Financial Innovation Beyond Wall Street

Many on Wall Street and in the City of London, before and after the crisis, have crowned themselves “financial innovators” or even “financial engineers”. Instead of getting into the details of the obvious flops that many of these financial innovations have been, I’d rather posit that there is financial innovation all around us, and not just in the vaunted halls of hedge funds or bulge-bracket banks. An article in this week’s Economist goes to show that innovation is happening everywhere, even deep in the mountains of Medellin, Colombia.

The developing world, and Latin America in particular, has served as a source of innovations in finance for decades. Many have been negative, like competitive devaluations and creative default. But many have also been positive, and are not just “tropicalizations” of existing Western mechanisms. Microfinance lending, despite its critics, has been an avenue for poor families into trusting banks with their money. The creation of small-cap sub-sectors on major stock exchanges have given small companies a blueprint to scaling up their business with world-class governance and accounting standards. Mobile banking has leapfrogged traditional ways of connecting consumers with their money in areas with limited access to computers or retail branches.

This is why I am thrilled that the latest innovation, social impact bonds, are finally making their way to the mainstream. And I’m humbled to have met and spent time with the folks that are doing some of the most cutting edge work.

With a genesis in the prison system of Peterborough, England, social impact bonds spread across the UK and then across the Atlantic to Massachusetts. Now being expanded into Colombia, Ghana and India through the vision and leadership of the team at Instiglio. The system is simple, and explained very thoroughly in this week’s Economist.

Why I’m so bullish on social impact bonds in Colombia is that, for the bonds to work, you need to organize the interests of government, civil society, and investors. Colombia, and particular the area where they are working in Medellin, Antioquia, has one of the most collaborative venture and private-public sector ecosystems I’ve seen anywhere in Latin America. Combined with an international team that understands how to pitch to investors abroad, and also has social impact at the core of their raison d’etre, I’m looking forward to seeing how Instiglio will show the world what true innovation in finance looks like.

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