On Your Behalf - August Report

Helping the World's Poorest Citizens

The General Board of Pension and Health Benefits of The United Methodist Church (General Board) acts as a prudent fiduciary by investing in a manner that produces financial returns commensurate with risk. As stewards of pension contributions for 66,000 United Methodist clergy and lay workers, the General Board's fiduciary responsibility involves more than financial returns, however. It also involves upholding the goals outlined in the Church's Social Principles.

The General Board, a long-standing socially responsible investor, recognizes that financial returns can be secured in alignment with deeply-held Church values. The General Board also recognizes that sound socially responsible investing involves more than screening investments or encouraging companies to be better corporate citizens. It means investing to help people, particularly disadvantaged people, in a tangible way. The Church recognizes such investing as a way "to seek a very specific social outcome, such as the construction of affordable housing, the renewal of a particular neighborhood, or the expansion of business ownership to those traditionally excluded." (Resolution 213, Investment Ethics, The Book of Resolutions 2004.)

In recent years, the General Board has been actively involved in new social impact investing known as "microfinance."

What is Microfinance?

Microfinance is a term describing a type of lending directed to individuals and groups who have little or no access to traditional financial services. Microfinance loans are generally small, sometimes no more than a few hundred dollars, and usually require no collateral. Recipients of such loans are typically low-income women engaged in household-based, small-scale businesses.

The origins of microfinance go back to the pioneering work of Muhammad Yunus, an economics professor at the University of Chittagong in Bangladesh. Professor Yunus believed that non-collateralized credit could be extended to the poor as a way to break the cycle of rural poverty. The success of his efforts in the late 1970s and early 1980s led to the creation of the Grameen Bank, an unusual banking facility offering non-collateralized microloans and owned almost exclusively by its borrowers.

The Grameen Bank, which boasts a loan recovery rate of nearly 99%, continues to be an important microfinance lending institution (MFI). Since 1983, it has loaned more than $5 billion to more than six million borrowers.

Because of the success of Professor Yunus' pioneering work, microfinance has become increasingly a part of the mainstream financial establishment. Through investments in MFIs, which extend loans directly to low-income borrowers, investors are showing their confidence in this unusual form of credit designed to help the very poorest communities around the world.

Microfinance Institutions

Microfinance lending institutions play the key role in microfinance. They originate and administer loans and, in some cases, offer a range of financial services. MFIs can be banks, credit unions, non-profits or social service organizations and often receive direct assistance from governmental or quasi-governmental agencies. Though some MFIs exist simply to provide a needed social service, others are becoming financially sustainable through increased profitability and the ability to raise capital.

Many MFIs (approximately 7,000 worldwide) are located in Asia and Latin America and most borrowers tend to be women. The average loan is about $350 and most borrowers make weekly payments and pay off their loans within a year.

A number of investment vehicles have been structured to provide capital to MFIs. As with other social purpose investments (affordable housing, community development, etc.), the General Board invests in these microfinance investment vehicles through third-party intermediaries. These intermediaries (frequently a bank or other financial lending institution) direct funds to credit-worthy MFIs. The intermediary pays the General Board a rate of return commensurate with the risk of the specific microfinance investment.

General Board Microfinance Investing Commitments

In late 2005, the General Board joined other institutional investors and development agencies in creating a $75 million fund for microfinance investing. The fund, primarily arranged and managed by Deutsche Bank, represents a new asset class for investors. The fund already has commitments for MFIs operating in Peru, Kosovo, Nicaragua, Azerbaijan, Colombia, Pakistan, Mozambique and India.

Currently, the General Board's total commitment to microfinance lending instruments is $50 million.

Recognizing that "the majority of persons in the world live in poverty," the Social Principles (¶163E) tell us that "ways must be found to share more equitably the resources of the world." One such way is to recognize the right "of members of racial and ethnic groups ... to credit, financial loans, venture capital, and insurance policies...." (¶162A.) By investing in microfinance lending instruments, the General Board is helping to bring needed financial resources to impoverished people around the world while upholding the Social Principles of the Church.