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January 11, 2008
Microfinance: Catch the Swelling SRI Wave
by Anne Moore Odell
The microfinance sector offers socially responsible investors a growing arena to create positive
social and financial growth according to a new Deutche Bank study.
Microfinance is at an exciting and pivotal point in its development. As microfinance moves from a
donor-backed model where microfinance institutes (MFIs) are run by non-profit organizations to
being based actively in capital markets, microfinance offers many new opportunities to
institutional and individual investors. And, importantly, as microfinance grows, so do the
opportunities to help finance the businesses of its clients.
A new study released
last month by Deutsche Bank (ticker: DB) entitled "Microfinance: An emerging investment
opportunity" projects the rise of microfinance into its own investment niche. The study anticipates
a growth in microfinance to $20 billion by 2015 from the $4.4 billion that was invested in
microfinance in 2006.
"Microfinance has undergone a significant transformation in recent
years," said Dr. Norbert Walter, Chief Economist at Deutsche Bank. "This study has demonstrated
that the steadily growing popularity of microfinance has reached a global audience and continues to
be a key facilitator in helping to fight poverty in both developing and developed countries."
The demand for microfinance capital is enormous the study postulates. The study's author Raimar
Dieckmann estimates that the microfinance sector worldwide has a total outstanding loan volume of
$25 billion. However, it is only a small percent of the funds that could be used to fulfill the
needs in areas served by microfinance. Dieckmann puts the funding gap at $250 billion. Involving
the private investment sector to help close this funding gap is one of the goals of the
The study's numbers do point to a massive growth in microfinance.
Between 2004 and 2007, public and private investments in microfinance institutions doubled.
Dieckmann suggests that microfinance investments will continue to rise due to a number of factors,
including the rising interest in socially responsible investing over all.
driving the growth in microfinance is that microfinance is increasingly being seen as a positive
way for a wide array of investors, not all necessarily social investors, to diversify their
portfolios. The other important factor leading to the increase in microfinance investment is the
creation of more MFIs that are able to use international funding.
Currently, there are
over 10,000 MFIs globally ranging from banks, credit unions, NGOs to cooperatives. The study
divides MFIs into four tiers, the highest being mature, regulated financially sustainable MFIs
which only make up 1-2% of the all MFIs. The second tier MFIs are close to becoming microfinance
banks and are nearly profitable. The third tier MFIs are NGOs that approach profitability. However,
the majority (70%) of MFIs are placed in the lowest tier and are classified as start up MFIs and
are largely unprofitable.
The study focuses on the two main types of foreign investors in
MFIs. The first are international financial institutions (IFIs), such as the World Bank and the
European Bank for Reconstruction and Development. The second type of MFI investors are private,
both individual and institutional investors. Getting more investors to invest in the tier one and
tier two MFIs would be the first step in closing the gap between demand and capital.
Dieckmann writes in the report, "IFIs might focus on providing riskier funding to smaller tier
2 MFIs while, over time, an increasing number of institutional investors might become willing to
invest in more junior tranches of collateralized debt obligations (CDOs) and, hence, crowd in
further social and commercial investors for less risky parts of a CDO that invest in tier 1 MFIs in
the long term. From a normative point of view, the full development of local financial systems
should be aimed for that would enable MFIs to refinance themselves from retail deposits, bank loans
and access to domestic capital markets."
Although MFIs expanded their customer base in
2006 on average 23%, the microfinance industry is can still only meet the needs of a small fraction
of its potential borrowers. To put this in perspective, MFIs currently serve an estimated 100
million borrowers, while the total potential demand is roughly estimated at one billion people the
The study itself is a very readable primer for investors interested in
learning about microfinance and how MFIs operate. The creditworthiness of the working poor who
qualify for microfinance loans is extremely high. One example of the information offered in the
study is its explanation of why traditionally women have made up the vast majority of MFI
"The predominance of women reflects the fact that women are more reliable
debtors because, due to stronger social and family ties, they often follow a more conservative
investment strategy which in turn results in lower default rates for MFIs," Dieckmann writes. "This
lower credit risk is further supported by a relatively low degree of labor mobility of female
clients (due to strong family ties women tend to work from home) which decreases the cost of
monitoring debtors for an MFI."
The study also includes the top 50 microfinance
institutions. The top 5 microfinance institutions listed are Grameen Bank, Bangladesh; ASA,
Bangladesh; VBSP, Vietnam; BRAC, Bangladesh; and BRI, Indonesia. The rankings are based, in part,
on the number of borrowers, gross loan portfolio and return on equity.
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