Loaning Your Money for Impact Can Also Generate Income

22nd in a series of excerpts from the book The HIP Investor (John Wiley & Sons, 2010). See other articles in the series here.

Fixed income investments play an important role in investment portfolios, generating regular income with reduced risk as compared to equities, although not immune from it of course. Within the family of fixed income investments there are four categories where you can seek to be more HIP, with the potential for both positive human impact and profit:

1) Fixed-income mutual funds
2) Pooled loan funds
3) Microfinance funds
4) Peer-to-peer loans

Each of these different categories of fixed income investments have their own traditional and evolving characteristics, and each of them have the opportunity to enhance human impact and potential profit.

1) Fixed-Income Mutual Funds

Established in 2000, the Domini Social Bond Fund (DSBFX) is a mutual fund of intermediate-term, investment-grade bonds from government and corporations, with the intended human impact to boost home ownership. Hence, the fund holds many Fannie Mae and Freddie Mac loans. In addition, the fund seeks to support corporations serving underserved communities by providing access to banking, improved education and health care or redeveloping deteriorating areas.

Up to 10 percent of this fund goes directly to community-focused investments, which may carry higher credit risk and default. Like Domini’s equity indexes, this fund has tended to under-perform the benchmark in up markets, but do better financially in down markets. While not 100 percent HIP because of this financial performance, each component of the fund can be rated for its human impact.

Another fixed income mutual fund that allocates a subset of its portfolio to high-impact fixed income, specifically microfinance, is the equity fund Pax World Women’s Fund (PXWEX). Up to five percent of the fund goes to microfinance loans that support women entrepreneurs around the world while seeking to generate positive financial return. This is a very HIP approach and adds higher impact and potential profit for a small fund allocation.

2) Pooled Loan Funds

RSF Social Finance CEO Don Shaffer advocates that today’s financial investments, many of which are “complex, opaque, and anonymous,” need to move to being “direct, transparent and personal.” RSF Social Finance (formerly Rudolf Steiner Foundation), based in San Francisco, is a nonprofit financial services organization that offers investing, lending, and giving options for its clients. Shaffer said in September 2009, that RSF’s assets under management increased 10 percent over the previous year, with few redemptions from investors, unlike many other financial management firms.

Among its offerings for investors, RSF manages two loan funds, one is accessible to all investors (RSF Social Investment Fund) and another is mainly targeted at high net worth investors (RSF Mezzanine Fund). As with the more HIP banks discussed in the previous feature, RSF’s purposeful drive is to make loans to organizations that “improve the well-being of society and the environment.”

In the loan-process evaluation, RSF highly values firms with sustainable design of products, a fair-trade production system, and even a “capital structure and existing financial partners that reflect commitment to social good and environmental sustainability.” Everyday investors can put in as little as $1000 to the Social Investment Fund, and the financial returns have been steady over time with low risk of default. Since 1984, the total amount of loans made to enterprises, both for-profit and non-profit, has been approximately $200 million.

RSF offers an innovative fund that seeks to deliver human impact and profit. The capital invested in its portfolio can vary among debt, warrants, revenue participation streams, and fee notes. The intent is to help growth companies that are cash-flow positive increase their impact and overall scale, seeking an attractive financial return as well. The criteria for companies is posted here.

3) Microfinance Funds

“We believe that microfinance is a financially scalable and sustainable model that can provide both attractive returns for investors, as well as significant social impact by improving the lives of clients it reaches,” says Jim Bunch, then director of microfinance investments for eBay founder Pierre Omidyar’s investment company, Omidyar Network, which has a core focus in microfinance. (Note: Author Paul Herman worked at Omidyar Network as an investment strategist in 2005-2006.)

Microfinance, which offers loans with interest to micro-entrepreneurs around the world, can be a big financial market that enables positive impact. While approximately $25 billion in capital for microfinance is actively deployed today, Deutsche Bank estimates that the total capital needed to serve all available micro-entrepreneurs to work themselves out of poverty could be $250 billion.

These quantifiable results include more equal access to capital for women and low-income citizens, the increase in education and literacy among them, and healthier lives lived through increased access to clean water and affordable health care.

Blue Orchard Finance and Dexia created one of the first microfinance-focused funds for professional investors. In 1998, the partners raised $40 million to reinvest in microfinance institutions in Asia, Africa, and Latin America. Since its launch, the Dexia Micro-Credit Fund (DMCF) has been advised by Blue Orchard, based in Geneva and New York. The fund has served 100 microfinance institutions (both for-profit and nonprofit) across 34 countries with more than $500 million in loans, and these low-income entrepreneurs pay back 98 percent of the time. Additionally, Dexia’s 3 percent share of the 9 million entrepreneurs supported is estimated at 300,000 people who have built a new income and asset base.

Today’s fund serves borrowers that are 43 percent rural and 52 percent women. The fund’s top five countries for loans placed are Bosnia-Herzegovina, Colombia, Ecuador, Ukraine, and Georgia. Annual returns on this fund, which are available in U.S. Dollars, Euros, and Swiss Francs, have ranged from 3 percent to 6 percent annually. But the management fees of 2 percent and potential loads of up to 4 percent offset the financial returns. Blue Orchard has partnered with Deutsche Bank, Citigroup, Credit Suisse, and Bank of New York-Mellon on subsequent investment funds, and won a Financial Times award in 2008 for the best sustainable investment deal with Morgan Stanley.

A listing of microfinance institutions (MFIs) worldwide can be found at This information hub tracks the performance details, both financial and social, of microfinance funds worldwide, both for-profit and nonprofit. also tracks the total number of micro-borrowers and value of microfinance loans around the world. “Microfinance is an ingenious idea because, in a way, it acts as the Federal Reserve for entrepreneurs globally,” says Jim Torrey, a professional investment fund manager and adviser to Washington D.C. based MicroVest. “If you look at the numbers, they are really extraordinary—the number of jobs created and people helped. I love the fact that microfinance is not a handout, but enables individuals to take ownership of their lives and become independent and entrepreneurs.”

4) Peer-to-Peer Loans

When banks give loans, they evaluate customers based on the likelihood of repayment. What if you could apply for a loan and be evaluated not only on opportunities for repayment, but the propensity for human impact?

Prosper Marketplace Inc., created by eLoan co-founder Chris Larsen does just that. Prosper Marketplace offers U.S. investors the chance to lend money directly to American borrowers. Since 2006 it has served more than 1,320,000 members and facilitated $335 million in loans. Loan-seekers post their names, photos, and purpose for the money, which is limited to $25,000. Everyday citizens can become lenders to offer capital in amounts as low as $25, which are aggregated among multiple lenders and act as a syndication of that loan.

Lenders can view validated credit scores (which need to be above 640) of those borrowers. Prosper uses a range of data to create an additional “Prosper rating” so the marketplace supports informed decisions. Borrowers finance everything from startup ventures, including those with human impact, to the refinancing of school loans, or recovery from financial disasters, including the cost of health care treatments. The yield to investors (the interest rate less the average default rate) in September 2009 ranged from 7 percent to 13 percent, depending on the risks assessed. Prosper lenders can also automate the process by purchasing a portfolio that matches their risk profile, and trade “notes” of previously funded loans.

As we move through multiple asset classes in a portfolio, the next feature will discuss the venture capital and private equity firms actively seeking human impact and profit. These VC and PE investments fuel the progress of sustainably focused companies, inventors, and investors who are helping solve many of our most pressing problems, as well as transform traditional business priorities to include human, social and environmental impacts while seeking profit.

To navigate this series, please use this table of contents.


HIP Investor supports Spring of Sustainability.  For three months, the Spring of Sustainability will feature 100 “stars” of sustainability, from Jane Goodall to Bill McKibben to Van Jones, in free interactive teleseminars throughout the spring of 2012. Live events will also be held in cities across the globe.


R. Paul Herman is CEO and founder of HIP Investor Inc. Herman is the author of “The HIP Investor: Make Bigger Profits by Building a Better World,”  published by John Wiley & Sons in 2010. Herman is a registered representative of HIP Investor Inc., an investment adviser registered in California, Washington and Illinois.

NOTE: This feature, excerpted and adapted from the HIP book, is not an offer of securities nor a solicitation. The information presented is for information and education purposes, and is not an investment recommendation. Past performance is not indicative of future results. All investing risks losing your principal. The author may invest in the companies mentioned above, and several are included in the HIP 100 Index portfolio. Details and full disclosures are at

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Photo by Ben Fredericson/flickr/Creative Commons

R. Paul Herman* created the HIP (Human Impact + Profit) methodology for entrepreneurs, companies and investors worldwide to realize how quantifiable sustainability can drive financial performance.Herman advises investors, designs HIP portfolios, and manages the HIP 100 Index -- all applying “The HIPScorecard” featured in his 2010 book (The HIP Investor; Make Bigger Profits by Building a Better World; John Wiley & Sons), Fast Company magazine, business school curricula, and at’s financial acumen was honed at the Wharton School and McKinsey & Co., and he accelerated social entrepreneurs at and Omidyar Network. Herman has advised leading corporations (including Walmart and NIKE), family offices and foundations on how to be more HIP. His insights have been quoted in the Wall Street Journal, The New York Times, Fortune, Forbes, BusinessWeek, and on CNN, Reuters, and CNBC.* R. Paul Herman is CEO and a registered representative of HIP Investor Inc., an investment adviser registered in California, Washington, and Illinois.

One response

  1. Very interesting article! Microfinance, that offers loans with interest to micro-entrepreneurs around the world, can be a big financial market that enables positive impact. Really? When I started my small business I was very sad and depressed, it was no income for half year, my parents advised me to close my shop but I stayed afloat. But I got some help, I decided to get loans from direct payday lenders only. But you must be careful because you can have debt burden!

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