In the global microfinance industry, the topic of valuation is being debated by investors and representatives of microfinance institutions (MFIs). In an article released by the Financial Chronicle, a Hyderabad-based business news publication, Padmaja Reddy, managing director at Spandana Sphoorty Financial, proposes that MFIs share similar business models with banks and non-banking financial institutions, but are unjustly undervalued. Investors respond that the risks involved in MFI investment are too high. In a related article, The Wall Street Journal, a US-based business newspaper, cites the risks involved in MFI investment. Avnish Bajaj, managing director of Matrix Partners India which has an investment in one of India’s largest microfinance institutions, states, “There are elements of bubble in this sector. Over-lending, lack of processes, excessive geographical concentration and excessive product concentration,” all increase investors’ level of risk.

Christian Banno, CEO of MicroVentures India, a private equity fund that invests in MFIs, told the Financial Chronicle, “The quality of portfolio of MFIs in some states is in doubt. Sometimes, we are also faced with institutions presenting unrealistic business plans.”

By Matthew Fox, Research Associate

Sources and Additional Resources:
Financial Chronicle: Experts Say MFI Sector is Undervalued, June 23, 2010: http://www.mydigitalfc.com/knowledge/experts-say-mfi-sector-undervalued-493

Wall Street Journal: Microfinance: Risky and Expensive, June 23, 2010: http://blogs.wsj.com/indiarealtime/2010/06/23/microfinance-risky-and-expensive/

MicroCapital Brief: Microloan Default Risk Rises in India as SKS Microfinance Plams Initial Public Offering (IPO), June 23, 2010: http://www.microcapital.org/microcapital-brief-microloan-default-risk-rises-in-india-as-sks-microfinance-plans-initial-public-offering-ipo/