In recent years, investors have become increasingly attracted to microfinance as a socially responsible or impact investment option due to its double bottom line results – i.e., both financial and social returns. This interest is due to the social mission of microfinance combined with its high growth, low delinquency rates, strong margins, and scalability of microfinance institutions (MFIs).
The success of these MFIs led to the emergence of microfinance investment vehicles, or MIVs. In the mid-1990’s the first MIVs appeared and the number of funds dramatically increase in the early 2000’s. MIVs have become a gateway for microfinance investment and today there are over 100 MIVs managing $7.5 billion in assets. About 40% of global microfinance investment is channeled through MIVs to MFIs, according to CGAP.
Microfinance investment opportunities have significantly grown and diversified in recent years as the MFI market grows and matures. Fund managers can select investments in MFIs or other MIVs based attributes such as geographic outreach, client demographic, services provided to clients, and the size of the MFI’s loan portfolio. Investments are also selected based on MFIs’ balance of financial returns and social performance, in accordance with the MIV manager’s investment philosophy.
As the demand for MFI services only continues to grow and the unmet need is still vast, efforts to facilitate additional private investment are essential. It is critical for investors to have standardized, objective information and analysis to identify which MIVs meet their investment criteria. Investors must be able to objectively compare and assess the risk, return, and social objectives of different MIVs.
If investors cannot gauge risk in microfinance and there are defaults, there will be a disproportionately negative effect on the entire industry, reversing the progress made in the last years. The microfinance industry is in its adolescence and its reputation could be seriously harmed at this stage.
-Damian von Stauffenberg, founder and chairman of MicroRate (2008)