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[00:00:07.930] – David Brett
Welcome to The Investor Download, the podcast about the themes driving markets and the economy now and in the future. I'm your host, David Brett.
[00:00:24.890] – David Brett
i jumped to the microfinance in 2014. It was exactly in the period when the worldwide crisis 2009/2010 has heated the Albanian markets.
[00:00:36.340] - David Brett
That's Herjola Spahiu. Herjola is the chief executive of NOA, a microfinance institution in Albania.
[00:00:45.400] - Herjola Spahiu
So the banking system was not aggressive and was not expanding. The whole system was in a standby situation, so the majority of ourselves at the young age couldn't feel good just to stay in an office and not serving to the customers, not providing more services to the customers in the market. And the microfinance was the alternative ways.
[00:01:07.980] - David Brett
Microfinance institutions like NOAA provide finance to individuals and small businesses, including a farmer whom, although 60%, blind, keeps running his farm alongside his wife while employing other farmers working for him. And the first female wood boat constructor in Albania who decided to return from Spain and keep investing in her dream.
[00:01:30.850] - Herjola Spahiu
So I liked a lot the dynamic, the energy. And the most important thing is, in microfinance we see the impact because we see the customers growing up, we see the people that have a dream to realise, like starting up a new business, especially women. In Albania we are very much focused on supporting financially the women that are trying now to create financial independency in the market and create an alternative income for the families. So we see that impact day after day and it gives you a pleasure and satisfies you finally with the work that we do there.
[00:02:13.450] - David Brett
So in this show, I speak with Herjola to understand how the world of microfinance works and how they manage and measure success in a world where some of their clients live in regions that are so remote. And we also speak to Daniel Perroud, whose company Blue Orchard Investment Management is one of the many financiers who finance the microfinanciers like NOA.
[00:02:41.170] - Announcer
On Apple podcasts, Spotify, or wherever you get your podcasts, you're listening to The Investor Download.
[00:02:48.470] - David Brett
NOA, like many other microfinance companies, give hope and opportunity to those that might otherwise be excluded from banking and financial markets.
[00:02:58.830] - Herjola Spahiu
Exclusion is everywhere. Even a big company, I don't know, if they don't have enough collateral to be provided for a bank, it's excluded from financing. So what we do is we try to be much more flexible in serving the whole part of the customers that cannot take a financing.
[00:03:14.370] - David Brett
But they can't do it alone microfinance businesses need funding themselves.
[00:03:19.230] - Herjola Spahiu
We cooperate a lot together in terms of the capital movement, because to finance you need all the time the capital. So what we, as microfinance institution, we are all the time searching the capital to enable it within the Albanian market. And in that effort we get alongside with investors and with investment plans in order to get that excess of liquidity from somewhere else and to bring it especially in the emerging market, when capital is a little bit difficult to be raised in. But the need is much more higher.
[00:03:52.560] - David Brett
Those investors include investment managers such as Blue Orchard.
[00:03:56.710] - Daniel Perroud
We see that the financing we provide to our partners in emerging markets is really helping to support the growth of our financial partners in those markets.
[00:04:10.670] - David Brett
That's Daniel Perroud, Global Head of Business Development at Blue Orchard.
[00:04:14.970] - Daniel Perroud
And we see that through that we can fight extreme poverty, we can help people to develop an activity, an economic activity. So this is why we think microfinance is a high impact strategy that makes absolute sense for any investors that is looking to generate social impact, but also a financial return.
[00:04:43.400] - David Brett
We'll come back to financial returns later in the show. But for a sector that focuses on such small enterprises, the microfinance industry is surprisingly big. In 2021, lending globally hit $187 billion and by 2030 that's expected to nearly treble to $550 billion. Of course, that pales in comparison to the $51 trillion US bond market. However, microfinance institutions are critical to economies such as Albania's, whose GDP is around $20 billion, according to the World Bank. In 2022 alone, NOAA pumped €45.5 million directly into the local productive economy and family living standards.
[00:05:32.610] - Daniel Perroud
But very important in terms of job creation, in terms of contribution to the GDP overall in the respective countries. So for us, really the engine of growth in the different emerging countries where we invest in.
[00:05:46.100] - David Brett
But lending to small businesses, many of which are rural and hard to reach, doesn't come without its challenges. That's coming up in part two of the show.
[00:05:56.770] - Announcer
Get in touch with us by email at email@example.com or visit our website schroders.com/theinvestordownload.
[00:06:09.510] - David Brett
Depending on the country microfinance institution's typical customers range from the small family businesses of just a handful of employees to very formalised companies of up to maybe 100 employees. But the one challenge they all seem to have in common is financial literacy.
[00:06:27.790] - Herjola Spahiu
Normally in a banking sector, challenges are alot. Financial education is the first one, and especially the lower the customer, the smaller the customer it is, the higher it is a financial education gap.
[00:06:43.030] - David Brett
The second challenge is one that is common throughout the world, but particularly in emerging markets, and that's the reliability of data. After all, when not everyone you're dealing with has a bank account and not every transaction is recorded, how can you reliably assess how viable a business is?
[00:07:00.570] - Herjola Spahiu
Informality remains high still. So we develop internally with scoring models in order to assess behaviour of the customer in the future, because just based on the data that we can receive for the market makes it a lot difficult. The information about the customer still remains difficult because you need to have access, which is not all the time available there. In Albania, the only official source we can have is the credit scoring.
[00:07:33.130] - David Brett
The third challenge is digitalisation.
[00:07:36.130] - Herjola Spahiu
Digitalization is another challenge recently because now the customers are tending and they're pushing to get the financial products very fast, so they don't want anymore in the same way the products have been served years ago. So they want fast products, personalised products, that fits exactly to the need that they have.
[00:07:59.820] - David Brett
Spahiu says meeting those challenges means boots on the ground. NOA has created teams dedicated to field research and connecting with customers, gathering first-hand data wherever possible, which is extremely personally sensitive. As a result, they act as collaborators in a loan, much like a small bank in the UK or US might have done half a century ago. Still, that presents a problem for potential investors in microfinance institutions like Blue Orchard, who are lending their clients money to largely unknown quantities. How do they reassure their investors?
[00:08:36.030] - Daniel Perroud
I think the key word would be education. So really informing clients on how we source the investment opportunities, how we assess them on the ground, both from a credit risk perspective, but also from a social impact perspective, making sure we really select the right partners in each countries, so that is really it requires to go that extra mile. But I think we also try really to bring that transparency to investors by bringing our investees also in front of our clients so that they can really understand where the money is going.
[00:09:14.640] - David Brett
Technology is certainly helping bridge that gap too. By collecting data, firms like NOA can better analyse the businesses they're lending to, which will help them make better decisions. And that goes the same for investors in microfinance institutions.
[00:09:29.570] - Daniel Perroud
Already before COVID obviously we were almost entirely digitised when it comes to sharing information, but also when looking at microfinance institutions, we think, as Herjola just said, we think it's really accelerating the penetration of microfinance in different countries. In India, we had absolutely fascinating examples of 100% digitised microfinance institution that during the pandemic were really able to just continue their business, but also sharing information with individuals around COVID. So it was way beyond just financial services, but really communicating and staying close to their end clients. So really great examples of how digitization is actually having a high social impact.
[00:10:26.990] - David Brett
Ultimately, everyone in the process has to answer to their investors, so what do they get in return? That's coming up in the final part of the show.
[00:10:41.310] - David Brett
According to data compiled by Blue Orchard, key microfinance economies showed resilience during periods of uncertainty over the last 20 years, while returns have remained consistent and with lower volatility compared with other parts of the financial market.
[00:10:58.400] - Daniel Perroud
So by choosing a pure private debt microfinance strategy, you can definitely add a lot of diversification because those are the type of risk you wouldn't find in any other private debt strategy. So this is really creating a lot of diversification for any portfolio, aside obviously of the social impact. So we even have investors that like the social impact, but they really choose microfinance debt as a way to diversify further their alternative investments. What we've seen over 20 years is really the great resilience of the industry and the low default rate and the steadiness of returns that are uncorrelated not only to public markets but also to the noise that you might have at the country level. So you see that because they are financing sectors like agriculture, the small economies of those countries which are lowly correlated to the noise that you have at the country, you see actually this great resilience of the industry and that's what we've seen in any really type of black swan events. We've seen really a great resilience of the industry.
[00:12:17.190] - David Brett
And investing in microfinance doesn't necessarily mean tying up your funds for years on end.
[00:12:22.750] - Daniel Perroud
You can run a semi liquid strategy where you would have liquidity terms ranging from quarterly to semiannual but you can also have closed ended private debt strategies which have lockups from five to seven years. So those are programmes which are illiquid in nature. But on the semi liquid strategies we have a weighted average life of 24 months so very short.
[00:12:51.620] - David Brett
As lending conditions tighten around the world. Spahiu says it's creating more opportunities in microfinance, particularly as larger regional banks begin to fold or merge.
[00:13:03.460] - Herjola Spahiu
So while banks are shrinking to the centres of the cities, we go more deeply closer to the customers with the capillar penetration of our branches and of our people. Albinian economy remains small, as I said, informality, it's on the way to reduce but still it's considered high. We have quite a high number of population not having a financial product like 40% of the population so the market is there for us for the future.
[00:13:34.520] - Daniel Perroud
From a pure portfolio management perspective, having a broad exposure to different credit risk from microfinance institutions across EM is definitely giving you diversification, it's certainly helping to improve your efficient frontier. On top of that you have the social impact that you are generating that is there and we can report to you the type of social return that you can actually generate. Through your partners you will be able to generate jobs, you'll be helping to include the excluded and that is often largely women that are excluded from the financial sector. So I think good risk return profile plus social impact.
[00:14:30.070] - David Brett
And if you want to hear more from our chat with Herjola and Daniel you can head to Schroders YouTube channel where you can watch the full unabridged interview that I had with them. There's also a quick Q and A between Daniel and Herjola. So that's the Schroders YouTube channel for more.
[00:14:48.090] - David Brett
Well that was the show. We very much hope you enjoyed it. If you want to find out more, check out our website schroders.com/thetheinvestordownload.
[00:14:56.520] - David Brett
You can also get in contact with us about anything in the show or ideas for future shows at firstname.lastname@example.org. Please remember to subscribe to us at Apple Podcasts, Spotify, Google or wherever you get your podcasts and don't forget to leave a review. We're now doing one show a week, which will be available every Thursday from 05:00 p.m. UK time. Thanks very much for listening, but above all, keep safe and go well. Cheers.
[00:15:25.230] - Speaker 5
The value of investments and the income from them may go down as well as up, and investors may not get back the amounts originally invested. Past performance is not a guide to future performance. The information is not an offer, solicitation or recommendation of any funds, services or products, or to adopt any investment strategy.