Two of the most challenging questions in the nonprofit and social impact worlds are these: when does it make sense to start something new that could potentially spur innovation but also increase fragmentation, and, conversely, when is it wise to wind down an institution and pass on the accumulated financial and intellectual assets to others? Those of us who began, managed, and ultimately closed down the Deutsche Bank Microcredit Development Fund (DB MDF) have gained, over the last 23 years, some unique insights into these questions.
Below we summarize the Fund’s journey including its surprising decision to wind itself down despite having substantial assets. In an article published on July 21 in the Stanford Social Innovation Review, we detail lessons learned from the wind-down experience.
A New Fund to Grow Microcredit Globally
Many of the jokes about the limited value of philanthropy conferences have a ring of truth to them. Too many convenings result in little more than networking and resume building. But there are notable exceptions. The Microcredit Summit held in February 1997, which was spearheaded by Sam Daley-Harris of the RESULTS Educational Fund, is a clear example of the latter. It set a bold goal for expanding the outreach of microcredit, then a little-known economic empowerment tool, from 8 million to 100 million families worldwide in less than a decade (a goal that was in fact reached in 2006). It challenged the 2,900 delegates and the organizations they represented to come up with institutional action plans to support this global effort.
The delegation from Bankers Trust, led by Gary Hattem (one of this article’s authors), who at the time was responsible for social finance and philanthropy for the bank, returned from the Summit inspired to engage the firm in an effort to scale up the impact of the microfinance sector by increasing its access to more sustainable sources of capital.
Gary and his team had already built a successful portfolio of financings within the United States to advance opportunities for disadvantaged communities – largely driven by the bank’s obligations under the Community Reinvestment Act (CRA). The credibility his efforts earned domestically encouraged senior management to support the globalization of this anti-poverty commitment, even without the regulatory obligations. This support came with the understanding that the bank would craft an intervention that relied on its unique capabilities as a wholesale bank and would be structured to bring others to the table in a commitment to field building. All in all, it was a rather bold declaration a full decade ahead of impact finance’ and ESG investing taking hold amongst mainstream financial institutions.
After much deliberation, and generous guidance from some of the sector’s trusted intermediaries – including Grameen Bank, ACCION, Women’s World Banking, and CGAP, among others – a model evolved. BT created a new nonprofit entity that uniquely combined that capabilities and resources of the firm’s private bank client base with the support of the bank’s in-house structuring, risk management, cash processing, and foreign exchange capabilities and global footprint. The fundamental underpinning of the effort was to leverage the credibility and capabilities of a global financial services firm alongside a pioneering group of wealthy clients seeking to go beyond traditional philanthropy in order to enable the microfinance sector to grow to scale.
The effort had the benefit of Steven Rockefeller, part of the Bankers Trust Private Bank team, who enthusiastically embraced this new approach to leveraged philanthropy as complementary to his own family’s legacy of innovation in the sector. The plan was to announce the initiative at the Microcredit Summit Campaign’s follow-up conference in June 1998 which was presided over by Grameen Bank founder Dr. Muhammad Yunus and Gene Ludwig, then Vice Chairman of Bankers Trust.
The immediate next step in launching the Bankers Trust Microcredit Development Fund (which became known as the Deutsche Bank Microcredit Development Fund or DB MDF after BT was acquired by Deutsche Bank) was to assemble a board that included Scott Reardon (a BT client) as chairman and Alex Counts (one of the authors of this article who himself started Grameen Foundation as a response to the Microcredit Summit). Then came raising funds from clients in the form of grants and Program Related Investments (PRIs) and the bank’s own philanthropic resources as the initial source of capital for on-lending.
To keep the fund’s operating costs low, all of the deal structuring and compliance work was done pro bono by DB staff and volunteer board members. In order to ensure that the fund was sustainable, microfinance institutions (MFIs) were charged a modest interest rate averaging 3% on their loans to cover DB MDF’s modest operating expenses. The financing from the fund, structured as subordinated debt or guarantees, enabled the MFIs to borrow multiples of what they borrowed from DB MDF from commercial capital sources. In many cases, those commercial borrowings represented the first time these organizations accessed market financing – and opened the door for many future opportunities to access capital markets.
Between 1998 and 2018, the DB MDF was able to build a corpus of more than $4 million and more importantly, was able to make 124 loans totaling $18.2 million to 89 MFIs. A study of the first decade of the Fund’s lending showed that for every dollar it lent, more than $10 in new lending to low-income people was catalyzed. The funds from DB MDF and the credibility that came with its involvement often made the difference between an MFI being turned down by a commercial lender and closing a milestone transaction.
DB MDF Matures
From those heady start-up days though its two decades of existence, the fund inevitably faced – and ultimately overcame – a series of challenges. Interestingly, the absorption of Bankers Trust into Deutsche Bank did not present any major issues for the fund. In fact, it brought new resources and support. When available capital ran short of demand, new donors and co-lenders were identified in Europe that leveraged DB relationships there. When charity regulations in the U.S. required a more diversified donor pool, board members stepped up by contributing personally and raising money from friends and associates. When commercial capital started to become easier to access for established microfinance institutions, the fund pivoted and launched new products oriented towards innovative start-up MFIs operating in frontier markets such as Haiti and Afghanistan, and to help revive microfinance markets like in Nicaragua where they had suffered set-backs.
A Crossroads is Reached and A Path Is Chosen
By the mid-2010s, it was becoming clear that DB MDF was going to have to reinvent its approach and operating model in order to stay relevant as the scale of capital available to MFIs had grown exponentially and a new set of actors were entering the newly defined marketplace of ‘impact investing.’ There was the recognition that DB MDF ran the risk of continuing business without the transformational relevance that had defined its origins. As well as the industry having moved on, Deutsche Bank had built a portfolio of impact funds that were operating at a scale that required the full attention of it is Social Finance team, which meant less availability to provide on-going pro-bono services to DB MDF.
For it to continue, the DB MDF needed new products that were relevant to a market that it had helped change and also a new team (one that likely would have to be paid market or near-market salaries). There were clearly serious financial and operational implications of addressing these challenges.
Ultimately, two options were considered: revamping the fund with new products and a new operating model (including the need to generate significantly more revenue from interest or from donations), or closing down the fund and transferring its assets to a nonprofit organization whose financial, technical, and network assets could be used to maximize the impact and outreach of our fund’s reputational, technical, and financial resources. After much analysis and debate, the latter path was taken.
Over the course of 2018 and 2019, a strategy for winding down DB MDF was painstakingly crafted and executed. The first step was to write a request for proposals (RFP) that would allow nonprofit organizations around the world to propose how they would use the fund’s $4 million corpus that was a logical extension of their own strategy and also the traditions and values of DM BDF. A key criterion was the requirement that the capital base provided by DB MDF would be leveraged for reoccurring impact to advance market opportunities for the poor in the developing world and would not be eroded through program expenses.
With the help of Christian Novak of FMA - Frontier Markets Advisors, an extremely diligent consultant, and a handful of supremely dedicated Deutsche Bank employees, the board finalized the RFP, circulated it widely, reviewed more than 60 letters of intent, short listed 20 and later 7 of the strongest full proposals, and finally selected a winner: MCE Social Capital. The funds MCE received are being used not for business as usual but rather to enable this dynamic organization to scale up its promising pilot to support small and growing businesses with the potential for social impact – which we believe to be fully consistent with DB MDF’s commitment to push on the frontiers of economic change. As part of this process, both of us were invited onto the MCE Social Capital Small and Growing Business Loan Committee as advisors in order to provide support and oversight of what amounted to the lion’s share of the Fund’s corpus: a $3.67 million grant.
However, after seeing the high quality of the six runners up applications, the board committee overseeing this decided against a “winner take all” approach. Instead, each of the finalists received a $50,000 grant in order to compensate them for the time put into their proposals and help them get their exciting ideas off the ground. Those finalists were ADA Microfinance, Calvert Impact Capital/Refugee Investment Network, Convergence Blended Finance, Engineers Without Borders (Canada), Grameen Foundation, and Population Services International.
At the conclusion of the process, the board of directors and staff liaisons at Deutsche Bank had a celebratory luncheon in New York City and dispersed for the last time as a team. We did so confident that we had been effective stewards of the Fund’s assets until the very end, which included sharing the lessons learned accumulated during its two-decade journey with the broader development community.
We conclude with note of appreciation to our fellow DB MDF volunteer board members who were all actively engaged in the successful wind-down of this high-impact organization and passing the torch to MCE: Shaheen Ahdieh, Asad Mahmood, Ben Midberry, Michael Rauenhorst, Scott Reardon (our long-serving chairman), and Richard Thaler.