Can investment in microfinance funds improve risk-return characteristics of a portfolio? - eScholarship

This article is concerned with contribution of microfinance investment funds to a sustainable financial portfolio. With regard to the dependence of microfinance funds’ returns on the performance of stock and fixed income markets in developed and emerging economies we find slightly negative correlation when measured by the portfolio beta measure. Our regression analysis confirms that returns on investment in microfinance investment funds exceed the returns on the market portfolio. This result together with reported near-to-zero beta estimates as a proxy for the systematic risk may be taken to be a clear financial advantage of an inclusion of microfinance assets in a portfolio compared to pure stock or bond portfolios. The results based on CAPM beta and Jensen's alpha are confirmed by mean-variance spanning test. We show that the socially responsible investors may invest into microfinance without sacrifice with respect to pure financial indicators.

This paper investigates investment performance of the most commercially developed microfinance investment funds and it also includes a discussion of major economic characteristics of microfinance investments. When we analyze the relation between microfinance funds' returns and the performance of stock and fixed income markets in developed and emerging economies we find a slightly negative correlation. We show that returns of microfinance investment funds exceed the returns on the market portfolio. Together with reported near-to-zero beta estimates as a proxy for the systematic risk, this means that investment into microfinance investment vehicles may be recommended as a desirable addition to an investment portfolio.

This paper develops a method to measure and compare social performance of microfinance investments at the level of microfinance investment vehicles. Drawing from measurement theory, it develops formal quality criteria that individual social performance indicators, the selection, and the aggregation of such indicators into a single metric need to satisfy. Social performance indicators are selected for both microfinance investment vehicles, and their underlying portfolio. The method presented here uses data of the microfinance investment universe to determine a rating framework for the underlying of microfinance institutions, in addition to a unique set of variables captured at MIV level. The paper demonstrates the approach in a sample calculation and serves as a guideline for a future empirical application among microfinance investment vehicles.

Microfinance institutions (MFIs) are increasingly addressing the traditional financial market to fund their continued growth and to better serve their clients. In its early days, the microfinance sector was essentially driven by non-profit organisations and official development agencies. Over the last few years, these institutions, together with a few new entrants in the sector, have set up an increasing number of investment structures to fund MFIs. Common usage in the microfinance industry is “microfinance investment fund” as the generic term to identify all corporate investment structures (such as holding companies for example) which have been set up to provide equity and/or debt financing to MFIs, with investors acting as shareholders or as lenders. This paper builds upon a study prepared by the author on microfinance investment funds (MFIFs) for the 2004 KfW Financial Sector Development Symposium held in Berlin in November 2004. This initial study presented an overview of microfinance investment funds with their main features and characteristics. This paper focuses on those investment funds which invest all or a part of their assets in the equity capital of MFIs. A number of investment structures were initially created as vehicles to provide funding to development initiatives, such as MFIs. Oikocredit was for example established in the Netherlands in 1975 to make development-oriented investments in church-related institutions. It was only in the mid-1990s that the first commercially focused investment structures emerged, targeting MFIs such as Profund, launched in 1995. The original promoters of these investment vehicles were development agencies and non-profit organisations. All these initiatives had a com-

The study seeks to examine the impact of microfinance bank on economic growth of Nigeria. The research estimated the specified models using the Cochran-Orcutt regression model applied on time series annual data from the central bank of Nigeria statistical bulletin and annual reports 2017 edition and world bank national account data. The study employed both descriptive and inferential statistic data in analyzing the time series data. The results garnered from the data analysis indicated among other things that; microfinance bank credit growth and investment growth were significantly but negatively related to the real gross domestic product. the microfinance bank deposit growth and asset growth were positively and significantly related to real gross domestic product. From the granger causality test, it was found that there is a bidirectional causality between real gross domestic product and microfinance bank credit growth and real gross domestic product and microfinance bank asset growth. We therefore recommend that the Central Bank of Nigeria, which plays a supervisory function over microfinance Banks should put strict measures in place to ensure that loans that are granted are used for purely economic reasons, so it can impact positively on the economy.

Risk is an integral part of financial intermediation. Hence, risk management must be at the heart of finance. However, it is disturbing to note that systematic risk management is still not as widespread as it should be in the microfinance industry. Except for a few flagship microfinance institutions (MFIs), which constitute the core of the industry, most MFIs do not pay adequate attention to systematic risk management. The microfinance industry has grown rapidly during the last decade in breadth, depth, and scope of outreach. The rapid growth seems to continue, given the massive unserved and underserved market. The growth of the industry has changed the risk profile of MFIs. Yet many MFIs seem to continue to seek growth without much attention to attendant risks. Surprisingly, many MFIs appear to neglect even the basic credit risk management which helped MFIs achieve high growth rates historically. The growing interest of many MFIs in agricultural microfinance must be seen in the broader context of risk management in the industry. Financing agriculture is more risky than financing trade or industry; it is also more risky than financing nonagricultural microenterprises. However, MFIs interested in agricultural microfinance should be more concerned about their internal structures and capabilities rather than the widely discussed, and often cited, pervasive risks in agriculture and their ramifications for the MFIs' pursuit of growth in agricultural microfinance. MFIs should recognize the inherent risks in agriculture. However, if they build their institutional capacity to effectively deal with risks generally associated with financial services for poor and lowincome households, their prospects for success in agricultural microfinance would certainly be much brighter. In addition, no amount of sophisticated and modern technical tools and analysis can help achieve effective risk management in respect of nonagricultural or agricultural microfinance if risk management is not embedded into the institutional culture and its value is not shared by all employees. Achieving this goal remains one of the most challenging tasks in risk management which MFIs need to address. To help in this effort, we need to bring into the discussion—now dominated largely by issues related to introducing sophisticated systems and technical tools of risk management—the institutional cultural issues and issues related to cognitive biases in executive decision-making behavior.

Micro-finance institutions (MFIs) will certainly be affected by the financial crisis ricocheting across the globe, but the authors believe that the sector is fundamentally sound. Larger institutions, especially those with diversified funding sources, such as retail deposits, are best positioned to manage the effects of economic and financial contraction. Valuations may change, but the authors believe the long-term outlook for equity investment in microfinance is positive. Private equity valuations for MFIs have varied widely over the past few years. Investors should not value MFIs the same way they value traditional banks. The authors highlight five characteristics that differentiate MFIs from traditional banks, and justify a slightly different valuation approach: a double bottom line that aims for social and financial returns, excellent asset quality, high net interest margins (NIMs), high operating costs, and longer term funding available from developmental investors.

Extreme losses are the major concern in risk management. However, the dependence between financial assets and the market portfolio is known to change under extremely adverse market conditions. This is why we develop a measure of systematic tail risk, the tail regression beta, defined by an asset’s sensitivity to large negative market shocks, and establish the estimation methodology. In our estimation methodology we exploit the heavy tail feature of financial returns instead of applying a linear regression based on tail observations. We find that the estimator of the tail regression beta has a similar structure as the estimator of the regular beta from regression analysis. Simulations show that our estimation methodology yields an estimator that has a lower mean squared error than just performing regressions in the tail. In an empirical exercise we compare the tail regression beta of industry portfolios to regular systematic risk measures: the market beta and the downside beta. The results demonstrate that the portfolio sensitivity to regular systematic risk is in general different from the sensitivity to systematic risk in severe market downturns. Hence, for risk management purposes, estimating the tail regression beta is an informative addition to the regular beta analysis. Furthermore, the tail regression beta is a useful instrument in both portfolio risk management and systemic risk management. We demonstrate its applications in analyzing Value-at-Risk (VaR) and Conditional Value-at-Risk (CoVaR).

Microfinance investment funds (MFIFs) are increasingly seen as a core part of the funding of microfinance institutions (MFIs). MFIFs take various legal forms and structures set up by a variety of players. But all serve the same purpose, which is to channel increasing funding to micro-entrepreneurs via MFIs in developing countries and transition economies.

Microfinance is primarily designed to have social impact. However, little is known about the financial attractiveness of investing in microfinance. Most microfinance institutions are private instead of publicly listed on a stock exchange. Hence, existing research relies on accounting-based returns to determine the diversification characteristics of microfinance investments relative to other asset classes. These prior studies use accounting-based risk measures as a proxy for market-based risk measures. We document that for a sample of publicly listed microfinance institutions, accounting-based and market-based risk measures have low correlation. Therefore, using accounting-based risk measures might underestimate the (market) risk embedded in investing in microfinance institutions. In addition, we show that mean-variance spanning tests that use accounting-based returns of microfinance institutions overstate the added value of microfinance institutions in investment portfolios. Taken together, our results indicate that previous research on the attractiveness of investments in microfinance institutions could be exaggerated.

This study highlights the characteristics of Small and Middle Entrepreneurs (SMEs) as a debtor of micro finance institution (MFI), whether as conventional or sharia type. The study was conducted by taking primary data including 30 debtors of conventional MFI and 29 debtors of Sharia MFI using a questionnaire. In the first stage, the study established several indices to measure the religiosity level using Principal Component Analysis. Additionally, game field experiments use in order to reveal the debtor’s risk preferences. At a later stage, the probit regression model used. This study found that debtors of sharia MFI is relatively more religious. There is also a fact that debtors from both types of MFI have the same risk preferences, risk lover. But debtors in sharia MFI have a relatively lower level one. So, in order to broaden the Sharia MFI inclution, the managers have to pay more attention to at least two other characteristics of SMEs; their age and the years of experience in business management.

On Mission Drift in Microfinance Institutions (B Armendariz & A Szafarz) Rural Microfinance & Agriculture Value Chains: Strategies and Perspectives of the Fondo de Desarrollo Local in Nicaragua (J Bastiaensen & P Marchetti) Insurance for the Poor: Definitions and Innovations (C Churchill) Microfinance Tradeoffs: Regulation, Competition, and Financing (R Cull et al.) Higher Education through Microfinance: The Case of Grameen Bank (A U Dowla) Spanning the Chasm: Uniting Theory and Empirics in Microfinance Research (G Fischer & M Ghatak) Microfinance in Bolivia: Foundation of the Growth, Outreach and Stability of the Financial System (C Gonzalez-Vega & M Villafani-Ibarnegaray) The Gender of Finance and Lessons for Microfinance (I Guerin) Understanding the Diversity and Complexity of Demand for Microfinance Services: Lessons from Informal Finance (I Guerin et al.) The Early German Credit Cooperatives and Microfinance Organizations Today: Similarities and Differences (T Guinnane) Social and Financial Efficiency of Microfinance Institutions (B Gutierrez-Nieto et al.) What External Control Mechanisms Help Microfinance Institutions Meet the Needs of Marginal Clientele? (V Hartarska & D Nadolnyak) The Performance of Microfinance Institutions: Do Macro Conditions Matter? (N Hermes & A Meesters) Ethics in Microfinance (M Hudon) Efficiency (M Hudon & B Balkenhol) Reaching the People Who Microfinance Cannot Reach: Learning from BRAC's Targeting the Ultra PoorA Programme (D Hulme et al.) Microfinance Evaluation Strategies: Notes on Methodology and Findings (D Karlan & N Goldberg) Corporate Governance Challenges in Microfinance (M Labie & R Mersland) Social Investment in Microfinance: The Trade-off between Risk, Return and Outreach to the Poor (R Lensink & R Galema) Taking Gender Seriously: Towards a Gender Justice Protocol for Financial Services (L Mayoux) Is Microfinance the Adequate Tool to Finance Agriculture? (S Morvant-Roux) What is the Demand for Microcredit? The Case of Two Rural Areas in Morocco and Serbia (W Pariente) Oversight is a Many-Splendored Thing: Choice and Proportionality in Regulating and Supervising Microfinance Institutions (J K Rosengard) Boosting the Poor's Capacity to Save: Instalment Plans and Their Variants (S Rutherford) Corporate Responsibility Versus Social Performances and Financial Inclusion (J-M Servet) Microfinance - A Strategic Management Framework (G Stuart)

Demand for microfinance products clearly exceeds supply: over 2.5 billion people, or 83% of the global market, lack access to financial services. One constraint that prevents microfinance institutions (MFIs) from reaching more customers is their lack of access to refinancing. Given the scarcity of donor funds and the limits of long-term domestic funding sources, MFIs seeking funding are increasingly turning to international private capital markets. The hurdles MFIs face in attracting private capital are complex and profuse. Industry-specific characteristics, including size, a dearth of regulation, lack of internationally-recognized ratings, and location in developing and transition countries impede MFI access to international capital markets. MFIs must also overcome the challenges of attracting private capital to a new asset class. Microfinance does not fit neatly into institutional investment mandates, few institutional investors have microfinance expertise in-house, and the perception of microfinance as a risky asset class, as well as the high cost of thorough analysis relative to investment size, may discourage due diligence. Moreover, the total potential volume of institutional investors’ portfolios of microfinance instruments is very large relative to the limited number and small size of such investments. This may limit institutional investors’ ability to reap the benefits of diversification – and may contribute to prohibitively high transaction costs.

Microfinance means “programme that extend small loans to very poor people for self employment projects that generate income in allowing them to take care of themselves and their families” (Microcredit Summit, 1997). The World Bank has recognized microfinance programme as an approach to address income inequalities and poverty. The microfinance scheme has been proven to be successful in many countries in addressing the problems of poverty. The World Bank has also declared 2005 as the year of microfinance with the aim to expand their poverty eradication campaign. The main aim of the paper is to assess the potentials of Islamic financing schemes for micro financing purposes. The paper argues that Islamic finance has an important role for furthering socio-economic development of the poor and small (micro) entrepreneurs without charging interest (read: riba’). Furthermore, Islamic financing schemes have moral and ethical attributes that can effectively motivate micro entrepreneurs to thrive. The paper also argues that there is a nexus between Islamic banking and microfinance as many elements of microfinance could be considered consistent with the broader goals of Islamic banking. The paper, first, introduces the concepts of microfinance, and presents a case for Islamic microfinance to become one of the components of Islamic banking. The paper then discusses, the potentials of various Islamic financing schemes that can be advanced and adapted from microfinance purposes including techniques to mitigate the inherent risks. Finally, the paper concludes with the proposals to accommodate the Islamic microfinance within the present Islamic banking structure. 2. Principles of Microfinance Microfinance grew out of experiments in Latin America and South Asia, but the best known start was in Bangladesh in 1976, following the wide-spread famine in 1974. Advocates argue that the microfinance movement has helped to reduce poverty, improved schooling levels, and generated or expanded millions of small businesses. The idea of microfinance has now spread globally, with replications in Africa, Latin America, Asia, and Eastern Europe, as well as richer economies like Norway, the United States, and England. Among the features of microfinance is disbursement of small size loan to the recipients that are normally micro entrepreneurs and the poor. The loan is given for the purpose of new income generating project or business expansion. The terms and conditions of the loan are normally easy to understand and flexible. It is provided for short term financing and repayments can be made on a weekly or longer basis. The procedures and processes of loan disbursements are normally fast and easy. Additional capital can also be given after the full settlement of the previous loan.

Micro finance is emerging as a powerful tool for poverty alleviation in India. This approach has recognition in India after the launch of SHGs and Bank linkage programme by NABARD in the year 1992. According to United Nations, micro finance institutions are the basic provider of small savings, micro credit and other basic financial services to poor and marginalised section like women. Despite substantial contributions of women to both household and national economy, their contributions are not recognised in the society. Rapid progress in SHGs and Bank linkage model has now turned into an empowerment movement among women in the country. From various empirical studies, it is found that micro finance through SHGs and Bank linkage model has enabled the members of SHGs to improve their socio-economic status. It also improves family savings, decision making process, self confidence among women section of our society. Micro finance is also necessary to overcome social exploitation and create confidence for self reliance among rural women and poor section of our society. Apart from the informal financial institutions, the formal and semi formal sectors also are taking much interest in providing micro finance to rural women in Assam. These financial institutions not only provide small savings and micro credit to women but bringing them together in organised banking sector. This paper highlights that micro finance through SHGs has a positive role in income, savings and investment of women in Rani Block of Kamrup District of Assam.