Do More Than Give: The Power Of Microfinancing [BOOK EXCERPT]

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This is an excerpt from Do More Than Give: The 6 Practices of Donors Who Change the World by Leslie Crutchfield, John V. Kania and Mark R. Kramer.

Do More Than Give tells the real stories of stand-out foundations and individual donors who are going beyond grant writing to generate breakthrough social change.

Based at FSG, a global social impact strategy firm, the authors propose a new approach that challenges philanthropists — from large corporate foundations to family foundations and individual donors — to measure the effectiveness of their contributions instead of only the size of their gifts.

Donors who are willing to be daring in the hopes of greater social impact are in a unique position to pioneer and test transformative financial instruments that can contribute to solving social problems on a global scale. After all, if someone had tried to persuade you, 20 years ago, that you could make a $50 loan to a poor farmer in Africa and ever expect to see the money back—let alone earn an attractive rate of interest after paying for all the transaction costs involved—you’d probably have laughed them out of your office.

It took early risk capital from the Ford Foundation to test Muhammad Yunus’s idea that microfinance loans were possible. Once the concept was proven to deliver reliable returns, however, it opened the floodgates to billions of dollars in commercial investment from large investors such as the World Bank and Deutsche Bank, investment that provided a pool of capital vastly larger than philanthropic dollars could produce. Today even individual donors—whether of high net worth, low net worth, or somewhere in the middle—can participate through online organisations like Kiva to raise the living standards of the world’s poorest through microfinance. In fact Kiva users alone had lent more than $100 million in microloans by 2010.

Microfinance is only one example of transformative investments that at their outset are perceived as too new or risky to access traditional capital markets yet that have the potential to yield market-rate returns. Philanthropy is uniquely position to absorb early risks and demonstrate the reliability of these investments over time, paving the way for much larger amounts of conventional capital to follow.

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Clackamas County, part of the greater Portland metropolitan area in north central Oregon, is better known for its densely wooded hiking trails to the top of Mount Hood than for innovative financial instruments. Yet with the support of a local foundation, the Meyer Memorial Trust, this small county is pioneering a new way of financing energy conservation that could have national repercussions. Retrofitting all county buildings with state-of-the-art, energy-saving equipment would dramatically reduce greenhouse gas emissions, but the county had no way to borrow the $10 million it would cost. The retrofit would also save a great deal of money on future energy bills, but without increasing taxes, taking out a loan, or issuing a bond—all of which were politically impossible—the county had no way to pay for the improvements.

Instead, the Meyer Memorial Trust agreed to put up the $10 million, as an impact investment, to pay for the installation. Once the equipment was installed, the county worked with a financial intermediary to sell the equipment together with a longterm power purchase agreement to a pool of private investors. The county now pays two energy bills each month: one to a utility company for the actual energy consumed and the other to the investors for the energy savings, enabling investors to recoup their capital with a reasonable return.

Selling the equipment and savings to the investors enabled the foundation to immediately recoup its original $10 million in capital, which can now be used for additional building retrofits rather than being tied up for over a decade of slow repayments. From the county’s perspective, the arrangement is just another purchasing contract requiring no legal authorization for loans or bond issues. If this model of securitizing the energy savings proves successful, it could expand rapidly, creating a powerful new type of security that finances energy-saving equipment for both private and public properties across the country. It required a transformative investment from a foundation, however, to test the concept.

Donors certainly don’t want to emulate the many Wall Street bankers who with wild abandon invented precarious financial instruments just to enrich themselves. Yet for all the creativity that is poured into financial innovation, few people spend their days trying to invent financial instruments than can solve—rather than cause—social problems. The availability of financing, however, can drive profound social change—whether through microfinancing in Africa or consumer credit in the U.S. Catalytic donors have the vision and daring to engage businesses by testing innovative financial instruments that can serve social purposes and, if successful, can be scaled up to national or global impact.

Reprinted by permission of the publisher, John Wiley & Sons, Inc., from Do More Than Give: The 6 Practices of Donors Who Change the World by Leslie Crutchfield, John V. Kania and Mark R. Kramer. Copyright (c)  2011 by John Wiley & Sons, Inc. 

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