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No trade-off between impact and financial returns in emerging markets

Juan Garcia Alvarez - July 27, 2017

Impact investing and financial returns in emerging markets

Having recently spoken in the opening debate at the “Impact Investing in Emerging Markets - Capital Allocation for Sustainable Development” conference organised by Palladium, it’s clear there are increasing numbers of impact investors seeking to deploy capital in order to achieve the SDGs and new asset managers seeking to enter the field without sacrificing financial returns.

It’s critical to consider how the two can work together in emerging markets for the benefit of all. And, indeed, there does not need to be a trade off.

No trade-off exists when pursuing a SDG with a scalable investment thesis

Companies with impact embedded into what they make or what services they provide, often end up generating an ecosystem around themselves that impact their communities, whilst offering attractive returns to investors.

Of course, there are exceptions to this, but for instance, we at Prodigy Finance are working to create the first cross-borderless student platform for international post-graduate students. To date, we’ve helped over 7,100 students from 127 countries borrow over US $323 million to attend top-ranked business schools and universities, such as Oxford, Insead, Harvard, LBS, Wharton, INCAE in LATAM, NUS in Asia.

These are aspiring, talented middle class students; 78% come from emerging countries, like India, Brazil, China, Colombia, and Nigeria, who are pursuing their MBAs, Masters in Engineering, LLMs, and MPAs outside their country of residence, and arming themselves with the skills, network, and a world-class education.

Students like Zimbabwean-born Tariro Goronga find it difficult to access financing – even when they’ve been accepted to top universities. He had lived and worked in South Africa before pursing his MBA at Harvard business school, but found that the high rates of interest on a local loan made accepting one prohibitively expensive.

Emaan Karamatullah was born and raised in Pakistan, though she completed her undergraduate studies in the USA. She struggled to find lenders willing to provide loans to international students – even though she had lived in the United States for nine years.

Working in the Central Bank of Mongolia allowed Orgil Sedvanchig a tangible look at finance and business in his home country. But he wants to make a difference; he wants to speed access to development in South East Asia – and an MBA is a crucial experience to making that happen.

“Having an MBA signals me as a qualified professional to be credible to pitch ideas and projects to potential investors that it is really possible. I have the network; I have been through the business academic curriculum to really put that project into value creation.”

It’s an unusual failure given that international student market continues to grow. Despite great credit prospects post-graduation, these international students continue to be overlooked by traditional lenders and experiences problems getting financing.

Almost incredibly, 82% of our borrowers would not have pursued their masters without a loan from Prodigy Finance – as no other funds were available. We are enabling access to post-graduate education to students, whilst challenging the global credit environment.

Farai Mwamuka, a Zimbabwean with an American undergraduate degree isn't sure what he would have done without a loan from Prodigy Finance. He believes it would nearly impossible to pursue his MBA at London Business School

"I don’t think I’d have been here without Prodigy Finance. I mean I may have been here, but it would have been extremely tough”.

No trade-off happens when capital markets are integrated into impact investing

I borrow this concept from GIIN, which says that their view is not to integrate impact into traditional capital markets, but to integrate the capital markets into the global pursuit of social and environmental progress.

At Prodigy Finance, capital for our student loans is sourced from a mix of investors that invest in a publicly-listed bond. These investors are school alumni, endowments, impact investors, family offices and institutional investors, that either:

  1. Support a cohort of students at one of our schools,
  2. Support students from a specific region, agnostic of the school they attend, like our LATAM and Indian Student bond, and
  3. Support students across all our schools with our Global Multi-School and Euro Multi-School bond

Our bonds are listed, traded, can be seen in Bloomberg terminals, and this has enabled us to engage both impact and mainstream investors that would otherwise quickly disregard the idea that a higher education bond can provide impact and financial returns.

Moreblessings Sekenhamo, a Zimbabwean with an MBA from Chicago Booth strongly believes in the Prodigy Finance innovative business model and supports the community-funded platform. He explains that investing in human capital is extremely important, especially when fast-tracked by companies like Prodigy Finance that help fund students from developing countries like Zimbabwe.

And, the model is sustainable. As more students receive financing for higher education, more future investors are drawn to the community.

Nargiz Sadigzade pursued her MBA at the University of Chicago’s Booth School of Business to become investment banker and she wants to make a positive difference in her home country of Azerbaijan. 

“My ultimate goal is to contribute and put my part into the development of the financial sector in the country”.

And, she sees herself supporting Prodigy Finance.

“I feel a little bit loyal, so I really hope that I will be successful after graduation so that I will be able to come back and help other people through Prodigy”.

No-trade off exists when hard core data, sits alongside storytelling

The Prodigy Finance model is clearly sustainable and scalable, but measuring social impact isn’t a straightforward process. Although there are industry templates for primary and secondary educations, nothing really exists to measure the impact of post-graduate education.

However, there are numbers that can be used to measure the impact of grad students. When we surveyed our students, we found that:

  • 55% of our borrowers are the first in their family to attend postgraduate school, and
  • 33% of our borrowers send remittances back home.

These are important findings that refer to the positive effect on communities. And they are only the measurable part of social impact; the projects undertaken by those given the tools to make an unquantifiable impact.

Tariro spent many of his formative years on a farm without access to electricity and hopes to use his MBA from Harvard Business School to make electricity a reality for all Africans.

For Orgil, returning to develop his home country is the end goal of his degree. 

“Eventually I would like to go back to Mongolia and apply the concepts that I was able to learn through an MBA, and apply it to really the underdeveloped, developing country, and frontier markets in South East Asia as well”.

Gabriel Catalani, a Sao Paulo native who pursued his MBA at INSEAD also wants to make a difference back home. 

“My long-term goal is to focus myself in public sector projects in the consultancy firms. I want to develop the public sector efficiency in Brazil with infrastructure and education, things that will help the country to develop, to create opportunities for people there, and really impact the people’s lives”.

Though only a few stories, the possible impact is immediately visible - even if there were no direct financial returns. The development of these markets and sectors alone would create additional opportunities. But, these students received the tools to pursue these projects while investors received a low-risk, high-yield return.

As such, there really is no-trade off between impact and financial returns in emerging markets provided funds are channelled into products developed to do both. Perhaps our efforts should be oriented towards having emerging markets businesses achieve size and scale, with funding structures that enables capital markets to integrate into these impact investments seamlessly. 

Ready to make your mark?

You can achieve impact and financial returns when investing in emerging markets. 

Prodigy Finance Ltd is authorised and regulated by the Financial Conduct Authority.

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