As a young executive, Martin Connell polished his skills in the rough and tumble world of mining exploration. He headed Conwest Exploration Company Limited, a family firm founded by his grandfather. After building Conwest and creating a business platform that successfully moved into the oil and gas field, Connell decided to do some exploration on a personal level.
Travels to Egypt, India and Bangladesh sparked his desire to promote development. In 1982, Connell and his wife, Linda Haynes, founded Calmeadow, a non-profit that funded non-profit agencies helping the working poor in developing countries.
Connell brought his business perspective to philanthropy, which allowed him to appreciate the millions of industrious, if poor, self-employed people in developing countries. It fired his curiosity to find efficient, non-subsidized ways of serving them. While refining Calmeadow’s approach to development, he was introduced to Accion, an early promoter of MFIs in developing countries.
Connell embraced Accion’s concept of microfinance and quickly turned Calmeadow’s focus to industry development – but with a difference. His purpose and contribution were to make financial services for the poor commercial, so the services could reach more low-income people efficiently.
Connell’s vision led to major innovations and a lasting legacy that shapes the microfinance industry even today. In Bolivia, he was a pioneer in the creation of BancoSol, Latin America’s first microfinance bank. He was instrumental in the establishment of ProFund, the first microfinance investment fund to buy shares in MFIs and strengthen their management through governance. Connell then helped to found AfriCap, a similar fund for providing equity to promising African MFIs.
ProFund proved that positive social and financial returns could be generated by microfinance investment funds. Its example has been followed by dozens of investment funds (microfinance investment vehicles, or MIVs) that today manage over $6 billion in funds invested in MFIs, expanding the access of microentrepreneurs to loans and other financial services.
After 20 years of stretching the envelope in international microfinance, Connell centered his energies on making things better at home, in Toronto, Canada. During 10 years at the Toronto Community Foundation, he led an expansion of support to hundreds of local organizations.
Reporter Lucy Conger, on assignment for Accion, recently spoke with Connell.
Conger: You were a successful CEO in the oil and gas industry before you got involved in microfinance. What connected you with microfinance?
Connell: In 1980, I was near 40 and had just kicked myself upstairs to chair of the board of Conwest and passed the CEO role to my colleague. Linda and I went to Egypt to see the sights, and in doing that walked through several small, rural villages. This triggered an interest to learn more about development. On our return from Eygpt, I joined the boards of Interpares in Ottawa and Save the Children. Interpares sent Linda and me off to Bangladesh and India for five weeks, and there we visited over 30 non-governmental organizations – NGOs. We came back and set up Calmeadow, our own small foundation, to make grants to Canadian NGOs. We weren’t sure what to do, but we knew we were going to focus on women and economic activity. At the same time, I thought, there has to be something more effective than annual granting. I was introduced to PACT [a UN-related agency funding small-scale development projects] and the executive director gave me a list of three NGOs involved in enterprise development. One was Accion.
Conger: So it was Accion that pulled you toward microfinance?
Connell: I think there are very few moments in life when you have an epiphany. Mine occurred during a lunch with Jeff Ashe and Bill Burrus of Accion. It was so evident to me from the first that this could fly. The math was there: Nobody had trouble finding clients, charging interest, getting money back. What was needed was the ability to leverage capital and attract deposits. I walked out of that meeting absolutely convinced that the concept of microcredit was what I wanted to work with. At that epiphany lunch, my thought was, let’s get on with it.
Conger: What did you do next?
Connell: In early 1984, I went back to Jeff Ashe and said, ‘This is such a fantastic idea, I’d love to bring together NGOs in Canada and expose them to the best programming people in microfinance.’ We organized a conference and had a good turnout—some 60 to 70 NGOs—and stellar communications, with talks by the head of CIDA [the Canadian International Development Agency], Hernando deSoto, Accion and others. But nobody showed any interest at all! It irritated me that people could be so blind to such an incredible opportunity. If they weren’t going to do it, we would. We realized we’d have to do it on our own. So, we staffed up with one person, developed a relationship with Accion, and told them Calmeadow could support a couple of projects.
Conger: You went on to help pioneer the first transformation of an NGO into a commercial bank dedicated to the poor. How did the conversion of Prodem into BancoSol come about?
Connell: I had joined the Accion board, and in 1986 or 1987 I made a trip with a few board members and Bill Burrus, ACCION’s executive director, to Santiago, Chile, where they were trying to establish a local Accion affiliate. Afterwards, led by (Accion board chair) Jack Duncan, several of us made a side trip to La Paz. There, we met the local leaders of Prodem (a non-profit microlender) and had a tour led by Pancho Otero (then Prodem CEO). At lunch with the Prodem board, I was sitting across from Prodem chair Fernando Romero, and we talked. One of our first thoughts was: Is this a financial institution that could be set up in its own right? The two of us landed on the same thought, and agreed to do something concrete. Calmeadow funded one staff person, Doug Salloum, to spend six months in La Paz to work on a feasibility plan for creating a viable financial institution. The outcome was positive, and led to the decision to set up a microfinance bank. It took three more years to finally launch BancoSol.
Conger: What was the reaction to this idea – completely novel at the time – of creating a microfinance bank?
Connell: It took us some time to get support. Accion came on board, and so did Calmeadow. Rich Rosenberg at USAID in La Paz was the linchpin. He put his hands on PL480 (food aid) money, and that was the major injection of capital that helped us turn the corner. He had the courage, conviction and moral energy to make this come together. BancoSol opened in 1992 as the world’s first MFI operating, under license, as a commercial bank. It was critical to success that it made money from the first and, as it grew, brought its costs down.
Conger: You then went on to help pioneer the creation of ProFund, the first equity fund to invest in MFIs. How did that happen?
Connell: After the success of BancoSol, the next big leap was to develop a fund for other commercially viable MFIs. Accion, Calmeadow, Prodem and the Schmidheiny philanthropic interests gave form to ProFund, a fund that would buy equity in evolving MFIs. It was a private-equity company with a horizon of 10 years, plus one or two for start-up, capitalized with preferred shares redeemed on sales of assets, with a strong management team receiving good incentives with shares and bonuses. The concept also depended on shareholders putting in additional financial resources as investment partners on individual deals. The interest and advocacy of Ernst Brugger and philanthropist Stefan Schmidheiny were critical to ProFund’s creation. Alex Silva, our CEO during the fund’s life, drove home ProFund as a viable alternative for development, together with the idea that you could create a series of viable financial institutions. That was proof that BancoSol and Grameen were not just flukes. Initially, there was more focus on building commercially viable MFIs than immediately focusing on returns to investors. The sense was that if we got enough MFIs up and running, ProFund would succeed as a business.
Conger: Did people buy into the idea of a fund that invested in microfinance institutions?
Connell: At first, nobody understood what the pay-off was. The thinking was: Show us the return, the five-year profile, etc. There was a lot of skepticism among the sharp-pencil and green-eyeshade crowd. I think of the cluster of people around Prodem, BancoSol and ProFund as the entrepreneurs – a lot of tinkering was done. Once, I was in an elevator with Burrus, Brugger, Fernando Romero and Alex Silva and I thought, if this elevator goes down, it’s going to set the industry back 10 years! We were pushing against a lot of friction. The IDB (Inter-American Development Bank) was positively minded, and they were an important catalyst for further funding.
Conger: How did it go once Profund began investing in MFIs?
Connell: ProFund got off to a rough start. There was a Colombian outfit with bad management. Then followed a series of successful investments. Alex Silva was the right person to drive it. He had incredible persistence and patience. He would wear people down and they’d come round. He was a brilliant leader and executive.
Conger: You later created AfriCap, the first microfinance equity fund for Africa. How did that happen?
Connell: There were a lot of resisters, so getting AfriCap going was essential. The long and short of these things comes back to the CEO. The first CEO of AfriCap, Stephan Harpe, was extremely effective in getting us started. This model of a small private-equity company, with the right leadership, does work. People then said, ‘Okay, if it works in Africa, too, and in Asia and Latin America, this is not fluky science – it really works.’ By early 2000, we said the proof of the principle is broad enough that it will attract capital, talent and competition. I was only involved with AfriCap until 2005. Once we saw institutions like Blue Orchard popping up, which capitalized small institutions, we knew we had reached the mainstream.It is important that the microfinance industry learns from the sea change that is beginning to happen in inclusive business. Credit is important — particularly if it is combined with access to markets and better production methods. But a focus on mono-credit offerings alone does not get poor people out of poverty. Microfinance needs to learn from companies and banks that are succeeding at inclusive business. It can learn how to build customer-focused databases, how to engage the clients in product and channel design, and how to cross-sell a coherent set of financial products.
Conger: What kinds of challenges were there for non-profit MFIs converting to regulated institutions?
Connell: I don’t think every executive director of every NGO is totally committed to the notion of conversion. There’s job risk, upsetting their universe, their nice salary… It makes them unsure of their future. When BancoSol got to a certain size, Pancho Otero moved out, which underscored the concern. A lot of it is personal. Other people, while great leaders, don’t have the necessary skill set or temperament to run a regulated financial intermediary, as it involves sales, marketing and taking deposits.
Conger: What concerns you about commercial microfinance and the investment-fund model?
Connell: My biggest anxiety about commercial microfinance is managing expectations. To build an institution and be sure all systems and people are in the right place takes time, and private-equity funds can raise unrealistic expectations of returns that probably put undue pressure on managers. You need patient money. If you’re going to market an investment fund, like in everything, there are good banks, bad banks and mediocre banks, and you have to be good to do the cherry-picking.
Conger: What should the microfinance industry be doing to develop or ensure its potential?
Connell: This is a challenging time for microfinance, but like everything else in this world, I’m confident the industry will make it through this. My biggest fear is that microfinance plays to the sweet spot of politicians. So, I worry about the politicization of microfinance and appropriation of the system by politicians. This financial service is very much needed. I hope the private sector can meet the challenge and continue to build microfinance.
