Foreign Capital Investment in Microfinance: Reassessing Financial and Social Returns

This focus note examines growth in foreign investment in microfinance. It assesses the outreach and social performance achieved by foreign capital and highlights the need for transparency in microfinance asset management

The note is based on data from CGAP's annual survey on foreign investment, Microfinance Information Exchange (MIX) Markets funding structure database and Symbiotics SMX index. It profiles the current investor landscape including the role of development finance institutions, retail investors and the size and structure of microfinance investment intermediaries. It highlights the decline in fixed income returns and the rise of equity investment.

The note states that the period from 2009-2010 has revealed serious weaknesses in the microfinance market, including rapid scaling, over lending and the risk of over indebtedness. Lessons for investors include:

• Risk adjusted return on microfinance investments should be reassessed in the context of recent problems in the industry;
• Investors should place greater stock in microfinance investment vehicles and asset manager selection;
• Investment in non-traditional microfinance areas to increase impact on poverty requires unique evaluation techniques.