Business with a Mission: Comparing Microfinance and Impact Investing

Microfinance enables individuals to strengthen their families’ livelihood. Impact investing supports businesses designed to solve community challenges. This segment of our ongoing “Business with a Mission” series compares and contrasts how these models use business to foster meaningful change.

Insofar as microloans have enabled millions of individuals to start or grow a business, microfinance, the more mature of the two industries, has exemplified to many the idea that business can be a force for social good. Most microenterprises sell products or services already familiar to their customers: baked goods, household essentials, small retail, cosmetics, crafts, etc. In turn, the microentrepreneur lifts his or her family out of poverty, generates employment and disseminates seeds of self-reliance.

Essentially, microfinance’s mission of social inclusion offers financial services to “unbanked” populations. Its impact lies in the strengthened livelihood of microentrepreneurs and their families. Impact investing, instead, involves entrepreneurs creating businesses that provide solutions to specific social or environmental challenges in their communities. Unlike in microfinance, these enterprises’ impact stems not from the change in the quality of life of the entrepreneur, but from their effectiveness in solving the specific challenges the businesses set out to address.

SalaUno, an impact enterprise, aims to eliminate preventable blindness in Mexico. How do they achieve this? They localized the Aravind Eye Care System model, which since 1976 has seen 32 million patients and performed over 4 million mostly low-cost or free eye surgeries in India. SalaUno addresses its sustainability through a tiered pricing system and an efficient use of technology and human capital. SalaUno’s impact—the restoration of livelihood and productivity for individuals blinded by cataracts, glaucoma, or retinopathy— depends on their efficiency and effectiveness in acquiring and treating large numbers of patients.

BusinessWithAMission2In Lima, Peru, over 3 million people use unhygienic pit latrines daily, a clear threat to public health. X-Runner, a sanitation business, installs sleek hygienic toilets in homes lacking sewage lines or septic tanks. Customers pay a monthly subscription for X-Runner to collect dry solid waste on a weekly basis, which X-Runner converts into nutrient-rich compost. Its success as a business and its ability to improve community health depend on its capacity to effectively obtain and treat human waste while generating cash flow for these services.

While TRF continues to support the microfinance industry, we also aspire to use impact investing tools like recoverable grants to support the growth of businesses whose operations directly address pressing challenges. If you would like to support our work in this area, contact TRF directly.

 

By Gian Paolo Einaudi, TRF Director of Social Investments