The Norwegian Microfinance Initiative (NMI) is a partnership between the Norwegian public and private sectors that will invest in microfinance institutions (MFIs) in developing countries. NMI will also provide professional assistance and technical support for these institutions. NMI will invest through two investment funds: the NMI Global Fund, which invests primarily in microfinance investment vehicles (MIVs) focused on investments in Africa, Asia and Latin America, and the NMI Frontier Fund, which invests primarily in emerging MFIs in Sub-Saharan Africa and South Asia. Investors have committed NOK 600 million (approximately USD 100 million) to the two funds. Professional and technical assistance will be provided through the NMI Professional Assistance Facility, funded by Norad, Norway’s international development agency. Investors and strategic partners of NMI include Norfund (a development finance institution owned by the government of Norway) and four private sector financial services institutions: Ferd, KLP, DnBNOR, and Storebrand.
MicroCapital: What is the background of NMI?
Richard Weingarten: The Norwegian Microfinance Initiative is a new partnership between the government of Norway (through Norfund, Norway’s development finance institution), and four private sector financial services firms. Those four firms are Storebrand, a large insurance company; KLP, a large insurance and pension fund manager; DnBNOR, the largest bank in Norway, through Vital, its insurance subsidiary; and Ferd, which is a large private equity firm. This is a true public-private partnership in the sense that the private sector partners contributed capital equally with the public sector. Total capital is about USD 100 million. One of the main purposes of the partnership was for NMI, as a special Norwegian initiative, to become a significant contributor and participant in the international microfinance community.
The mission of NMI is to contribute to the empowerment of the poor and the creation of jobs, wealth and economic and social sustainability in developing countries by investing in and supporting MFIs. It is very focused on supporting MFIs in its focus regions and countries. The NMI Global Fund will invest in Latin America, Asia and Africa and will concentrate on mature, well-established MFIs. The Global Fund will invest primarily through other investment vehicles and thus will be a “fund of funds.” It can make direct investments, and it can invest in both debt and equity, although it will be focused primarily on debt investments.
The NMI Frontier Fund will complement the Global Fund in that it will concentrate on younger, less mature, emerging MFIs and will generally make direct investments in those MFIs. The Frontier Fund will invest only in Sub-Saharan Africa and South Asia, so it has a much narrower regional focus. The Frontier Fund will emphasize equity investments, as well as product and service innovation, and thus will take significantly more investment risk than the Global Fund.
MC: You said the public-private partnership has a commitment of USD 100 million. What portion of that is in each of the two funds?
RW: The MFI Global Fund is USD 60 million in size and the Frontier Fund is USD 40 million.
MC: Are you committing to any standard or measurement in terms of social return?
RW: Both of our funds are committed to balancing financial returns and social returns. Social performance, as CGAP (Consultative Group to Assist the Poor) defines it, is very important to us, and we are working to assure that each of our MIV managers and all the MFIs in our portfolio will be measuring and reporting on social performance on a regular basis. We really look to establish an equal balance between a fair financial return and social returns.
We are also trying to help the industry consolidate around the social performance reporting structure that has been developed by the CGAP Social Performance Task Force. We would like to get everyone to report to the MIX Market, and we are trying to be very rigorous with our MIV managers to be sure that all the MFIs in which they invest report on social performance to the MIX. We understand that not all of those institutions will be able to do all of the reporting at first, so we are encouraging our managers to support those MFIs that can’t do all of the reporting initially. We expect that our managers will work closely with those institutions over a reasonable period of time and will help them to obtain any training or capacity building they may need to provide the social performance information. In particular, we expect to work closely with all our managers and MFIs on measuring and reporting on development impact and progress out of poverty.
In addition, we are encouraging our MFIs and the managers with whom we are investing to obtain social ratings from the various firms that are now providing these ratings. We are thus seeking to support the development of an industry database and analytical tools regarding social performance. This includes encouraging our MIV managers to get social ratings themselves.
MC: How is the process going?
RW: So far we’ve made one investment in an MIV from our Global Fund, and we had a very productive discussion about social performance with the manager. The manager essentially committed to the measurement and reporting standards we suggested. In addition, we are in the final stages of investing in another MIV, and again the manager has essentially agreed to utilize the Social Performance Standards Report as a key reporting tool. We are not suggesting that this is the only tool that a manager uses. If they have additional tools and reporting obligations (particularly with respect to environmental, social and government issues) that other investors are familiar with or insisting on, we are very happy to have that as well. But what we’re focusing on is development impact for the MFIs.
MC: What is the chronology of the project in general?
RW: NMI was organized in October 2008. I was hired as the Managing Director in September 2008. NMI was basically a start-up at that point. I have hired two Investment Directors, one for the Global Fund and one for the Frontier Fund. That management team was established in May, and we are looking to hire one more person. We really began looking at investments at the end of the first quarter in 2009. We now have completed our first investment in the Global Fund, and we are expecting to close another one at the end of this month. We are also working toward our first direct investment from the Frontier Fund, which we expect to make before the end of the year.
MC: What timeline to you anticipate?
RW: NMI has a five-year investment period, but I would expect that in 2010 and 2011 we’ll put a good portion of our committed capital to work. We’ll be very active over the next two years, for sure.
MC: What are some other elements of the project that you would like the public to know about?
RW: First of all, we are very keen on developing investment opportunities in Sub-Saharan Africa for the Frontier Fund. We consider that to be our most challenging market. The Indian market for example, is one of our target markets, and it is fairly well organized and relatively mature as a place to invest. Sub-Saharan Africa is more challenging. As a result we expect to work with a variety of strategic partners in Africa, some of whom will be fund managers and some of whom may be technical service providers or other institutions in the industry that have broad and deep relationships in this region.
Two other aspects of NMI that are worth mentioning are our Professional Assistance Facility and our ability to invest in local currency. Our Professional Assistance Facility will be used to help build institutional and human capacity in the young and emerging MFIs in which the Frontier Fund makes investments. We should be able to help build capacity and provide training for these MFIs in a wide variety of areas. We will also look to invest in local currency wherever we can, and we have several unusual ways that we can manage or hedge some of the local currency risk.
Also, the financial services institutions who are NMI’s partners are very large institutions with a variety of financial services experience and expertise. We hope to be able to bring some of this experience and expertise to benefit the MFIs in which we invest. Our partners are going to be very open to developing relationships with some of the MFIs. That’s unusual for an investment fund like NMI and can be very helpful for emerging MFIs.
MC: Is there a relationship between NMI and direction of the Sovereign Wealth Fund of Norway?
RW: I’m not an expert on that subject, but what I understand is there has been a lot of discussion in the political environment in Norway on whether the Sovereign Wealth Fund should invest more in emerging markets. Many people feel they should do more emerging market investments. This issue is currently being considered by a variety of stakeholders here, and we would be hopeful that if they decided to invest more in emerging markets, then they might make microfinance a priority. Right now they are not an investor in NMI, and I don’t think that NMI would fall within their mandate at the present time, although I’m not sure.
MC: What is your personal background? What first awoke your passion for microfinance?
RW: Prior to joining NMI, I was the Executive Secretary at the UN Capital Development Fund (UNCDF) in New York. During my tenure we sponsored and managed the International Year of Microcredit and established the UN Advisors Group on Inclusive Financial Sectors. In addition, UNCDF invested in microfinance institutions in the Least Developed Countries. These are the countries where people generally live on less than USD 1 per day. As I worked on these industry issues and made investments in MFIs in these countries, it became very clear to me that microfinance was a very effective tool for helping poor and low-income people work their way out of poverty and improve the conditions of their families. Because it involves entrepreneurship and empowerment, and because people are taking responsibility for themselves rather than looking for charity, I concluded that microfinance is a very good mechanism for dealing with economic development issues around the world. I also observed that microfinance can be consistently applied and used in all different types of countries and economic environments and that it seems to work everywhere.
MC: The current mainstream public discourse on microfinance seems focused on the fact that microfinance alone does not cure poverty. What is your perspective on that?
RW: I follow that discussion very closely, and I would say that it is definitely the case that microfinance alone is not enough to end poverty in many, many cases. Also, the data supporting a direct, causal relationship between microfinance and poverty elimination is thin, but also difficult to obtain. The issue of causation is clearly quite complex and difficult to measure. I’m not sure that we, as the microfinance community, have done a good job measuring development results or impact. This is why NMI is so focused on creating standards and comparability for measuring and reporting on social performance, as we discussed earlier.
On the other hand, aside from what has been or can be technically measured, when you go into the field, you see that microfinance plays a very important part in making people’s lives better in a wide variety of ways. Whether in terms of education for kids, healthcare for families, better nutrition, learning financial literacy or simply smoothing consumption and reducing vulnerability to economic shocks, microfinance definitely helps to improve the lives of the poor. The proof is the number of poor people that utilize microfinance services and that they keep on using these services over long periods of time. That MFI customers are frequently repeat borrowers and regular savers, under whatever circumstances they find themselves, shows that microfinance is making their lives better in some way. That’s a different statement than making a technical economic argument that microfinance brings people out of poverty.
MC: What challenges have you faced in your career that you found particularly instructive?
RW: I’ve come from the private sector, and I have an extensive background in corporate law as well as in investment banking. I was a Managing Director of a Wall Street firm. I was very active in venture capital, private equity investments and the capital markets. I would say that my biggest disappointment was that, as I became more successful in my legal and investment banking career, I saw how disconnected it was from solving important social and economic problems, particularly those of the poor around the world. I was also troubled to observe how little the skills and talent of enormously successful and creative colleagues were devoted to helping people that had less. I was also surprised at the extent of the greed that was driving and rampant throughout the system. People never seemed to have enough, no matter how much they had. I decided relatively early in my career that I wasn’t going to do that.
MC: What successes have you found particularly instructive?
RW: After I made the decision to move away from Wall Street, I started to work with NGOs and to do development work in a variety of places. It then became clear to me that all of the highly developed skills, analytical capability and strategic thinking that I had developed through corporate law and through investment banking were equally applicable to helping people that were in poverty. People in the private sector frequently told me how difficult it would be to work with NGOs and on development issues. They would say: “You won’t be able to use your skills in an NGO. People in NGOs and in development don’t really understand how to do things; they don’t operate at the same level that we do at the private sector. It’s always going to be frustrating, and people don’t work hard or up to your standards.” But quickly I found that this was not the case. I was pleased at how easy it was to use my skills and all my creativity and energy to actually help people, rather than to get more for myself.
MC: What trends do you see in microfinance? What will it look like five years from now?
RW: One issue that I am extremely concerned about is having too much capital chasing too few situations and what the impact will be on the overall breadth and depth of the sector. I think that the ability to look at microfinance as an asset class, to bring in new institutional investors with large amounts of capital, is a very positive trend. I think that this trend will continue, and we will see that through the next five years. On the other hand, I think there is a danger that return expectations may become unrealistic, and that the ability to use that available capital in a sustainable manner may be limited. This is likely to be particularly true in Sub-Saharan Africa and the poorer places in South Asia. Really getting to the poorer populations is always going to be a challenge for MFIs, and investors will need to have patience and look carefully at social, as well as financial, returns.
It will also challenge the industry to use its capital well and not to forget its social mission. Capital availability will also challenge MFIs to operate efficiently and to use the capital productively.
I also think there is a huge scope for using technology for the next several years. Using mobile phones and other communications devices to reach rural and unbanked populations will be particularly important. In addition, there is significant scope for creating more sophisticated products, specifically microinsurance and remittances. I think we are at the early stages for some of those things.
One other thing I would mention: the relationship between microfinance and climate change needs to be further explored. Many people, particularly the poorest in Asia and Africa, are going to be very negatively impacted by climate change and very soon. Their ability to adapt is going to be a challenge. It will therefore be very important to have financial services and products for people that are going to face that challenge. This area, in my view, needs much more attention from MFIs and microfinance industry leaders.
Richard Weingarten is the Managing Director of NMI. He was formerly the Executive Secretary of the United Nations Capital Development Fund (UNCDF).
Please also see our “Who’s Who” on the Norwegian Microfinance Initiative (NMI).
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