This whitepaper provides a basic framework for how investors can evaluate microfinance investment vehicles (MIVs). The author’s interview with Christina Leijonhufvud, Managing Director of the Global Social Sector Finance Group at JP Morgan, results in a general framework that investors and microfinance institutions (MFIs) can utilize to better understand one another’s requirements and expectations in order to make informed decisions in meeting both social and financial goals while achieving rational, sustainable industry growth.
Today there are approximately 100 microfinance investment vehicles (MIVs), which focus on investing in microfinance debt and/or equity. With this strong proliferation of dedicated investors, the sector has indeed behaved like a separate asset class over the last few years. However, the sector is becoming less “micro” with leading institutions growing their portfolios with larger average loan sizes and microlenders offering wider ranges of services.
With the collapse of the subprime credit market, investors and other players are asking if the same forces that drove this market also extend to commercial microfinance. Will the legitimate drive to maximize profits result in neglect (or abuse) of the interests of the borrowers, as it did in the subprime market? Will “overabundant” funding lead to irrational growth? Or will the interests of all stakeholders remain in balance as the commercial microfinance market evolves? This paper explores the development of the subprime market, the rise of predatory lending and recommendations for investors and others in the microfinance industry.
The microfinance sector is rapidly developing into a dynamic global financial services sector. In 2006 and 2007, the first IPOs were realized and many more are now brewing around the world. Based on several well-known performance indicators, the author will not only show the worldwide growth potential of the industry, but also its current strength. The author further suggests using “comparable return on equity” (CRoE) as an improved return measure in microfinance. On a comparable basis, the returns of Compartamos and ASA exceed 100%. The main conclusions are that microfinance:
• Shows high growth and high returns on a global basis,
• Is still under-leveraged,
• Has high expense ratios,
• Has good asset quality and
• Has returns of a global nature that show no geographic bias.
The Microfinance Gateway is the single best source for general research on microfinance, generating over a million hits per month. The purpose of this paper is to save you time and help you to take full advantage of the tools that the Gateway provides. The guide is organized in nine sections and includes ratings of each: Home, Library, Resource Centers, Discussion Groups, Events, Organizations, Consultants and Jobs, Microfinance FAQs, and Industry Newsletters and Journals.
A vast array of sources, of which the Gateway is one, provide a significant amount of information on microfinance to the general public, but the reader should be warned: sadly little rigorous quantitative analysis is hidden in a flurry of promotional material. Independent third party research requires paying customers, however, few such customers exist in microfinance. Typical of an emerging industry and the developing world, microfinance suffers from a dearth of expert “market intermediaries.” Until a market for research develops, the Gateway reigns supreme.
The Gateway is a project of a consortium of 33 donors that include government development agencies, (pseudo-governmental) “multilateral” financial institutions, and three private foundations of 19 rich countries called the Consultative Group to Assist the Poorest (CGAP), the microfinance arm of the World Bank. Microfinance remains a fragmented and immature industry as yet dominated by governments and charities, leaving the general public to depend on quasi-governmental groups such as the World Bank for information. The World Bank employs the most PhDs in the world, so its backing provides heft, badly needed in microfinance research.
As the emerging asset class of microfinance spirals slowly to the surface, MicroCapital looks at one of its main stumbling blocks: regulation and supervision. Vijay Mahajan, CEO of the BASIX Group, a micro-bank in India, refers to regulatory frameworks as one of the “triple helix” of constraints to microfinance expansion: low-quality regulation, inadequate financial resources; and the weak institutional capacity of most micro-banks, any of which may be the ruling constraint at a given time. BASIX, one of the first microfinance institutions (MFIs) in the world to attract commercial equity investment internationally and within India, has been a major influence for successful changes in Indian policy framework.
As in mainstream financial sectors, predictable regulatory standards for microfinance reduce uncertainty and increase the attractiveness of the investment. The challenge is to strike a balance between preventing abuse of markets and consumers, and encouraging industry expansion.
This paper will:
• explore the unique challenges of microfinance regulation;
• advocate “regualtion by risk”;
• consider balancing financial system integrity with costly microfinance regulation that inhibits investment;
• review the hugely positive role that rating agencies have played in facilitating transparency and risk assessment for investors and regulators alike.
We will also take you to Peru, a burgeoning market for microfinance in which regulators seemed to have figured out how to control risk while promoting investment in microfinance.
The Microdevelopment Finance Team (MFT) carried out pilot projects in Uganda to determine the role technology could play in increasing the reach of microfinance. The team envisioned a “data transaction backbone” that would link microfinance clients to their financial institutions and beyond. The resultant technology was known as the Remote Transaction System (RTS). The conclusions drawn from the study (and similar initiatives conducted in other parts of the world) include: that business process change and the implementation of new technology should proceed in tandem; that creative technology solutions are required to be tailored to the unique and often challenging needs in emerging markets and local contexts; and that partnerships between MFIs and local companies assist in reducing infrastructure costs. Technologies such as the RTS can evolve and provide functionality that serves to build bridges between MFIs and the formal financial sector.
On October 10-11, 2005, leaders of microfinance institutions (MFIs), investment firms, and development agencies met in Switzerland for the Geneva Private Capital symposium. This event was designed by the Centre for Applied Studies in International Negotiations (CASIN), a Swiss non-porofit foundation, to showcase micro and small business finance and to increase inveestor interest in this sector. In keeping with this objective, many of the featured speakers gave persuasive speeches about the merits of microfinance (MF) investment. This persuasion proved to be unnecessary, given the acumen, experience, and commitment of the symposium’s participants.
A major event in microfinance in 2005, the symposium attracted an unprecendented group of experts in microfinance and investment, including the leaders of highly successful MFIs, founders of leading microfinance investment firms, internationally acclaimed journalists, top executives of international banks, world renowned consultants, experts from development agencies, and distinguished public figures.
Collectively, this group possessed unsurpassed knowledge of the microfinance sector. Through the official sessions and private conversations with participants, it was possible to construct a picture of the current and future state of microfinance investment.
This paper assesses just how big the problem of currency risk is for MFIs, and for the industry as a whole. It looks at how commercial investors are affected by that risk, and examines possible solutions to the problem.
This paper examines the fact that, while microfinance is still a fledgling industry in the former Eastern Bloc, it’s growth in the region since 2000 has exceeded that of the rest of the world. This growth is fueled in part by an increase of interest among commercial microfinance institutions that have discovered the rate of return on microfinance can be higher in the former Eastern Bloc.
This paper highlights the growing social relevance of commercial microfinance and its impact in developing communities. It also compares the “social returns” of microfinance to those of other socially responsible investments, such as socially responsible investing (SRI) funds. The paper also differentiates between the social impact of microfinance from publicly funded sources and that from private, commercial sources.
MicroCapital Players Report 2004 – Managing Commercial Microfinance: The People and Institutions Behind the Asset Class (pdf)
This paper attempts to explain how microfinance works by painting a picture of the parties involved and the processes by which parts of the sector are managed. It also talks about the direction in which commercial microfinance is moving, and what the future holds.
This paper examines developments in microfinance in South Asia, the current state and prospects for commercial microfinance, the growing role of so-called “apex organizations” to fund microfinance institutions, and their implications for commercial investors.
This paper focuses on the problems that have arisen with the commercialization of microfinance, and the possible solutions that can be found if the industry is properly structured and developed by the players involved and those that seek to regulate it. This paper also examines the types of microfinance models, the institutions, and the growing sources of capital available for microfinance in Latin America.