Microfinance: An Attractive Dual Return Investment Opportunity

This paper highlights risks and benefits of investing in microfinance.

The microfinance sector is currently undergoing a transformation from a traditional, donor-driven NGO-dominated framework towards one with a greater degree of capital market involvement. At the same time, it is also striving to adhere to its original mission of poverty alleviation and social development. Microfinance offers investors:

• Attractive dual-nature investment opportunity;
• Appealing risk-return ratios;
• Stable financial returns;
• Potentially low correlations to mainstream capital markets.

Investors, however, also need to consider risks resulting from MFI transformation, the concentration of large capital inflows to tier-1 MFIs, increased risk compensation in the market for structured products and the growing debate on whether microfinance should be considered a social or commercial business concept. Full development of local financial systems would enable MFIs to refinance themselves from retail deposits, bank loans and domestic capital markets. Until then, microfinance will constitute an emerging investment opportunity that institutional and individual investors have started to explore. But it is reasonable to expect that, by 2015, private-sector investors will have raised their investments in microfinance significantly.