PRESS RELEASE: Consultative Group to Assist the Poor (CGAP) Report Reveals First Performance Figures on Microfinance Funds

Source: Consultative Group to Assist the Poor (CGAP).

Original press release available here.

WASHINGTON, March 11 – Today CGAP, the Consultative Group to Assist the Poor, a microfinance industry body housed at the World Bank, reveals the first ever performance figures for microfinance investment funds. Until now, little has been known about microfinance fund performance, but a new report reveals an increasingly sophisticated market, with a wide spectrum of investments, including fixed-income mutual funds with close to money market returns, structured finance vehicles and private equity and venture capital companies. Returns range from an average of 8 percent for structured finance vehicles at the highest, to as low as zero for some young funds.

There are now over 93 investment funds specializing in microfinance. Fifty-three of these have been established since 2005. Their microfinance investment grew at an annual rate of almost 80 percent between 2004 and 2007, reaching a total of USD 3.5 billion in 2007.

The top ten investment funds account for around two-thirds of the total investment, including the largest, ProCredit, a German holding company that invests in new, “greenfield” microfinance banks. Most of the funds are relatively small, half having a portfolio of less than USD 25 million. But they are growing very rapidly.

Foreign fixed-income investment has been dominated by a few funds investing in hard currency in a small number of high-growth, large microfinance institutions, mainly regulated institutions in Latin America and Eastern Europe and Central Asia. But the authors of the report, Xavier Reille and Sarah Forster, say it is a very active and fast changing market. Competition between funders has triggered innovation and a broad range of debt products are now available as debt providers move down market. The authors warn that the debt market has “become overheated and pricing does not reflect real risks”.

Overall, equity investment has lagged behind fixed-income investment, as few microfinance institutions are legally structured to take equity, and exit options are scarce. But Forster and Reille point out that in the fastest growing emerging markets, more microfinance institutions are transforming into for-profit, shareholder models, valuation metrics are improving and exit options are increasing. And in some markets, where there is sufficient local market depth, IPOs are on the horizon. The dramatic initial public offering of Compartamos in Mexico, with a valuation at 13 times book value, has encouraged other microfinance institutions to raise capital through this route. And as a result, microfinance institution valuations are up. But is there a bubble? “The equity market shows some signs of exuberance,” says Reille, “but while it’s likely that some consolidation will happen in the coming years, we do not anticipate a collapse because business fundamentals are still good.”

Nonetheless, in many countries foreign investment is always going to be small in relation to local funding sources, such as savings intermediation, local bank loans and bond issuance, says CGAP CEO Elizabeth Littlefield: “Savings are often overlooked as the main, growing and ultimately most important form of funding for microfinance institutions. Deposits are not only the cheapest way for an MFI to fund itself, but they also provide a valuable service for clients.”

The recent development of private equity players investing in high-growth microfinance institutions with target returns in the 20-30 percent range, say the authors, raises the question of whether an increasingly profit-maximizing investor base will allow microfinance to uphold its social mission. “If private equity investors want high and fast returns, there are pressures that go along with that”, says Reille. “It could fuel aggressive lending practices, particularly in the absence of effective consumer protection and low financial literacy, as is often the case in emerging markets.” At the same time, says Reille, these investors have the potential to bring business and technological expertise to the microfinance industry that can help fuel outreach to much greater numbers of poor people.

CGAP is the world’s leading resource for the advancement of microfinance. CGAP provides the financial industry, governments and investors with objective information, expert opinion and innovative solutions to effectively expand access to finance for poor people around the world.

Similar Posts: