Günther Kastner of Impact AM explains why microfinance provides institutional investors with both financial and social returns and why this investment facility is particularly beneficial to women in poorer countries.
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The crown pandemic not only hit the developed economies of industrialized countries, but also significantly increased poverty in financially weak countries. According to World Bank estimates, 97 million people worldwide were pushed into poverty in 2020 by a pandemic: they must survive with an income of less than $ 1.50 a day. The current market environment with high energy and agricultural commodity prices and rising interest rates in the US is also a toxic mix for the development of poorer countries: the financial and economic burdens are increasing, concludes Günther Kastner, founder and CIO of I-AM Impact Asset Management, who recently observed deteriorating trends in poorer countries in the world, in this article exclusively for Institutional Money.
We remind: Wiener Impact Asset Management (I-AM) is a former C-Quadrat Asset Management and is responsible for portfolio management of the Dual Return Fund – Vision Microfinance (ISIN: LU0306115196) and the Dual Return Fund – Vision Microfinance Local Waluta (ISIN: LU0533938022) z.
The financial inclusion can be significantly expanded
At the same time, poverty at the individual level in poorer countries often leads to a vicious circle, reminds Kastner: money cannot be saved, due to lack of capital and no collateral, bank accounts cannot be opened in traditional banks or other financial services used, let alone invest . Full financial integration is still a distant goal in many countries: in Morocco, for example, the percentage of the population without a bank account is the highest in the world at 71 percent. According to the World Bank, 1.7 billion adults worldwide do not have access to banking services.
Microfinance loans as an effective measure
According to Kastner, microfinance loans are one way to break the vicious cycle of poverty. They are limited size loans that are made to micro-entrepreneurs locally through microfinance institutions in developing and emerging countries. For example, small farmers, shopkeepers, hairdressers and rickshaw drivers will be able to invest for the first time and thus lay the foundations for a growing business. Accumulating capital also enables you to pay off your loan in the short term, including any interest owed. The concept of microfinance loans was popularized by a Bengali economics professor and Nobel Peace Prize winner Muhammad Yunus. However, the idea of making financial services available to everyone and thus helping people to become independent was realized over 200 years ago in Europe based on the idea of setting up savings banks and Volksbanks. The cooperative sector is still an important pillar of our economy today.
An anchor of stability in troubled times
Microfinance funds are sustainable investments that have a direct social impact. Unlike most balanced equity funds that invest in sustainable secondary equities, microfinance funds are a segment of the fixed income market that is governed by its own factors, reminds us Kastner. In this way, they show a stable development of value even in difficult economic years or during a bear market on the stock exchanges. Default rates are minimal and 98% of short-term loans are paid on average historically. Diversifying the portfolio with carefully selected microfinance institutions from different countries and continents also provides lower risk. Face-to-face meetings between fund managers and microfinance institutions and supported local borrowers are part of the due diligence process, notes Kastner.
An analysis of microcredit lending reveals other advantages of microfinance funds: for example, many borrowers are women. According to the World Bank, 55 percent. people affected by financial exclusion are women. According to the UN, women were twice as likely to lose their jobs as a result of the crown pandemic. Microfinance loans not only actively combat these abuses, but also empower women as entrepreneurs in society. Moreover, other family members can be supported and potentially more people can get into wages and bread. According to EY estimates, the financial inclusion of the population in larger developing countries may increase gross domestic product by 14%, and in frontier markets by as much as 30%.
Self-help help with further effects
Micro-entrepreneurs, an important pillar of the economy in emerging and developing countries, have the chance to break out of the vicious cycle of poverty and build an economic existence that can benefit other local residents.
“Microfinance funds provide investors with stable returns that develop relatively independently of the stock and bond markets. In this way, it is possible to achieve a financial return in addition to a social return, ”Kastner concludes, referring to the better results Double return fund – Vision Microfinance I compared to the benchmark from its inception to the end of the first quarter of this year, as shown in the chart below. (aa)