modest wealth perhaps cannot even envisage. Earlier this year, Schwab Charitable, which operates a national donor-advised fund from its San Francisco headquarters, offered its donors an opportunity to participate in an innovative charitable endeavor that significantly affects the lives of people in developing countries--an opportunity that previously has been the province of only the richest donors. The organization's Microfinance Guarantee Program uses a portion of its donors' assets to enable microfinance institutions in developing countries to open commercial lines of credit to facilitate their lending to poor people who want to start and operate income-generating enterprises, according to Kimberly Wright-Violich, president of Schwab Charitable.
MFIs operate largely on donations, which they lend out to local entrepreneurs--who happen to be mainly female. After the loans are repaid, the money is circled out again, says Wright-Violich. The challenge for these institutions is to become self-sustaining so they can engage in lending without having to conduct annual fund-raising campaigns. Historically, they have sought to establish commercial lines of credit by asking wealthy philanthropists to co-sign loans at local banks. In partnership with Citigroup, the Grameen Foundation started a program in the U.S. four years ago that enables wealthy individuals to provide guarantees to MFIs--for a minimum commitment of $1 million. (See sidebar.) Now, Schwab Charitable has partnered with Grameen to bring this guarantee activity down to the retail level.
How it works
The Microfinance Guarantee Program is an opt-in opportunity for participants in Schwab Charitable's donor-advised fund. Typically, when an individual or a family opens a Schwab Charitable account, it receives a tax deduction when the money transfers into the account. The charity essentially takes control of the assets; in return, the donor can direct where those assets are invested and has the right to advise how and when they are granted as well as what will happen to the account at the donor's death.
Smaller donors can select mutual funds from a family of products in which they want their donation invested until they decide where to make grants. Those with accounts of $250,000 and up can name an investment advisor, approved by Schwab Charitable, to manage the assets. And donors with accounts of $5 million and more can allocate a portion of their accounts to alternative investments.
Donors can make grants to any current 501(c)(3) organization in the U.S. in good standing. Schwab Charitable conducts rigorous due diligence on designated nonprofit organizations, but is otherwise agnostic as to which groups receive grants. "Our job is to facilitate philanthropy--not to tell them when, where and how," says Wright-Violich.
Participants can commit up to 10% of their accounts to the Microfinance Guarantee Program. Thus, for a $25,000 account, $2,500 remains invested and cannot be touched for the term of the guarantee period--typically five years. The remaining $22,500 can be granted out when and as the donor chooses. At the end of the guarantee period, the $2,500 also becomes available for the donor to grant as he or she sees fit.
During the guarantee period, the donor's $2,500 is aggregated with the commitments of other participants, and--through a Citigroup facility--those assets serve as the backup for some 30 microfinance organizations around the world seeking commercial lines of credit at their local banks.
What if one of the 30 microfinance organizations fails? There would be a capital call, and each donor's account would be tapped for one-thirtieth of the amount he or she guaranteed; in the $2,500 guarantee example, that comes to $83.50. That amount would immediately be granted out to the failed organization so that it could meet its obligations. At the end of the five-year period, the remaining $2,416.50 of the guarantee would still be available for granting out at the donor's discretion.
Schwab Charitable's Microfinance Guarantee Program blazes several new trails in philanthropy. For one thing, it democratizes an area of charitable giving that until now only ultra-high-net-worth donors could engage in. For another, the amount of money the donor guarantees does double duty. "Your money stays invested, and it gets to be used again," says Wright-Violich.
Indeed, a chief motive for this program was to put donor assets to work while they are waiting to be granted. "There aren't a lot of ways to do that," says Wright-Violich. "The minute you put the money to work, it usually has to leave the account; we didn't want to do that." She and her colleagues decided that guaranteeing loans was the only way to leave assets invested while putting that money to work for charitable purposes.
The guarantee program also relieves individual donors of the burden of contractual red tape with Citigroup, placing it directly on the shoulders of Schwab Charitable, which owns the assets. "Schwab Charitable goes through the big complicated process once, and then everybody else participates very easily," Wright-Violich says.
The program's potential for doing good is enormous. "We've got $1.7 billion in assets," she says. "If, let's say, 50% of our donors agree to participate at the 10% level, then we could put to work $90 million. Think how many people that impacts. There's a tremendous potential for impacting the lives of these women."
Michael S. Fischer (firstname.lastname@example.org) is a New York-based financial writer and editor and a frequent contributor to Wealth Manager.