Microfinance

Subheadings

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.


The team

By partnering with Developing World Markets (DWM), Trill Impact Microfiance, has access to the expertise of one of the leading global impact investment firms.


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Team in partnership

Viktor Andersson, Head of Microfinance, has extensive experience managing large microfinance investment portfolios and sourcing impact transactions in Latin America, Africa, and Asia. He works closely with DWM, a leading global impact and microfinance investment firm. They work as one team where: 

Viktor focuses on portfolio construction and chairs the Fund Credit Committee, which decides on which MFIs the fund should lend to.
DWM sources and structures the transactions and manages the underlying relationships with the inclusive financial institutions.

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More about DWM

DWM, headquartered in Stamford, Connecticut, USA, is an emerging and frontier markets investment originator and manager with extensive capabilities through its 16 global locations across Latin America, Eastern Europe, Africa, Middle East and Asia. They have a longstanding track record in microfinance and impact transactions since 1999.

Through this partnership, Trill Impact has access to DWM’s expertise in sourcing microfinance transactions, managing relationships on the ground, and fund management activities.

Microfinance

Trill Impact's Microfinance strategy advises 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. It was launched in July 2020 in partnership with Developing World Markets (DWM).

The fund contributes to several SDGs, such as Access to Finance, Women’s Economic Opportunities, Clean Energy Access and Agriculture & Rural Development, while giving investors an opportunity to achieve 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.

This 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:

Responsibility

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.

People

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.

Ladder

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 provides financial services to millions of low-income entrepreneurs and households primarily in developing countries.

Goals, mission

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.

Loyalty

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 the Microfinance fund supports tend to be rather simple, 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.

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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.

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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.

IMPACT approach

Trill Impact's approach to impact investing life cycle management is applied in each of our investment strategies. 

Within Microfinance, Trill Impact and DWM work with high-quality microfinance and impact finance institutions all over the world to create diversified portfolios with attractive risk-adjusted returns, at the same accelerating financial inclusion.

Hover on each of the letters below to explore to learn more:

Ideate

Initial screening and eligibility analysis: Impact framework is completed to document theory of change, the five dimensions and to quantify expected impact on key metrics (aligned with IRIS+). Investment must fit with our theory of change and avoid excluded activities.

Materialize

Full due diligence: DWM Impact IQ completed by potential investee (MFI) and quality checked by DWM. Impact score assigned and site visit conducted to verify responses and clarify questions.

Partner

Credit committee review: Trill Impact and DWM partner through the credit committee. The committee confirms that the MFI fits with the impact goals, flags potential ESG risks and identifies needed covenants or provisions to strengthen impact or ESG management. This is discussed with the investee, which has the opportunity to improve its impact and ESG profile.

Accelerate

Ongoing investment management: Impact performance compared to expectations is tracked through annual data collection. Portfolio-level analysis performed to analyze yearly data and benchmark results.

Collaborate

Ongoing collaboration: DWM collaborates with the MFIs and provide feedback to improve impact and financial results.

Transfer

Exit of a relationship:  Long term relationships with the investees are sought, but sometimes a relationship is exited due to macro, currency, credit or portfolio aspects. Continuity of impact at the investee level is then sought. The impact generated against the targets is assessed and analyzed.

Idea generation Investment Ownership

Theory of Change

The Theory of Change model is part of the IMPACT approach above and covers the Ideate phase. Before funding an MFI, we confirm that this credit investment fits with our theory of change. 

Below, learn more about how the Theory of Change is 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

All credit investments must 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 and DWM, integrate impact measurement and management throughout the entire investment process above.  

Social and environmental results are assessed and tracked across the whole investment cycle.

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

This robust impact measurement and management system enables Trill Impact Microfinance to select and lend to the MFIs with high potential for impact and to manage social and environmental results. It also helps to learn from experience that is important for future investments.

Building a diversified portfolio - step by step

Trill Impact's Microfinance investment strategy applies a local currency, unhedged private debt investment strategy, giving 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 benefits borrowers by removing the burden of currency risk. 

The investment portfolio is built via a top-down process, drawing on the respective areas of expertise of Trill Impact Microfinance and DWM.

Model

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.

Model

Country and Currency Allocation

Together with DWM, the investment team looks at factors like how well regulated the microfinance market in each country is, how mature the microfinance institutions are and finally, pricing versus risk. This step generates the model portfolio, how we envision the ideal portfolio to be allocated, given country risk, currency risk, and pricing.

Model

Microfinance Institution Assessment

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

Model

The double bottom-line for investors

The end result provides 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.

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