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Tackling Global Poverty by Supporting Entrepreneurial Skills Combined with Educational Needs of the Future Generation

Zarpana Massud-Baqa,  Assistant Vice President, Asset Management–Environmental and Social Capital, Deutsche Bank AG
Ideas Fair

 

Zarpana Massud-Baqa.jpeg
Most people believe that the solution to the global problem of extreme poverty is to be found in providing large amounts of free money. However, the actual solution is very much related to the mobilization of private sector capital.

Socially responsible investments (SRIs) have been increasingly gaining investors’ attention. The SRI world has seen several traditional microfinance funds. The majority of the funds have achieved a great deal of positive impact. Nevertheless, as we can see from the lessons learned for instance in Andra Pardesh (India), a free and uncontrolled use of the money especially for consumption purposes can be a danger. Poverty means coping with life on a daily basis and trying to cover basic human needs; thereby, making education a luxury good. The lack of education though prevents people from obtaining skills that would sustainably lift them out of poverty. It is a vicious circle.

A modified microfinance fund structure could be an answer here. The characteristics of a so called “Microfinance & Education Fund” (MEF) would allow only the disbursement of microfinance loans to borrower groups linked to the specific use of, for instance, 15% of the loan size for educational purposes, a condition subsequent to the loan agreement between the microfinance institution and the borrower. How would the MEF structure work in practical terms?

Fund level

  1. Public sector initiators/sponsors provide first loss capital to leverage the fund and make available a risk cushion for private sector investors in case there would be an exposure default.
  2. Private sector investors, for instance (Ultra) High Net Worth Individuals, Pension Funds, Insurances, Family Offices and other socially oriented investors are invited to participate in the mezzanine and/or senior tranche of the MEF entailing less risk because of the first loss capital and “waterfall” income structure of the fund.
  3. The MEF refinances microfinance institutions which fully understand and agree to the investment guidelines of the fund.
  4. Investors expect a relatively risk-adjusted return while also focusing on the social return.

 

Microfinance institution/borrower level

  1. Microfinance institutions provide loans to borrowers containing a condition subsequent to using a certain share of the loan for educational purposes.
  2. Borrowers generate income from the invested capital in their micro business (85% of original loan) and pay interest on the entire loan amount.
  3. Repayment of the actual microfinance loan at maturity (short-term loans).
  4. Repayment of the educational loan whenever possible for the borrower but at the latest after 12–15 years.

 

Microfinance and therewith educational loans are different than pure philanthropic concepts which primarily rely on development aid, grants and donor money. The traditional microfinance idea combined with promoting education and making it affordable for poor people clearly has a bigger impact on global poverty. Targeting both goals—(i) fighting poverty and (ii) increasing the education rate—is more of a sustainable concept as they are clearly complementary subjects.

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