Microfinance: An Emerging Investment Opportunity

This study discusses the microfinance sector transitioning process from a donor-driven, NGO dominated framework, towards an increasing involvement of capital markets. The main reasons it identifies are:

• Microfinance institutions (MFIs) have begun exploring new funding opportunities;
• Private sector investors appreciate microfinance investments.

The study examines the increase in involvement of private sector investors and foreign and MFI funding on seven core assumptions:

• Private sectors getting attracted to microfinance investment vehicles (MIVs);
• Increase in socially responsible investments;
• Change in regulatory framework;
• Increase in number of joint investment activities;
• Frequent use of structured debt instruments;
• Microfinance being regarded as an attractive supplement for portfolios;
• MFIs absorbing commercial funding and effective channeling.

Discussing various MIVs, it states that they are:

• Microfinance development funds that act as non-profit entities or cooperatives, and primarily target the development of MFIs;
• Dual-objective microfinance or commercially oriented vehicles aiming a balance between social and financial returns;
• Commercial funds which have predetermined financial rate of return.

The study demonstrates that a greater degree of institutional and individual investor involvement would not only narrow the funding gap of MFIs and scale up microfinance, but also offer a dual nature investment opportunity.