Towards ‘socializing’ mainstream capital markets

Tony Wainaina

Although there is a strong inclination to treat ‘MRI-type’ social enterprises in developing countries with kid gloves and to use warm and cuddly adjectives such as ‘soft’ and ‘concessionary’ when talking about financing for them, this can be counterproductive if we want capital markets to take them seriously in the longer term.

I’m a strong advocate of embracing blended value investing in developing countries, but concessionary finance – the focus of much of this Alliance special feature – should be seen only as a staging post towards the eventual incorporation of MRI-type social enterprises into the fold of commercial enterprise. Or let me put it another way. Because of the fragility of our environment and our social structures, it is imperative that all commercial enterprise redefines and transforms itself into social enterprise.

A comparison can be drawn between social enterprise and a primary component of the poverty trap in developing countries. The mind set is the problem. The fact that people believe they will always be poor makes this more likely to be the case. Similarly, the belief that ‘we will always be the stereotypical social enterprise’ makes it more likely that enterprises will continue to depend on aid, concessionary financing and handouts. If capital markets are to take social enterprise seriously, social enterprise must aspire to position itself as the new and improved mainstream commercial enterprise. Microfinance institutions are well positioned to take the lead in doing just this. There is no need to create a different ‘social’ capital market to address their needs.

If MRI-type social enterprise can compete effectively for funding in the mainstream capital markets, this will allow grant and concessionary money to be reallocated towards PRI-type social enterprises that cannot generate their own income streams.

Credit enhancement – a double-edged sword?

Debt is far more developed than equity in developing country social capital markets. Credit enhancement (loan guarantees) has been the key enabler in developing marketable debt securities, eg bonds sold on mainstream stock exchanges. For the standard issue heavily underwritten debt instrument, eg the Faulu Kenya bond (see p48), the issuing social enterprise typically attracts every shade of investor, primarily because of the liquidity of the instrument and the fact that it is underwritten by a credible financial institution.

But credit enhancement can be a double-edged sword. On the one hand, it makes it easier for social enterprises to raise finance because investors focus their risk exposure on the underwriter rather than the issuer. On the other hand, social enterprises will never be perceived as financially viable, standalone commercial entities if investors consider their risk profile as secondary to that of the credit enhancer. Credit enhancement should be seen only as a catalyst, a foot in the door. As the social enterprise raises its profile in the market, its dependency on credit enhancement should diminish. The ultimate object should be to achieve sufficient investor comfort to raise capital entirely on the strength and financial viability of the issuing social enterprise.

Microfinance can lead the way

The issuance of a five-year bond by a Kenyan MFI, Faulu Kenya, which was 75 per cent underwritten by AfD (Agence Française de Développement), was a landmark event in the development of social enterprises in Kenya’s capital markets. One advantage of pursuing market financing is that it subjects social enterprise to the same regulatory and public scrutiny as commercial enterprise, and the same pressure to perform and comply. This sets these MRI-type social enterprises on the path to competing head to head for capital in the larger capital market. While MFIs would make ideal candidates to take a lead here, there is a question about how willing they are to raise finance from capital markets.

There is a marked difference between the cost of raising finance from capital markets and mobilizing deposits from MFI bank customers, ie low-income people depositing their savings who are also potential borrowers. When all the costs are added up – financial advisers, marketing, credit enhancement in the case of concessionary finance, and so on – raising money from capital markets tends to be far more expensive. Concessional credit lines on offer from foreign donors and development finance institutions tend to be foreign currency denominated and so mismatched with the local currency lending the MFIs are engaged in as well as expensive. There is thus a strong argument for allowing MFIs to focus on deposit mobilization as their primary source of funds for lending, with finance from the capital markets serving as supplementary financing after deposit mobilization has been exhausted, perhaps for longer-term needs such as branch expansion and related infrastructure.

MFIs should in fact make attractive candidates for debt or equity capital markets, given that they can often generate higher returns than conventional commercial banks. There are two main reasons for this:

  • Among the unbanked or underbanked lower-income groups there is far more demand than supply for banking services. The cost of money for the micro-borrower also tends to be higher.
  • The delinquency or default rate of MFIs, particularly where money is lent to groups rather than individuals, tends to be far lower than for middle to higher income retail and corporate clients – the primary client base of the conventional commercial bank.


The BRAC microcredit securitization structure (see p48) would be ideal for other developing country MFIs to help them finance long-term assets and diversify funding sources. There is a significant level of support – the FMO guarantee and KfW counter-guarantee, with Citibank and FMO taking up two-thirds of the certificates – which is necessary until the instrument gains acceptance within the broader capital market. It would be even better if Citibank and KfW were willing to accept below-market returns, thus lowering BRAC’s funding cost.

In Kenya, there are two MFIs that are on the verge of seeking a listing on the Nairobi Stock Exchange. Initiatives like the Kenya Social Investment Forum are an excellent and necessary lobbying platform for firmly establishing social enterprise within the fold of capital markets in Kenya. This is a model that should be taken on board by other developing countries.

Venture capital

Venture capital spawned what are today considered to be the new order in corporate America – companies like Microsoft, Google, Yahoo and eBay. One would assume that the same venture capital approach to stimulating entrepreneurship, perhaps with a bit of tinkering here and there, would already be well on its way in developing countries. Unfortunately it isn’t.

The genuine venture capitalist is a very rare breed in developing countries. The majority of fund investors that have entered equity markets under the guise of ‘venture capital’ have gone for the safer, lower-hanging fruit on offer in the private equity world. Investors aren’t willing to take the risk and make the effort to invest in start-ups and early-stage companies. Instead they prefer to put money into larger, later-stage companies, which are more established going concerns and less risky. Private equity investments in developing countries typically start at US$1 million and can go into the tens of millions of dollars, but there are many ventures that need financing of only US$100,000 to US$1 million. These ventures would also benefit from the mentoring and hands-on involvement that is typical of the venture capital approach, but few investors are willing to support them. This may be understandable, but it is also very unfortunate – this is a class of financing that is least available where it is needed the most.

Venture capital support for start-ups would be an ideal way to supply social equity capital markets with high-quality IPO (Initial Public Offering) candidates looking to sell their shares on a stock market for the first time and take their enterprises to the next level.

Financing low-cost housing – the next step

Sheela Patel (p43) describes how SPARC/Nirnan (SSNS) is using loan guarantees to enable them to borrow from mainstream banks – with the aim of being able to borrow from these banks without guarantees in the future. This is an extremely positive development, but could still more be done to increase the pool of funding for low-cost housing projects in developing countries? First, is it possible to develop projects that are economically viable for below-market investors.

One difficulty is that the slum dwellings that the low-income groups are relocating from are typically owned by slum-lords who are able to generate way above market returns on these housing units. Unless government is willing and able to enforce minimum but decent low-income housing standards, slum-lords have no incentive to upgrade these housing units or to give them up to developers who are willing to invest in them.

On the other hand, the demand for housing is strong and the supply of decent low-cost urban housing chronically short – as is the supply of financing for it. This is a low margin/high volume business, and one would imagine that it has all the makings of a good investment opportunity. It might particularly suit social capital market investors, for whom the investment will have a strong social attraction as well as the potential to make a decent financial return.

The challenge has been to tap the capital markets to create a sustainable pool of funds for long-term investment in the urban housing sector. Secondary mortgage markets have yet to take root in developing countries. Some of the constraints to securitizing mortgages[1] and creating tradable securities that can be traded on the stock market are:
Laws governing the transfer of assets and the perfection of rights to those assets have yet to be enacted.
Investors, and particularly foreign investors, lack confidence in the enforceability of laws in an effective and timely manner.
Laws regulating issues such as foreclosure and the ability to transfer or assign rights in mortgages are not robust enough to give confidence to investors.

The next step could be to securitize mortgages and create a larger, sustainable pool of housing finance. However, the primarily legal constraints mentioned above will need to be addressed first.

Parting thoughts


  • Developing countries cannot afford not to take the blended value approach. Legislation should play a role in encouraging all enterprises, social and otherwise, to adopt socially responsible reporting standards such as the Global Reporting Initiative.
  • Investment capital mobilized domestically will always be the most stable, least fickle source of funding for strong capital markets. This investor group should be the primary target for social enterprise investment. One difficulty is that small individual investors cannot afford the luxury of earning below-market returns.
  • Venture capital funds can target entrepreneurial, socially responsible ventures that can create wealth among the low to middle income groups. These social enterprises can then become ideal candidates for capital markets listings.
  • In developing countries, particularly in Africa and Latin America, faith-based institutions such as Christian credit unions and Islamic banks[2] present a social investor group with a potentially large pool of funding that could be amenable to earning below market returns or no interest.


1 The process of pooling similar financial assets into a security that can be transferred or delivered to another party. Loans/mortgages taken out by lower income groups to buy housing can be pooled to create a security against which a housing bond can be issued to raise funding to facilitate a greater number of loans for low-income home buyers.

2 Islamic law prohibits usury, the collection and payment of interest.

Tony Wainaina is a founder and managing partner of Origins Venture Capital Fund for Africa and a board member of K-Rep Bank. Email

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