A few months ago I wrote a blog piece entitled Build It and They Will Come in which I commented on an op-ed piece in the Financial Times concerning ways banks might help the poor. The author wrote about how more funds might be raised to assist the poor. I argued that we needed better anti-poverty infrastructure to ensure that funds are effectively deployed in the fight against poverty.
Now comes a research paper from Hope Consulting entitled Money for Good that shows there is $120 billion in potential funding for individual impact investments for the poor. Now that’s a lot of money! But I still think we need to focus on infrastructure to make this money work for the poor. “Unlocking” this resource will be a major topic at the upcoming SOCAP10 conference to be held in San Francisco October 4th 5th and 6th. In fact, the conference has initiated a contest called the “SOCAP10 Impact Challenge” to generate ideas. You can read Banking on the Poor’s modest proposal and vote for it here.
The rationale of my proposal to unlock even a fraction of this $120 billion is that we must create human capital for community development much in the way Teach for America is creating human capital for the classroom. Social investors need assurances that their funds will be invested responsibly and effectively. I have argued that for-profit financial institutions won’t do this work because it is too costly and doesn’t generate sufficient returns to meet the requirements of mainstream investors. However, I believe an enterprise of the type defined by Muhammad Yunus in his book Building Social Business could make a sustainable, scalable business distributing investors’ funds to low-income entrepreneurs.
As described in my entry to the competition the major components of my proposal are:
1. To create certificate programs at academic institutions to train students for jobs as community development bankers;
2. To place the “certificated” community bankers with non-profits and MFIs serving low income communities; and,
3. To work with financial institutions to provide loan processing and portfolio management services.
Over the next few weeks I will discuss here in more detail each of these components but I thought I would start by looking at some key numbers.
Let’s assume that we are looking at building a portfolio of Individual High-impact Investments (IHIs) for low income entrepreneurs in the U.S. Proposals for such funding usually fall in the range of $10,000-$25,000. Let’s assume an average IHI is for $17,500. This would mean approximately 5,700 entrepreneurs could be funded for $100,000,000 which is less than one tenth of one percent of the amount Hope Consulting estimates is available for such investments.
Now let’s assume that each IHI pays a 3% up front fee and 6% p.a. fully amortizing over a term of 3 years. That translates into an effective interest rate to the entrepreneur of approximately 7.35% p.a. Allow 3% of the 6% spread to provide social investors with a modest return and use the remaining 3% spread and the upfront fee to cover the costs of managing the program (mainly salaries for the Community Development Bankers). Once the portfolio is fully invested it will generate approximately $7.8 million in revenue after paying investors their 3%.
So how many Community Development Bankers (CDBs) are required to invest $100,000,000 in IHIs and how much should they be paid? Seeking out and mentoring viable businesses run by low-income entrepreneurs will be people-intensive, time consuming work. I believe 175 well-trained CDBs originating a little less that three transactions a month could successfully place $100,000,000/year in quality IHIs. After three years each would be managing a portfolio of about 100 IHIs at various levels of maturity. My “back of the envelope” analysis seems to indicate they could earn about $35,000/p.a.
Banks and financial advisors to the wealthy are understandably reluctant to recommend directly to clients alternative social investments. However, as the Money for Good study indicates, their clients are looking for effective ways to employ some of their wealth for social causes. Working through a social enterprise focused solely on providing low income communities with access to individual impact investment funds could be the link for unlocking the $120 billion.
Please go to Build Human Capital for Social Investment and cast your vote for Banking on the Poor’s proposal. This is a work in progress so comments and suggestions are very welcome.