Microfinance: An Emerging Asset Class for Equity and Debt Investors

This paper predicts that microfinance will develop into a new asset class for equity and debt investors. It analyzes nine MFIs from leading microfinance markets around the globe, comparing and ranking them on returns, number of borrowers, portfolio size, growth, expense ratio and comparable return on equity (CRoE). The paper concludes that microfinance demonstrates the following characteristics:

• High growth and high returns on a global basis;
• Under-leveraged balance sheet;
• High expense ratios;
• Good asset quality;
• Global returns, showing no geographic bias.

Clarity on the roles of donor money, developmental financial institutions and commercial investors will help microfinance continue its healthy development. Further, access to an international microfinance best practices regime will help countries apply the same or explain why they have deviated. This could form the basis for an improved capital weighting under Basel II in the future. Finally, the paper states that IPOs and equity investments will speed up the recognition of microfinance as an emerging asset class. Increased recognition and competition will help the industry mature, reduce costs, increase profits and reach out to larger numbers of unbanked population in developing countries.