Capitalizing on Microfinance: Pursuing Financial Return with Social Impact

This paper offers a microfinance industry overview, presents the business and social case for microfinance investing, describes sample investments, and discusses future trends for the industry.

There are compelling business and social justifications for the increasing commercialization of microfinance. Microfinance helps investors align investments with their values actively, rather than through passive screening. MFIs exhibit attractive business attributes such as:

• Loyal client base that lowers acquisition costs;
• High interest rates to cover hefty operational expenses;
• Excellent loan repayment rates due to strong portfolio quality;
• High solvency and liquidity resulting from short loan tenors;
• Opportunities to investors for emerging market diversification.

The microfinance sector presents a unique investment opportunity for investors seeking social impact and financial profits that can range from below-market to risk-adjusted returns. Industry leaders believe that microfinance will evolve into a niche investment alternative, appealing to socially responsible investors seeking impact as well as a growing range of commercial investors pursuing portfolio diversification. MFIs will also continue the trend towards investment-readiness. Based on these assumptions and the industry’s attractive fundamentals, the long-term outlook for microfinance investment is positive.