Microfinance is a form of financial services that is designed to serve people with low incomes. These services, which may include business and housing loans, insurance, pensions and deposits, are primarily offered by dedicated microfinance institutions (MFIs), a term which can include entities organized as commercial banks, non-governmental organizations (NGOs), credit unions and others. The commercialization of microfinance is gaining momentum as NGOs convert into regulated financial institutions. Despite strong – sometimes unhealthy – growth over the last decade, the microfinance industry still has robust growth potential, as it is estimated that less than 20 percent of the world’s 3 billion poor people use financial services. Although estimates vary widely, the global microfinance market is worth approximately USD 100 billion as of 2013. Much of the industry is funded by investors’ capital via microfinance investment vehicles, which channel funds to MFIs, which in turn provide retail financial services. Globally, USD 8.5 billion in private assets are placed in microfinance as of 2012.
While microfinance is a fledgling industry, there is evidence that microcredit programs have reduced the poverty rate in some markets by increasing household income and facilitating women’s participation in the labor market. However, there is also body of evidence indicating a glut of poorly performing MFIs operating in saturated credit markets with high default rates leading to over-indebtedness – the inability of borrowers to repay debts fully or on time. As a result, only a small percentage of MFIs around the world are profitable. Still, because of its comparatively low systemic and volatility risk, the microfinance industry remains an attractive investment.
How to Invest in Microfinance?
Managers of investment funds that accept smaller investments include Vision Microfinance in Europe, and the Calvert Foundation in the United States. (To request inclusion of your fund in the list, please contact MicroCapital.)