The Mansion at Glen Cove on Long Island’s Gold Coast, with its landscaped gardens, a wellness spa and a Georgian-style home that once served as Herbert Hoover’s summer White House, was an unlikely setting for a conference about solving world poverty. But here, in the spring of 2018, representatives from the Rockefeller Foundation, Morgan Stanley and Apollo Global Management gathered to talk about climate change and inequality.
During one session of the Global Impact Investing Network annual meeting, former JPMorgan Chase & Co. investment banker Desiree Fixler proposed using Wall Street financial engineering to benefit some of the world’s poorest. A structured-credit specialist, Fixler described a plan to attract institutional investments by pooling microfinance loans into a tradable financial product. It would provide the poor with resources to help themselves, she said, while delivering investors a reasonable return. Fixler’s idea was so well-received she was invited to discuss it with a top official of the US Overseas Private Investment Corp., a government agency known as OPIC whose mission was doling out taxpayer funds to encourage development.
Fixler’s idea hit the market in July 2019 — a $175 million collateralized loan obligation, or CLO, that channeled money to 26 microfinance and small-business lenders in 18 countries, including Botswana, Indonesia and Peru. OPIC put in $131 million. But Fixler’s rosy predictions worked out better for the bankers, lawyers, consultants and middlemen who make up the microfinance industry’s infrastructure than it did for many of the borrowers. At least three companies that received funding have been accused of abusive sales and debt-collection practices. Others charged annualized interest rates as high as 120%.
Although the financial firms and development banks Fixler worked with told investors they would weed out all but the most socially responsible companies, the vetting was largely outsourced to the Smart Campaign, an industry-funded initiative that rarely censured lenders publicly for engaging in predatory collection practices or charging excessive interest rates. One firm that lost its Smart accreditation received funding from the CLO anyway.
While predictions that microlending would alleviate poverty were downgraded years ago to the more modest goal of financial inclusion for the unbanked, even that has proved largely unattainable. Instead, the drive for profit and the billions of dollars in investments have transformed the industry into an increasingly commercialized one, where borrowers’ poverty is compounded by debtors’ prisons, coerced land sales and sometimes even suicide, according to a Bloomberg News investigation.
Most microlenders don’t engage in such practices, but even those that charge reasonable interest rates and strive to help the poor have produced little evidence of a long-term positive impact, according to recent studies. Alternative methods such as credit unions and village savings associations that provide a more effective path out of poverty but aren’t as profitable have received less attention from investors. Despite microfinance’s flaws, development banks and foundations continue to pump record amounts into the industry — more than $50 billion of committed funds in 2020, industry data show.
Fixler’s CLO was just a rivulet in that flood. She had helped create one of the first microfinance CLOs in 2006, a $100 million deal arranged by Morgan Stanley and investment manager BlueOrchard Finance Ltd. It was the same year that Bangladeshi economist Muhammad Yunus won the Nobel Peace Prize for his work lending small sums to poor women to boost development. But optimism about building a trillion-dollar industry soured during the financial crisis. Fixler set out to jumpstart the movement in 2018 with her new investment vehicle.
“We wanted to take this niche market, generally funded by the public sector, and make it mainstream,” says Fixler, who got into impact investing after reading a book by Yunus. “Where else are you going to get the scale and the power? You must tap the capital markets. You have to bring in institutional money.”
A CLO is a pool of loans sold in tranches with varying interest rates depending on how much risk investors are willing to take. It’s similar to a collateralized debt obligation — the instrument that helped spark the financial meltdown in 2008 — but it packages corporate loans instead of subprime mortgages. In Fixler’s deal, the target returns would flow from the payments made by shop owners in Cambodia and farmers in Peru.
The firm Fixler was then consulting for, Swiss impact investor responsAbility, hired JPMorgan to help structure the deal. ResponsAbility would serve as the middleman. It chose the lenders, distributed funds, collected money and disbursed interest payments to investors, including OPIC. RepsonsAbility was promised as much as $4.9 million in upfront and servicing fees, while OPIC would be paid $393,000 in return for its investment, according to the offering document. JPMorgan’s fees weren’t disclosed, and the bank declined to comment about how much money it made. But a spokesperson for the bank said microfinance organizations “broadly speaking do a good job of lifting up communities and creating opportunities.” If there are occasions where borrowers are treated unfairly, the spokesperson said, “the correct regulatory authorities should address them and we would certainly be supportive of that.”