Impact8 – Quebec’s first investment-readiness program supporting high-impact ventures. The MaRS Centre for Impact Investing launched the Impact8 initiative because we saw a broad spectrum of potential opportunities for impact. There was the opportunity to grow the pipeline of investible opportunities in impact investments, the opportunity to help social entrepreneurs navigate the ecosystem of support and […]Read More ›
Using Wall Street Tools to Help the World’s Poor
How impact investors can use Wall Street tools to make their investments more impactful
Emerging markets have had a rough couple of months. Among the hardest hit were South Africa and Argentina, which have seen double-digit drops in their currencies. And while they don’t make the headlines, smaller developing countries were also battered. In Africa, for example, the Ghanaian cedi and Zambia kwacha fell by 10% in the last two months.
This volatility hits not only global companies and investors, but small entrepreneurs who rely on capital provided by microfinance and socially conscious impact investments.
Microfinance lends to small entrepreneurs, such as a group of women starting a textile business or farmers expanding a small dairy processing facility. These investments – often as small as $500 – have been a vital source of credit in poor countries that lack established banking systems. Other impact investors target sustainable agriculture, alternative energy, health, responsible forestry and water and sanitation projects.
These funders lend in “hard” currency to institutions in developing countries that operate in local currency in their local market. This creates a mismatch between the dollars or euros the institutions borrow and what they earn locally. If the local currency depreciates it can leave the institution unable to repay its hard-currency loan. This currency mismatch has been a problem for microfinance from the beginning and is known as the industry’s “original sin.” It is now a growing problem as other sectors of the impact investment movement begin to take off even as currency markets become more volatile.
But impact investment does not have to repeat the sins of microfinance. In recent years microfinance lenders have been lending increasing in local currency and hedging their currency risk using derivatives, the tools of Wall Street investors. To encourage local currency lending in the most volatile markets such as in Africa, the microfinance industry created its own hedging facility – MFX Solutions – which already has hedged over $500 million in loans in over 30 currencies.
If there is a lesson here, it is that industries can learn from their mistakes and make themselves more resilient. Original sins don’t have to be permanent sins. New impact investors can benefit from the modern tools that are now available to make their investments even more impactful. For the world’s poor, who, unlike Wall Street, never have the option of a government bailout, it is critical that they do so.