Co-Creation for Impact Investment in Microfinance

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.

© 2014 Vilnius Gediminas Technical University (VGTU) Press. 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.

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-

In recent years, more commercial banks have been entering the microfinance market as there are opportunities for sustainable growth and revenue. This study analyses and compares the cases of four major banks that acquired Peruvian microfinance institutions. The paper argues that banks have sought equity investments in MFIs to attain deeper outreach at the ‘bottom of the pyramid’. Conversely, MFI shareholders were motivated to sell because of attractive valuations paid by the banks, difficulty competing with larger investors interested in the MFI sector, and in order to offset the risk of portfolio concentration in microfinance investments. This paper concludes that bank participation in the microfinance sector will be both profitable and have a positive social impact in the medium term, since it will foster reduced interest rates, greater efficiency, and improved risk management.

Purpose – These last three years, the global reputation of microfinance has been damaged by some major crises, notably in India. The Microfinance Investment Vehicles (MIVs), funded by public money and socially inclined investors, are believed by observers to be part of the causes of the crises (von Stauffenberg & Rozas, 2011). As a consequence, they now have to demonstrate their commitment to the social mission of microfinance. This chapter aims at putting forward the debate on MIVs’ ability to effectively contribute to the social mission of microfinance by analyzing how they integrate social performance in their investment decisions. Methodology/approach – Analysis of interviews with microfinance fund managers based on a framework of recognized impediments to a socially responsible approach in investing. Findings – While social performance is recognized by respondents to be an important topic for the industry, fund managers still do not give a strong role to social criteria in investment decisions. The findings of the qualitative analysis in the chapter demonstrate that this is linked to a number of major impediments such as the tendency to believe that microfinance is social per se, the lack of standardization in social performance tools, and also a loose regulation regarding social reporting. Research limitations/implications – The findings of the study are limited due to the relatively small sample size and the focus on fund managers’ answers only. Future research could investigate the viewpoints of different stakeholders in the investment process, such as the back investors of microfinance funds or the regulatory institutions. Originality/value – To the best of our knowledge, this is the first attempt to get insights on the impediments to a stronger focus on social performance by MIVs, with the application of a recognized framework from the Socially Responsible Investment (SRI) literature.

The following sections are included:IntroductionDataThe Risk-Return-Outreach Trade-OffQuantifying the Risk-Return-Outreach Trade-OffConclusionReferencesAppendix: Methodology

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)

Over the last few years, the microfinance sector has seen its transformation. Microfinance institutions seek a wide range of sources of funding, while private investors seek not only social returns but also financial returns. This new approach has led to the emergence of microfinance investment funds and initial public offerings of certain Microfinance institutions. Microfinance now seems to be seen as a new investment opportunity by global investors.Aim of this paper is to study the performance of public Microfinance Investment Vehicles. Despite a significant currency risk, we find that the integration of microfinance assets diversifies the investor’s risks and improves the efficient frontier. We conclude that microfinance institutions, via investment vehicles, are likely to attract capital from socially responsible investors seeking new investment opportunities despite a sharp decline in the Sharpe ratio over the past few months.

Microfinance's success in terms of scale, poverty alleviation, and return on investment has drawn the attention of financial markets. At the same time, microfinance is under increasing scrutiny as controversies abound over the risks of overindebtedness, microfinance's actual impact on clients, and other contentious issues. Among some investors, the result has been a call to ‘go back to the basics’ - client-centred institutions that offer products that make a difference. Social performance is therefore becoming an integral part of assessments of microfinance institutions (MFIs), and is gaining ground in the investment world. What are microfinance investors doing to systematize social performance management at the MFI level and to improve their own practices as responsible investors? What tools and approaches are being used? This article introduces the approach of social audit through the example of the Social Audit tool for Microfinance investment vehicles (SAM). This tool was designed to analyse investmen...

Social and Solidarity Investment In Microfinance

In view of the recent evidence that the impact of microfinance is being overstated, this study assesses the causal link between receiving credit from a microfinance institution and poverty reduction among rural households in the Upper East Region of Ghana. Using consumption expenditure as the outcome variable, we test the hypothesis that receiving credit has a poverty reducing effect. Treatment effect estimation technique is used to examine data on 250 beneficiaries and 250 non-beneficiaries from five Districts in the Region. Although the method of study is based on a quasi-experimental approach, the process of selecting the beneficiary and non-beneficiary sample cautiously made an attempt to minimize the potential problems that will arise from contamination, spill-over effects and programme and self-exclusion selection biases. The results support the hypothesis that microfinance has 0.12% poverty reducing effect. Premised on this, we conclude that even in very poor areas microfinance is capable of reducing poverty. Therefore microfinance investment is recommended to broaden the scale and scope of beneficiaries reached and improve delivery strategies to suite context specific characteristics.

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.

Foreign investment for microfinance is on the rise. Socially-motivated foreign investors have placed US$ 1.2 billion in debt, equity and guarantees in about 500 specialised microfinance institutions (MFIs) and cooperatives.1 These investments are provided by both privately-managed microfinance funds and public investors (the international financial institutions or IFIs). New and existing private investment funds have an estimated US$ 400 million on hand to invest in microfinance, and were expected to raise approximately US$ 255 million in additional capital in 2005. As the supply of foreign investment in microfinance continues to grow, it will be increasingly important to understand the appropriate role of foreign investors in helping to build strong institutions that provide financial services to poor people.

Is venture capital socially responsible? Exploring the imprinting effect of VC funding on CSR practices

An unacceptably high proportion of the world’s population lives in dreadful conditions that consign them to Malthusian lives that are “nasty, brutish and short.” While relief and other donations surely help to alleviate poverty temporarily, poverty can be fought decisively only by the creation of wealth where wealth is most lacking, which is among the poor. Wealth creation in this context is broadly defined as improvements in human productivity.