Investing in microfinance

As we have come to learn, microfinance is the provision of small loans to the working or self-employed poor through microfinance institutions (MFIs).  Microfinance has spread to involve small savings accounts and other products such as life insurance and even crop insurance.  Once the domain of non-profit entities with a social mission, MFIs are now successful businesses with a hybrid social and commercial mission.  There are now thousands of MFIs in over 100 countries in the world.

MFIs may have become likely investment targets for impact investors in developing countries for several reasons.  First, because microfinance provides basic financial services which are necessary at some level for even poor people to conduct their economic activities, MFIs reach a lot of people and therefore has a lot of social impact.  Second, various industry metrics are available about microfinance that are not easily obtained or comparable in other industries such as agriculture or renewable energy.  Because of the similarity of microfinance to banking, investors often have some familiarity with those metrics such as return on equity (ROE), return on assets (ROA), portfolio yield, capital adequacy ratios, delinquency and default.  That data is collected, standardized and analyzed by the Microfinance Information Exchange, a Washington, DC-non-profit which provides a great service for potential investors as well as policy-makers and researchers.  Third, many MFIs, especially those that are deposit-taking, are regulated, even those in remote, under-developed corners of the globe.  While the extent and quality of regulation and supervision vary, the existence of regulatory authorities should provide some comfort to investors.

All this investment opportunity in microfinance is not without some caveats.  As some MFIs have grown, many have moved away from their original social mission and have become more focused on commercial success and, in some cases, look very much like commercial banks.  In other cases, MFIs have struggled to maintain their social mission in tandem with a commercial focus and therefore may not welcome private investors, in spite of a possible need for equity, unless the investors have goals that are compatible with those social objectives.  Genuine impact investors may welcome that challenge and opportunity.

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