded with a return of 4.8%, it says. The product is a flexi-Isa, which means you can withdraw money and put it back in during the same tax year without it affecting your £20,000 tax-free entitlement. However, to withdraw money, investors must first sell outstanding loans – which depends on there being demand from other investors.