Social Finance, Impact Investing & Insurance

(3-Credit Course from Finance Area)

by HKPradhan
Introduction Social finance deals with savings, credits, pension, insurance and other forms of financial products that help the asset poor households and the marginalized communities, including microentrepreneurs,engageinincomegeneratingactivitiesandtocopewithrisk.Providing businessandemploymentopportunitytothepopulationatthebottomofthepyramidrequire finance. Widening financial market access to these vast segments requires the design of innovativefinancialcontractsandinstruments,unbundlingriskoflendersaswellasborrowers, and most importantly credit enhancements and guarantees. Such innovations in financial contract design and risk unbundling can have tremendous potential for financial inclusion, ensuring equity and, at the same time, enhancing confidence among formal financial institutions to lend asset poor. Social Finance therefore is concerned with the design of financing mechanism and regulations which would cater to the financial needs of the asset poor,microentrepreneurs,andsocialventurestartups. Scope: Thiselectivecourseintendstointegratethebroaderareasoffinancethathaveimplicationsfor socialsectorinvolvingassetpoor.Thecoursewilladdressbroadlythefollowingissues: How do poor households organize their savings and consumptions, and meet their deficit spending, make investment decisions? What are the specific characteristics of cashflowsofassetpoor(onthedemandside)? And how are traditional financial systems meet such demands (basically supply side perspectives,toserveonlyasaprelude)? WhataresomeoftherecentinnovationsinthemarketsforthePoor,thatfacilitaterisk unbundling,andmadefinancingviablefortheformalstructure?

Whataresomeoftheinnovationsintroducedbythemodernfinancialsystemsthathave potential applications in financial inclusion? (micro insurance, securitization, weather insurance,etc) Whatarethefinancialmarketinnovationsthatsupportsavings&Investmentsofasset poorhouseholds? Howdoinnovationsintransactionbankingspaceenablespoortohavebroaderfinancial marketaccess,whileatthesametimereducingtransactioncosts? How do companies in social sector create sustainable social value while working profitably? What are the governance issues, board composition, disclosures, and fiduciary responsibilitiesofcompaniesthatareinthesocialinvestingspace?

Pedagogy: Thecourseisbuiltaroundconceptualrigor,internationalbestpracticesand,mostimportantly, Indiancasesituations.Studentspresentcasesituationsingroups,andpreparefinallyafinancial designinasocialenterprisesetting. Topics: 1. FinancialMarketArchitectureandAccesstoPoor Introductoryoverviewofdemandandsupplysideissuesofthefinancialmarketsforpoorare discussed(onthesupplyside,contrastingformalvsinformalcreditmarketsandonthedemand side,understandingthecashflow/budgetingpatternoflowincomehouseholds). PortfoliosofthePoor,byDarylCollins,JonathanMorduch,StuartRutherford,andOrlanda Ruthvan,PrincetonUniversityPress 2. FinancialInnovationsasMarketAccess Herewedelveonpropoorfinancialinnovationsthathavegonebeyondmicrocreditbutwith commercialization,propoorurbanfinance,lowincomehousingfinance(e.g.micromortgages), microinsuranceproducts;etc. BuildingHouses,FinancingHomes:IndiasRapidlyGrowingHousingandHousingFinance MarketsfortheLowincomeCustomer,MonitorInclusiveMarkets(2010).

 3. MicroEnterpriseFinancingInnovations We examine the finance constraints faced by microenterprises, the institutional legal constraints restricting access to finance, Financial market innovations supporting SME finance(securitization,leasing,factoring,valuechainlendingwithcasestudies);financingstart upandventurecapitalfund,creditguaranteemechanisms,etc 4. ImpactInvesting:ValueCreationattheBottomofthePyramid Hereweseektoexplorethestrategiesadoptedbyinvestorsinsocialenterprisescreatedvalue, bypromotinginnovations,thedifferenceimpactinvestingmakesascontrasttostylizedventure capitalandprivateequity,balancingtheneedsofinvestorsaswellassocialentrepreneurs. BridgesVentures:InvestingforImpact,CaseStudiesacrossAssetClassesMarch2010; AugustinLandierandVinayNair,InvestingforChange,OxfordUniversityPress,Dec2008 5. VentureCapitalFunds,InitialPublicoffersandEquityInfusion Examinehowfinancecompaniesinsocialsectorcouldcreatesustainablesocialvaluewhile workingprofitably,oriftheprofitabilityissuewasoverstretched. NothingVentured,NothingGained:AddressingtheCriticalGapsinRiskTakingcapitalfor Social Enterprise,Jed Emerson, Skoll Centre for Social Entrepreneurship at Oxford SAID BusinessSchool; AcumenFund:ValuingaSocialVenture:MichiganBusinessSchool;InitialPublicOffers:SKSin India,HavardBusinessSchoolCaseStudy. 6. StructuredProducts,CreditEnhancementsandGuarantees,Microloansecuritization, structuringdealsandlegalissues CaseswilldrawnextensivelyfromICRAandCRISILDatabase 7. CapitalMarkets&AccesstoFinance Wediscussherealsothefinancialinnovationstosupportsavings&Investmentsofassetpoor households,frameworkformanaginginflationrisks,etc,drawingfromglobalaswellasIndian

experience.Wealsodrawevidencefromfieldstudiesastohowpoorsaveandinvests,with typicalriskreturnanalysis. MicroSIP(SBIMF Chhota SIP fund), MicroPension(context of Indian Pension Reform); investmentlinkedinsuranceproducts;GDP&InflationIndexedBonds(caseofRBI2003Inflation IndexedBond);communitybasedhealthmutualfund 8. InvestmentandInsurancelinkedProducts Transition from a creditbased to creditinsurance based financing arrangement, thereby includingmicroinsuranceproducts. 9. WeatherDerivatives&CropInsurance WeatherinsuranceinAgriculture,LivelihoodRiskManagementusingCropInsurance;Index BasedInsurancearediscussed,withvaluationofinsuranceproductsworkings. IndexbasedweatherinsuranceadoptedbyBASIXICICILombard;BarishBimaYojana;etc 10. CommodityFinanceandRiskManagement We also discuss the Indian commodity derivatives markets and how have they benefitted farmers. CasessuchaseliminatingmiddlemeninruralmarketssuingtheITCeChoupalInitiative(Harvard Business School Case Study); Price dissemination and Commodity Hedging model of Gramin SuvidhaKendra(MCXCaseStudy)arediscussed. 11. TechnologyInnovationsforFinancialInclusion Wediscussheretheinnovationsintransactionbankingenablingpoortohavefinancialmarket access;whileatthesametimereducingtransactioncosts. DiscussedbydrawingcasesfromFINO,MicroSave,MPesa(Kenya),etc. 12. Credit Rating Models of Social Finance, Credit Scoring Model, Credit Information for Microenterprises,SMEExchangeinIndia Here we also discuss the distinct features of micro loans such as unique borrower profile, dependenceongroupcreditbehaviorandrelativelylowerratingoforiginators,etcthatdefine uniquerisksfacedbytheinstitutions.

Scoring:TheNextBreakthroughinMicrocredit?MarkSchreiner.CGAPOccasionalPaper(2003) 13. CorporateGovernance&SocialFinance Weaddressherethegovernanceissues,includingboardcomposition,disclosures,andfiduciary responsibilitiesofcompaniesthatareinthesocialinvestingspace.Wecompareandcontrast withthegovernancemechanismsofprivatelisted/unlistedcompaniesasperSEBIGuidelines. SKSMicrofinanceValuation/PostIPO 14. PreparingBPlan Here we understand the practical issues of leveraging formal finance in a social enterprise setting, combining market based financing, with/out guarantees and assistance. Students prepare investmentready proposals, possibly taking guidance from social entrepreneurs, use traditionalprojectfinancing/valuationskillsthattheyareprovidedinCAPEX/Valuationcourses. Thisportionmaybecombinedwithapresentationfromaguestfaculty. EvaluationCriteria: MidTerm: 15% EndTerm/Interview 35% CasePresentation(Group): 25% Project/BPlan(Individual): 25% References/Readings Thecoursewilluseseveralpublishedandinternetbasedresources,casestudiesand experiments,andpolicyrelateddocuments.