In the 1990s, microcredit became popular in developing countries, receiving support from international bilateral aid and development agencies. The concept of financial inclusion has gradually garnered more attention, the International Aid and Development Fund (ICDF), Taiwan’s official aid agency, has long adopted microcredit programs, helping developing countries reduce poverty while promoting economic mobility and growth. This model includes providing financing to local microfinance institutions, such as cooperation between Haiti and international financial institutions, and assisting microcredit lenders through government loans, as in Gambia.
Since 2000, the concept of microcredit has changed. The ICDF is increasingly focused on two aspects of its model. The first is the soundness and stability of financial institutions. Governments generally understand that financial institutions require a sufficient operating environment and regulatory assistance to improve efficiency and achieve sustainable, independent management. The second consideration is the financial independence and soundness of customers. Customers should not only have access to basic financial services, but also the ability to manage savings, insurance, payments, and remittances, as well as emergency expenses.
The concept of financial inclusion has developed in diverse ways by following international development trends and emerging technological applications. Development finance successfully utilizes the “dual bottom line” concept of impact investing, which promotes social and environmental issues such as community well-being, environmental sustainability, and social justice, besides just the maximization of financial returns. Furthermore, the 2015 United Nations Addis Ababa Action Agenda advocated for the use of private sector capital to fill in the funding gap of Sustainable Development Goals (SDGs), allowing development finance to complement private sector capital. Development finance institutions can use private sector capital to de-risk investment, as catalytic capital, or as a blended finance tool to promote investment in the economic and social construction of high-risk developing countries. Therefore, ICDF aid is no longer limited to loans or technical cooperation; instead, ICDF is working with impact investors and private sector partners in more diverse and flexible ways. The following two cases are based on actual experience.
Blended financing of Women’s Livelihood Bond 3
In 2020, the U.S. International Development Finance Corporation (DFC) and the Singapore Impact Invest Exchange (IIX) jointly issued the third South and Southeast Asian Women’s Livelihood Bond (WLB3, a 4-year bond listed on the Singapore Exchange (SGX) sustainable bond board that matures in December 2024). WLB3 connects development partners and private sector capital to support social inclusion and women’s economic empowerment.
Though WLB is planned, issued, and managed by IIX, the ICDF and DFC each provide WLB3 with subordinate loans and guarantees. This advances both Taiwanese and international private sector investment in WLB, increasing the financial resilience of South and Southeast Asian women through sustainable livelihoods.
Because the public sector has limited resources, private sector resources have also been mobilized. Using this hybrid mechanism, WLB used the stock market to gather private sector investment from those interested in women’s economic empowerment. Market investors are catalyzed to buy credit enhancement tools, such as credit guarantees and subordinate loans, supplied by official development institutions or international charities. The funds raised are then loaned to financially sound microcredit institutions and impact enterprises (IEs, influential companies that focus on corporate social responsibility), advancing women’s empowerment from economics and health to sustainable agriculture and climate change. ICDF has played an important role in WLB’s innovative financial structure, mobilizing eight private sector investors to expand the project scale.
IIX created a proprietary impact assessment tool and quantitative methodology to calculate the social return on investment (SROI) for a given WLB beneficiary. It considers each microcredit institution’s or IE’s mission objectives, financial feasibility, and social/environmental benefit, then quantifies the impact of each organization after receiving WLB funds.
WLB3 was issued in December 2020, raising a total of US$24.7 million in private sector funding (the ICDF has a leverage ratio of 8), which has been lent to Indian, Filippino, Cambodian, and Indonesian microcredit institutions and sustainable agricultural businesses. This has provided women with financing, savings, insurance, and other financial services and skills, helping them obtain raw materials and reach new markets. The number of women beneficiaries has reached 260,000, with an SROI of US$4.31, exceeding the targets. Further, the borrowing institutions have no overdue payments in the plan implementation phase. During the implementation period, WLB3 assisted women to create approximately US$76 million in income value. Women’s incomes increased an average of about 25-30% every year, strengthening economic empowerment and improving livelihoods.
Microfinancial holding companies
Gojo is a special multinational microfinancial service company. Headquartered in Japan, its business covers India, Tajikistan, Sri Lanka, Cambodia, Myanmar, and other countries. It has helped eight microfinance institutions develop inclusive services, serving primarily women from rural low-income households (defined as making an average of US$1.90 to US$5.35 per day). So far, it has more than 2 million low-income customers world-wide, of which 95% are women and 85% are from remote rural areas. When Gojo was first established in 2014, its mission was to promote financial inclusion through private sector investment, aiming to provide high-quality and affordable financial services to 100 million customers globally by 2030, becoming the World Bank of the private sector. At its 10-year anniversary assembly in early July, CEO Taejun Shin told shareholders that despite ridicule and skepticism of this goal, Gojo has not been swayed and will continue to promote affordable and inclusive financial services to improve the livelihoods of women and other disadvantaged groups.
Globally, financial inclusion is a competitive industry, and each institution has its own features and limitations. Local cooperatives or NGOs funded by grants from international aid organizations or development agencies focus on small-scale operations in specific villages and towns, but lack the resources to improve technical capabilities. Commercial non-bank financial institutions have large scale and low cost, but face challenges in technological innovation and overseas expansion. Specialized fintech companies provide some basic services, such as administering microlending via smartphone, but despite their positive user experience and potential for growth, they have higher default rates and a low conversion threshold. Instead of these models, Gojo operates as a holding group, combining the advantages of scale and digitalization to implement localized operations, which differentiates it from other competitors on the market. Recruiting from all over the world, it has experience in investment banking, finance, microfinancial operations, and fintech. To maximize its cost-effectiveness, it invests in high-quality local microfinance institutions, expanding its global presence to increase the number of loan and asset management customers. At the same time, it also focuses on integration to enhance the management of its subsidiaries. Through systematic supervision, it ensures good governance and operational implementation, and it is continuing to improve its digital applications. In addition to this traditional integration, Gojo also adjusts its management for optimal operational efficiency according to local market characteristics and conditions, reducing default and fraud risks.
Measuring social benefits
Gojo also attaches great importance to measuring its social benefit, ensuring that their financial inclusion goals are being met while enhancing the confidence of investors and capital markets, forming a virtuous cycle. When Gojo assesses its subsidiaries, besides doing its commercial, legal, and financial/tax due diligence, it also does social due diligence. Subsidiaries must undergo social efficiency audits and correct any discrepancies according to established procedures. In addition, Gojo requires all subsidiaries to comply with consumer protection principles and obtain relevant certifications. The results of these measures are disclosed in annual impact reports.
Gojo’s operating strategies, good governance, and emphasis on social benefits have been recognized by impact-minded investors. Besides local Japanese investors and international institutions, its shareholders also include Japan’s official investment fund Cool Japan Fund, the Japanese development aid institution JICA, as well as Japanese investment and private wealth funds. In 2024, ICDF will join this private-public sector partnership to become an investor in Gojo. By committing itself to financial inclusion in developing countries, Taiwan is demonstrating its contribution to the SDGs.
through preferential loans and equity investment, ICDF lowers the financing costs for private sector participation in financial inclusion projects, making the overall project bankable and investable, and generating both financial and social benefits. Therefore, in regards to development aid, financial inclusion should integrate public and private sector resources to exert financial leverage, demonstrate the power of social inclusion, and promote virtuous cycles. ICDF is a leader in financial inclusion, charting a path for Taiwan’s private sector to fulfill their social responsibilities through investment.