Does Microfinance Form a Distinctive Asset Class? Preliminary Evidence

This paper examines whether microfinance represents a distinct financial asset class that forms the basis for MFIs access to global capital markets. It empirically examines the correlation between microfinance and global and local market movements. The study considers the institutional transformation of microfinance from donor-driven NGOs towards market-based financial institutions. The paper also presents case studies of MFI performance in times of severe financial and macroeconomic distress. Study findings indicate that:

• MFIs generally show weaker correlation with domestic GDP and major, emerging market equity indexes than do commercial banks;
• MFIs seem to be significantly less exposed to market risk than commercial banks in developing countries in terms of key financial and operating metrics. 

The study suggests that microfinance may form a distinctive financial asset class. It concludes that the difference in market risk between microfinance and emerging market commercial banking is based on differences in ownership and governance, client and product characteristics, lending methodologies and operational and financial leverage.