Today, retail investors, high net worth individuals, and institutional investors all invest in microfinance institutions. Investment opportunities often depend on regulations in a specific country or region. For example, in order to make an investment at MicroPlace, the investor must have a US social security number.

Investment opportunities also depend on the investor’s risk appetite, since some funds advertise a high return for investments made in less stable but high potential MFIs. Institutional investors and high net worth individuals often invest in these riskier options.

Public donors and investors, including multilateral and bilateral donors and development finance institutions, provide the majority of cross-border funding of microfinance. However, private funders, such as microfinance investment vehicles (MIVs), are growing their commitments at a faster rate.

For more up-to-date information, see CGAP’s Investor’s Corner for the latest research and publications on microfinance funders.

2. How can I invest in microfinance?

Retail investors now have a range of MFI investment opportunities. While a retail investor can invest directly in traditional funds or microfinance investment vehicles, a growing trend is to make investments through online platforms such as MicroPlace.com or RangDe.org.

The investment opportunities available to you will depend on the rules and regulations where you live, the amount you wish to invest, your appetite for risk, and your asset allocation objective – for example, what percentage of your MFI portfolio is allocated to debt versus equity.

Institutional investors and high net worth individuals, who make much larger investments than retail investors and follow a strict set of investment objectives, can access additional microfinance investment opportunities which require large minimum investments in the millions of dollars.

3. Is it risky to make investments in microfinance investment vehicles (MIVs)?

Like most investments, there is no guarantee that the capital you invest will generate a return, or even be returned to you in full or in part. However, studies have shown that the performance of microfinance investments does not directly correlate with the performance of the broader market. This means that investors seeking to diversify their portfolio risks can do so by investing in microfinance in addition to their other investments.

4. What does “crowding out” mean?

Some microfinance investors claim that international financial institutions (IFIs) make investments in MFIs that are mature enough to secure investments from private sector investors. They argue that the IFIs’ objective should be to make investments in riskier MFIs, in which the private sector is not yet ready to invest. Since IFIs tend to offer more favorable investment terms (such as cheaper loans or longer repayment schedules), private investors have accused the IFIs of “crowding out” private investment into these MFIs.

The Microfinance Gateway hosted an online discussion on the best roles for IFIs in 2007, entitled IFIs: Crowding Out or Crowding In?, which offers a good summary of this debate.

5. What is the difference between a CDO and a CLO?

A CLO (collateralized loan obligation) is a type of CDO (collateralized debt obligation) (see Investment Glossary for full definition). Other CDO types include CBOs (collateralized bond obligation) and CMOs (collateralized mortgage obligation). CLO and CDO may be used interchangeably, but CDO is a more general term. Because CBOs are now so rare, almost all corporate (i.e. company debt) cash CDOs are CLOs.

6. Which type of currency – local or hard currency – is most suitable for an MFI investment?

Local currency investments in MFIs reduce the costs and risks involved for the MFI, and are becoming more common than they once were. Recognizing the benefits for both investors and MFIs, investors have undertaken initiatives to eliminate foreign exchange risks.

For example, The Currency Exchange Fund (TCX) and MFX Solutions offer long-term local currency hedging options to emerging market investors. These funds include a number of partners ranging from international financial institutions to commercial banks. With a partnership like this, the lender can benefit with a lower credit risk, and the borrower with a lower business risk and lower cost of funding.

7. How is an MFI rating or assessment useful to an investor?

MFI ratings and assessments help investors decide where to put their money. Different types of ratings and assessments – credit risk ratings, global risk assessments, mini assessments, and social ratings – serve different purposes.

A credit risk rating quantifies the statistical probability that the MFI will be able to meet its debt servicing obligations. A global risk assessment provides a broader assessment of an MFI’s operations and prospects. A mini assessment is a rating of a young MFI that is too small, or too young, for a full-scale credit risk rating or global risk assessment. A social rating is a rating of the social performance of a microfinance institution, which investors can use to compare institutions so that they can direct their funds to help achieve specific social, ethical and/or financial goals.

Investors use these reports, in varying degrees, as part of their due diligence process, which provides a picture of an MFI’s profitability potential. Details such as an MFI’s level of profitability and management stability, as well as the key opportunities and challenges, are expressed in a rating or assessment report.

Latest Library Additions

Progress for Microfinance in Europe
Analyzing trends in European microfinance

Role Reversal Revisited: Are Public Development Institutions Still Crowding out Private Investments in Microfinance?
Reviewing the role of development finance institutions in funding microfinance

Swiss Microfinance Investments
Presenting an overview of Swiss investments in the microfinance sector

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