Maya Prabhu, head of UK philanthropy at Coutts & Co, answers our quick Q&A on microfinance for philanthropists

What is microfinance?
Microfinance is the provision of a broad range of financial services such as deposits, loans, payment services, money transfers, and insurance to poor and low-income households and their microenterprises.

What returns does investment in a microfinance fund offer?
Microfinance spans the broad spectrum of social investing and investors can choose whether they wish to invest for impact only, for financial return only, or for a blend of both.

What role can philanthropists play in microfinance?
Microfinance is at a complex stage of its development. Many issues need to be carefully considered when deciding how to engage with it - including the mission and culture of the MFI, the strategy and goals, the regulatory environment it operates in, its current funding mix and how it measures its social impact. With the presence of significant sums of commercial funding in the microfinance sector, it can be confusing for philanthropists to understand the role they can play. The very first thing to understand is that there is a spectrum of types of microfinance organisations around the world in terms of size, maturity, funding mix and goals. For the philanthropists interested in achieving purely social return, as those members of Coutts’ Microfinance Donor Advised Fund (a purely philanthropic fund) are - I see three potential roles:

• They can fund projects in hard to reach areas, say the mountains of Nepal, where creating a commercially viable operation would be difficult because of its geographical remoteness
• Microfinance is about more than offering loans to the financially excluded; it goes hand in hand with providing training and support to help clients with training including in business skills or even education and health - it is these training and support projects that are often critical to achieving the desired social impact that might also be a target for philanthropic funds.
• And philanthropic capital that expects no financial return might also provide the initial 'risk capital' to get a new microfinance organisation off the ground.

 What risks does investment in microfinance carry?
We have seen how successful microfinance can be and it has come of age. However, even recently, we have witnessed events (in India for example) that have led some to question aspects of microfinance. There is a need for funders to be fully aware of how each project operates, what its social and financial ambitions are and how these ambitions will be fulfilled. Mission drift (where an organisation's drive for financial returns is achieved to the detriment to its social returns) need to be guarded against.