Impact investing in Pakistan: The role of private debt and shadow banking in financing development

– Juvaria Jafri –

Philanthrocapitalism rests on the notion that philanthropy can be more successful when it is more like business. This view is an invitation to global financial capital to chase more than just profit, and to also seek social and environmental goals, particularly to address the challenges of global poverty and climate change. The logic of impact investing builds on this. Impact investing is thus an approach to development, which the investment bank, Morgan Stanley, describes as ‘doing well by doing good’. The rise of this idea has considerable implications for financial flows to poor countries.

Impact investing strategies fit in nicely with global initiatives such as the Finance for Development programme led by the UNDP. The purpose of such programmes is to mobilise the resources required to meet the Sustainable Development Goals for 2030, the successor agenda to the Millennium Development Goals for 2015. Here, the term ‘resources’ is interchangeable with ‘finance’; development is thus portrayed as an issue of finance, and lack of development is a lack of finance.

Given such a narrative, impact investing has provided a space for large institutional investors, including development finance organisations and private equity firms, to be involved in ventures run like businesses but with an ostensible social purpose. Impact investing also echoes practices that have facilitated the deployment of substantial amounts of capital — from public, private, as well as philanthropic sources — in poor countries, particularly for infrastructural projects, in the past. Examples of such projects include electricity generation and telecommunications, which facilitate the growth of scale economies via industrialisation.

Nevertheless, as recent examples from impact investing in Pakistan show, the potential to replicate such past approaches to development has been limited by the way in which the core features of impact investing, which are measurement and reporting, are designed. Consequently, impact investors have largely re-directed their funds, as shown in the table below, to projects with a ‘base-of-pyramid’ focus such as microfinance: in doing so, impact investors compromise social impact and thus raise questions about the extent to which social and financial goals are indeed compatible.

Table: Illustrative Examples of Measurable Social or Environmental Outcomes

Agriculture Increase in productivity or crop yield as a result of improved technology or training
Education Participation rates of girls in secondary education in sub-Saharan Africa
Energy Number of individuals at the base of the pyramid who gain access to electricity
Environment Tons of CO2, equivalent offset as a result of organisation’s product or service
Financial Services Number of micro-insurance products sold to people with AIDS and infected with HIV
Health Readmission rate of diabetes patients using innovative product for monitoring health
Housing Reduction in the rate of homelessness among major US cities

Source: World Economic Forum (2013, p. 7)

These tendencies appear to be symptoms of the financialisation of development, where poverty is seen to persist because of lack of access to credit and capital. Financialised development strategies may thus be studied in the light of a related phenomenon: the expansion of the shadow banking industry. The processes and practices associated with impact investing in Pakistan appear to be driven by the activities of shadow banks. Such activities are the outcome of a regulatory environment where mainstream, traditional banks are not inclined to disburse the credit needed to meet the needs of enterprises. In the case of Pakistan, this is the result, on one hand, of a structure where the government relies on the banking system to plug budgetary gaps, and on the other hand, a banking system, which in complying with the Basel frameworks, has a partiality for lending to corporate and large public clients over relatively small private ones. Additionally, shadow banking practices are also the outcome of a global demand for financial yield, from international institutional investors. Asset managers, in responding to this, have in recent years spurred the impact investing agenda by steering their funds towards those opportunities in the Global South, that have an ostensible social impact as well as the promise of financial return.

These observations contribute to how we can think about finance and development, particularly how strategies that link the two are prone to being absorbed by the shadow banking industry. Such a discussion forms a basis to think about critical approaches that seek to identify where the goals of finance and of development are indeed in harmony, and where they might be in conflict.

Read more in the Financial Geography Working Paper #14.

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