Can Impact Investment Be an Effective Tool to Reduce Poverty?

Story bubbles on world map
Source: Ashoka

As a new field, impact investing has tremendous potential to address the challenges of poverty. The question is not whether it can, but whether it will.

Dealing with entrenched poverty requires new solutions. A narrow focus on economic growth was never enough. And today, with increased concentration of wealth, the benefits of prosperity exclude too many.

Further, it distracts us from asking the central question: how do we animate market dynamics to address social challenges? How can we create markets that effectively play their fundamental role of creating value in society?

Answers to these questions will require fundamental, but often eminently achievable, changes. That is the primary role of the social entrepreneur: to change the basic systems of our societies. And social entrepreneurs’ innovative new approaches often show that the barriers to progress on entrenched social problems are not impossible to overcome.

For example, it is easy to assume that the working poor lack the material assets to improve their circumstances. But Ashoka Fellow Jean Claude Rodriguez Ferrera’s Association of Self-Financed Communities shows that the economically disenfranchised often lack the basic rights and access to financial services necessary to put their assets to work. The group’s Self-Managed Financial Communities (CAFs) provide immigrants access to flexible credit that enables them to cover basic needs while they focus on larger ambitions. CAFs also encourage saving money.

To join a group, each member is required to buy “stock” in the group; the amount purchased determines his or her capacity for credit. This capital allows each member to request small loans for which he or she pays a certain amount of interest determined by the group. The interest paid by the members who request loans provides a profit for the other members of the community.

Today over 3 million people participate in CAFs. Because the community profits more when CAF members use the money effectively, CAFs have helped align community interests. As a result, community members are often willing to provide CAFs with more assets than can be put to use.

This case and many others—such as Steve Rothschild’s Human Capital Performance Bonds in the United States—have demonstrated that the challenge is a lack of access to flexible financial services, not the lack of assets.

Impact investing has the potential to spur and leverage innovations that address this fundamental challenge. But to realize the promise of impact investing, we have to avoid the temptation of taking a low-risk, investor-centric approach.

To do this, we must create a financial environment that favors value-based entrepreneurship and fosters innovations through the wise allocation of philanthropic and investment capital.

Editor's note: This post was first published in Americas Quarterly as part of the "Ask the Experts: When Profit Meets Social Purpose" series.