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 microfinance
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.
Another factor 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
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 study reports.
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 borrowers.
"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
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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