Suitability of Microfinance as an Investment Option

© 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.

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.

The boom of microfinance and its high profits in emerging countries has raised interest in this sector of investors in developed countries. The question to be addressed is how venture capital will help this MFI scale its business and profits? Can developed country investors, facing a lack of profitable investment opportunities in the wake of the financial crisis, marry their business acumen with social responsibility towards the poor? The paper uses a case study of Riskebiz, a venture capital fund that is investing in the microfinance sector. Microfinance is a tool, among others, in development and poverty alleviation. The value of the tool is enhanced if technology and technical services are provided to the MFI as well as to the poor entrepreneur. The case illustrates that the poor are not only requiring microcredit, but also micropayments and microinsurance, as well as health check-ups. A team of complimentary partners who can standardize and deliver these services could be very useful to provide a rich experience to the customer to co-create value, growth, new revenue opportunities and new delivery opportunities to the MFI. Donors and social investors who do not have specific knowledge of emerging country markets should consider such issues before investing in microfinance funds. The receiving MFI should also try to partner with VCs who can provide the required advice.

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.

Stimulating the Economy of Southeast Europe.- Setting the Stage for Stability and Progress in Southeast Europe.- The Scenario for EU Accession by Southeast European Countries.- Infrastructure Finance, Accession, and Related Policy Issues in Southeast Europe.- Making It Easier to Do Business in Southeast Europe.- Financial Regulation for Stability and Protection in Southeast Europe.- Financial Sector Development in Southeast Europe - The Roles of EU Accession and Basel II.- Implementing European Standards of Banking Regulation in Georgia.- Issues Concerning Foreign Banks' Operations in Bosnia and Herzegovina.- The Role of Foreign Banks in SEE.- The Impact of Basel II on Banking in Albania and Southeast Europe.- Financial Stability in Southeast Europe - Basel II and the Challenges Ahead.- Bankers' Perspectives - Dynamic Banking in the Changing Market of Southeast Europe.- Bankers' Perspectives - Dynamic Banking in a Changing Market.- Evolution of the Banking Sector in Southeast Europe - The Role and Business Strategies of Domestic Banks.- Financing Small and Medium-Sized Companies.- The Business Strategies of Domestic Banks in the Long Run - SME Lending as an Attractive Market Segment.- Building a Market Niche Also Builds a Market - Opportunity Bank in Montenegro.- Clients' Perspectives on Access to Financial Services for Micro and Small Enterprise in Southeast Europe.- Clients' Perspectives - Providing More Effective Financial Services for Micro and Small Enterprises.- Access to Finance: Issues and Opportunities in Southeast Europe.- Nonfinancial Obstacles to SME Financing in Serbia.- Constraints to Business Development in Bulgaria and the Case for Action.- Degrees of Competition in Serving Target Groups - They May Be Closer than You Think.- A New Approach to Business Development Services in Southeast Europe.- Looking Ahead - Public-Private Partnerships in the Financial Sector in Southeast Europe.- Public-Private Partnerships for Financial Development in Southeast Europe.- Replicable and Transparent PPP Models for Financial Sector Development.- Using PPPs to Facilitate Transactions in Financial Markets.- Sustainable Microfinance Banks - IMI as a Public-Private Partnership in Practice.- Opportunities for Public-Private Partnerships in Financial Sector Development.- Public-Private Partnership - Results in the Banking Sector in Southeast Europe.- Microfinance Investment Funds - An Innovative Form of PPP to Foster the Commercialisation of Microfinance.- Summary and Conclusions.- An Overview of Banking, Financial Regulation, and Access to Financial Services in Southeast Europe in the Context of EU Enlargement.

KfW Entwicklungsbank has a long history of supporting microfinance through funding and technical assistance. Apart from KfW funds, Financial Cooperation funding supplied by the German Federal Ministry for Economic Cooperation and Development (BMZ) is invested directly in MFIs. These BMZ funds are concessional or grant funds. Funding, usually in the form of debt, was initially made available through existing financial institutions that were willing to make smaller loans (downscaling). In a second phase KfW began to support specialised institutions, using two different methods. The first was upgrading, that is, transforming nonbank microfinance lending organisations into full-fledged financial service providers. The second approach was to establish new specialised financial institutions (greenfielding).1 In a third, subsequent phase, KfW has provided further support for the development of microfinance by investing in microfinance investment funds (MFIFs).

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-

This study investigates the effects of the market portfolio being unknown on the estimation of beta in the CAPM. Providing an analysis of the impact of using a proxy for the market portfolio when the market portfolio is known. This allows one to ask and answer ‘if what’ questions, such as if portfolio A is the true market portfolio, what happens to beta if one uses portfolio B as a proxy for A. It is shown that for a given universe of investible assets, frequently used equally weighted and value weighted portfolios are far from the Markowitz market portfolio and thus the betas calculated with the equally weighted and value weighted portfolios are quite different from those obtained with the Markowitz portfolio. These calculations are based on sequential assumptions that one portfolio is a proxy whilst another is the actual market.

The Importance of New Partnerships.- New Partnerships for Innovation in Microfinance.- New Partnerships for Sustainability and Outreach. Partnerships to Leverage Private Investment: Raising MFI Equity Through Microfinance Investment Funds.- Market Transparency: The Role of Specialised MFI Rating Agencies.- MFI Equity: An Investment Opportunity for the Broader Public?- Microfinance and Economic Growth - Reflections on Indian Experience.- Microfinance Investments and IFRS: The Fair Value Challenge. Technology Partnerships to Scale up Outreach: Remittance Money Transfers, Microfinance and Financial Integration: Of Credo, Cruxes, and Convictions.- Remittances and MFIs: Issues and Lessons from Latin America.- Using Technology to Build Inclusive Financial Systems.- Information Technology Innovations That Extend Rural Microfinance Outreach.- Banking the Unbanked: Issues in Designing Technology to Deliver Financial Services to the Poor.- Can Credit Scoring Help Attract Profit-Minded Investors to Microcredit?- Credit Scoring: Why Scepticism Is Justified. Partnerships to Mobilise Savings and Manage Risk: Micropensions: Old Age Security for the Poor?- Cash, Children or Kind? Developing Old Age Security for Low-Income People in Africa.- Microinsurance: Providing Profitable Risk Management Possibilities for the Low-Income Market.- Securitisation: A Funding Alternative for Microfinance Institutions.- Reducing Barriers to Microfinance Investments: The Role of Structured Finance

Microfinance Investment Funds — An Innovative Form of PPP to Foster the Commercialisation of Microfinance

Investing in Microfinance Investment Funds — Risk Perspectives of a Development Finance Institution

On the plane home from the KfW Symposium on microfinance investment funds, I thought about the facts, the ideas, and the feelings that we shared during those two days in November 2004. The feelings were especially important because they are what most motivate us, stir us to action or resign us to abstinence. One feeling I sensed several times was fear — the fear of private investment in microfinance. Are investors “short timers,” getting in, making or losing a quick buck, and getting out? Will investors sitting on boards corrupt strategy, moving management towards consumer lending, away from the smaller borrowers and the rural markets? Will they load existing customers with more debt than they can handle? In response to such questions rooted in fear, and to explore another way of experiencing what lies ahead, I offer the view of one investor.

The stage of the formation and establishment of a market economy in Georgia raises the necessity for economic science to solve fundamentally different problems concerning the improvement of the investment environment and investment climate in national economy. After the collapse of the former Soviet Union, the replacement with new relationships has been quite difficult and painful in which foreign investments should play a crucial role. Issues to be discussed include the questions that explore some of the categories and the constraints of the investment climate (potential). All this leads to the relevance of the article and, therefore, determines the purpose of the article. The research process uses general dialectical methods of socio-economic research (description, analysis, systematization, abstraction, synthesis) as well as modern methods of research of economic theory (systemic, institutional, evolutionary). The scientific aim of the research is to highlight the current issues of the investment environment and investment climate in economy, to study the transformation processes taking place in Georgia during the last two decades, to conduct analysis using proper methods, to show the current social and political as well as other important processes, to generalize them and to form proper opinions. Findings based on research suggest that it is possible to speed up the process of economic development of Georgia. However, the situation will remain difficult in the region and the factors causing the recession _ instability in oil prices and the weakening of the national currency against the US dollar will still be present. In conclusion, the opinion can be formed that a stable and predictable legislative process is important for the investment environment. Therefore, all the parties that may undergo the changes should be informed and involved in every project planned by the government; At present, it becomes necessary to further extend the deregulation policy, which should include the development of financial and investment sectors and support of the establishment of appropriate infrastructure, promotion of the further development of microfinance institutions, investment companies and funds, designing the system of investment insurance and stimulation, elimination of unnecessary bureaucracy and artificial barriers, etc.

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.

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.