For most aid agencies, however, the reality is more difficult. The process of raising donations can be expensive, complicated and highly competitive. There is, however, an alternative to traditional fund-raising and payment methods for aid agencies that is gaining some traction.
In a global economic environment yielding very low return on investment, commercial micro-lending to the poor has caught the eye of private equity investors around the world. Since commercial banks are traditionally more interested in funding large investments where the revenue opportunities are greater and the risk of default lower, they tend to avoid this type of lending. This has introduced Microfinance Institutions (MFIs) to a previously unrealized source of funding: private equity.
The practice of offering collateral-free loans to low-income people at high interest rates is often criticised, yet it has gained greater acceptance since Bangladeshi economist Mohammad Yunus was awarded the Nobel Peace Prize for his work in this area. It is the ability to fund a wide variety of projects, like farming or hand-made clothing, in developing communities via international payment methods that holds the most promise. Popularity is growing to the point that ResponsAbility Investments AG, an asset manager specialising in developing economies, is forecasting the microfinance market to increase to around £11.25 billion by 2019.1
Currency Considerations for International Payments
Once funded, the money needs to flow through international payments to the recipients and, in the case of MFIs, back again. Occasionally, hundreds or even thousands of small international payments may be required at the same time. If an NGO doesn’t have the right payment methods in place, this can be quite a costly exercise. In addition to incurring high fees, the time consuming and expensive process of manually inputting a large number of international payments can be riddled with error. In response to this, many organisations are making bulk International payments using a file-upload facility that allows payment details to be exported from a CRM or accounting software package in just a few clicks. Some payment providers have the ability to integrate with another platform via an automatic sync, providing a secure online payment method for bulk international payments.
Saving money on processing time and fees can substantially lower administration costs, allowing a higher percentage of donated funds to reach the hands of those that need it most. The added benefit here is that lower administration costs can increase a charity’s attractiveness to donors.
One obstacle for private equity funded MFIs is that they expect to be paid back in their own currency (e.g. U.S. dollars, euros or Japanese yen), but are concerned about weak local currencies in developing nations depreciating against the world’s leading currencies. The usual FX risk management tools such as forward contracts and options are not always readily available in developing-nation currencies. To compensate for high levels of currency and default risk, interest rates for these types of un-collateralised low-value loans can be in excess of 20 percent.
Aid organizations and other NGOs may want to explore alternative international payment methods when sending funds abroad. Saving money on processing time and remittance fees can lead to lower administration costs, and the efficiencies and effectiveness gained through such international payments could enhance an NGO's attractiveness to donors.
- Microfinance Market Outlook 2015: Growth driven by vast market potential, ResponsAbility; http://www.responsability.com/funding/data/docs/es/10427/Microfinance-Market-Outlook-2015-DE.pdf