Access to basic financial services such as a bank account is something many of us in the developed world take for granted. Yet according to research published by the World Bank’s Global Financial Inclusion Database in April this year, around 2.5 billion people worldwide do not have a formal account at a financial institution. In a nutshell, more than half of the population in developing countries does not have a bank account, compared with just 10% in developed countries.
“Pension funds say, ‘we would like to start with $150m’ and we say, ‘not going to happen – you can start with $50m and take it from there’.”
Vincent Oswald
The subsequent need to provide financial services in developing economies has created an opportunity for investors to tap into what many would describe a ‘win-win’ situation; doing social good while earning a return for the portfolio.
Step forward microfinance. At its core microfinance is providing access to basic financial services for those in frontier and emerging world countries that do not otherwise have access to them. This can be through providing micro credit, working capital for businesses and savings and insurance products. The market is now in the region of $90bn worldwide, with up to $20bn of this invested through funds.
Commonly investments are channelled through microfinance investment vehicles (MIVs), which are independent investment funds that allow private and public capital to flow to microfinance institutions (MFIs) who offer these financial services. There are essentially two ways to invest: through debt and through private equity. The most common form is debt, but according to microfinance rating agency MicroRate’s 2012 survey, MIVs increased their equity weighting from 13% in 2008 to 18% in 2011.
Overcoming obstacles
Returns from microfinance vary depending on whether access is through a debt vehicle or a private equity-type strategy. For the former, a currency-hedged strategy can return anything between 2% and 6%, while an unhedged strategy can return between 7% and 12%. Private equity meanwhile, can offer up to 30% per annum, but carries more risk.
Microfinance also has a low correlation with more traditional asset classes. For example, Heide Jimenez Davila, head of investor services and communication at Blue Orchard Finance, a specialist in impact investing, says the Blue Orchard Finance flagship fund has a correlation of -0.06 with the MSCI World Equity index and 0.01 with the JP Morgan Emerging Market Bond index.
But despite some compelling reasons for investing, the industry has struggled to shrug off some high profile crises which threatened to rock it to its core. Most notable was the Andhra Pradesh microfinance crisis in India in 2010. The explosive growth of microfinance institutions in southern India had provided people with easy credit and eventually led the Andhra Pradesh state government to pass a law severely curtailing the MFIs and calling on borrowers to stop paying back their loans. According to reports at the time, this led to a number of suicides among over-indebted clients of some of India’s biggest MFIs.
However, industry experts are quick to dismiss this grim episode. Blue Orchard Finance’s Jimenez Davila believes this “wake-up call” helped strengthen the industry and that the knockon effect on Blue Orchard’s performance was “negligible”. Meanwhile, Bob North, chief technical officer at SharedImpact, a charity that connects donors with social investment, describes the India episode as a political “one-off”.
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