From the Classroom to the Field: Financial Innovation in the Social Sector

By Priya Parker

Given the financial crisis of the last two years, exploring “financial innovation” for the social sector and low-income communities seems a bit ironic.  And rightfully so.  The mismanagement of financial tools like credit default swaps and sub-prime mortgages have led to one of the worst crises in the last century.  Yet, as we have been studying in our MIT Sloan business school course, financial innovation is like fire, it can burn the house down, but it can also do a lot of good.

What happens when development folks and finance folks start thinking together?

This spring, three groups of MBA students from MIT Sloan have designed courses that explore some aspect of innovation and development.  Financial Innovation in the Social Sector explores the use, application and potential innovation of different types of financial products in the social sector, particularly in Southeast Asia.  The other two teams are examining Agriculture and Innovation in Brazil and India and Access to Capital in East Africa.

In line with MIT’s mans et manus mission (mind and hand), the course comprises of a 5-week curriculum discussing readings and talks from practitioners and policy-makers followed by a 2-week trip to Cambodia and Indonesia to learn about realities on the ground. The 21-student team is intentionally comprised of students with both development and finance backgrounds and we use our “finnovation” blog to capture and reflect on what we’re learning.

Through our curriculum and speaker-series, we’ve learned from Dilip Ratha about tools like the potential use of diaspora bonds in Haiti, from Christine Eibs Singer of E+Co about leveraging future carbon offsets to finance cook stoves in Ghana, about the GAVI immunization bond program, and the use of quasi-equity from Brian Milder at Root Capital that address access to capital in the “missing middle.”

Touch down in Cambodia

We have just reached Phnom Penh, Cambodia and will be meeting with 13 organizations in smaller teams in both countries.  In Cambodia over the next week, we will be meeting with organizations like Sky Health Insurance Program, HAGAR, Digital Data Divide, MAXIMA, CREDIT Microfinance Institution and International Development Enterprises. We will then spend one week in Indonesia, including two full days in the offices of Allianz and New Ventures in Jakarta learning about their micro-insurance program in the region and ways to attract “smart capital” into the region to help build SMEs.

Food for Thought

This post is the first of four for Beyond Profit in which we will explore different aspects of these questions and the strengths and challenges of financial innovation in this sector.

As a team we have been exploring the following questions, and would love to hear your thoughts and opinions on the following:

• What does moving “beyond” micro-finance look like?
• What tools can be transferred from another country’s experience and which tools (or aspects of tools) must be uniquely structured?
• What is the right threshold for investment decisions when balancing sustainability and profitability at the BOP?
• How do we know we’re moving the needle on community and economic development in a sustainable fashion?
• As the walls of strictly-for-profit and non-profit, government and business, and all the spaces in between begin to crack, how can a new generation of MBAs use the tools and lessons from the last to use financial innovation to create better lives and a more sustainable future?

Photo Credit: Students of the World