Why the world’s poor are a good credit risk
By John Aldonas
Deputy Vice President, OPIC Small and Medium Enterprise Finance
Does it make business sense to invest in the world’s poorest people?
Earlier this month, I joined some OPIC clients on a panel at the Society for International Development, where we discussed why private sector investments in some of the poorest and least developed parts of the world offer such promise for a strong return on investment.
As the U.S. Government’s development financial institution, OPIC has a long history of investing in emerging markets, and my fellow panelists provided some of the key reasons why these investments make sense.
- Diversification Before the 2008 financial crisis, many people considered a portfolio to be diverse if it was invested in major financial centers around the world from New York to Hong Kong. But when U.S. markets crashed, all those foreign markets behaved in the same basic way, said MicroVest Chief Executive Officer Gil Crawford. In order to find assets that don’t behave like all the others in your portfolio, Crawford said, you have to invest in real frontier countries. “The tire repairman in Tanzania is entirely unaffected (by world financial markets),” he explained.Microvest manages a family of funds that invest in microfinance institutions in low-income countries, sometimes with the support of OPIC financing, in order to support more lending to local entrepreneurs, who often cannot obtain conventional bank loans. “Writeoffs are surprisingly low,” said Crawford.
- Scalability The reason microfinance lending works, is because it can lead to “explosive growth in productivity” by its entrepreneurial borrowers, Crawford explained. And because scale is so essential to the success of microfinance, he said Microvest focuses on identifying worthy microfinance institutions with the potential to grow. “The best way to help a large number of working poor out of poverty is through commercial microfinance,” said Crawford.
- Strong demand When investing in the world’s poorest and least developed places, demand for basics like housing can be extremely strong, explained Thomas Livelli, co-founder and vice president of Inter-Mac International Inc., an OPIC client. In 2008, Inter-Mac began using $70 million in OPIC financing to support Los Castanos de Choloma, a housing project in Choloma, the sixth-largest and fastest growing city in Honduras.The Inter-Mac project is designed to include 2,400 affordable single-family homes in gated communities with a central park area that provides shelter from surrounding violence and encourages residents to maintain and take pride in their property. These homes represent a major improvement over the “informal housing” that is so common in this region. Additionally, Inter-Mac is delivering important infrastructure such as paved roads, electrical grids, wastewater treatment, and running potable water; nevertheless, the homes still remain affordable to working families in Honduras earning minimum wage.When considering the project’s long-term potential, Livelli said, Inter-Mac looks not just at this initial housing project but at its scalability. “We are serving a market where there is no shortage of demand,” he said.
Their comments also underscore the importance of the private sector in development in emerging markets. OPIC work supporting private sector investment in some of the world’s most challenging business environments is based on the understanding that the world’s development problems are too vast for any government or nonprofit group to address on their own. In my comments on the panel, I quoted President Obama’s remark that in advancing development, “we need to harness all the tools at our disposal – from our diplomacy to our trade investment policies.” By leveraging private capital, OPIC is able to address major development challenges and generate financial returns.