By Xavier Reille and Ousa Sananikone, published by Consultative Group to Assist the Poor (CGAP), April 2007, 2 pages, available on the Microfinance Gateway at http://www.microfinancegateway.org/content/article/detail/40677
The paper, a Consultative Group to Assist the Poor (CGAP) brief, by Xavier Reille and Ousa Sananikone, highlights the growth of foreign capital investment in microfinance, specifically the proliferation and impact of private investment funds. The authors begin by describing two primary players in microfinance investment, international financial institutions (IFIs), which provide seed capital to start-up microfinance institutions (MFIs), and private investment funds know as microfinance investment vehicles (MIVs). IFIs are investment arms of public development agencies. For example, the International Finance Corporation (IFC), a member of the World Bank Group, is considered an IFI. The Netherlands Development Finance company (FMO) is also an IFI. MIVs, on the other hand, draw funds from the private sector. BlueOrchard, an MIV, manages funds that deliver capital from private investors directly to MFIs through loans and other structures. MIVs are, in essence, financial intermediaries that act as distribution channels of private monies.
In the brief, the authors first provide details on the changing MIV market. From 2004 to 2006, IFI microfinance portfolios more than doubled from USD 1 billion to USD 2.3 billion. However, MIV portfolios more than tripled, from USD 600 million to USD 2 billion. In 2005 and 2006, thirty new funds were created. At the time the authors wrote the brief, 74 MIVs existed. MIV portfolios grew at 110 percent per year and consisted of primarily USD and EUR fixed income investments, but also a mix of equity and local currency investments. The authors indicate 47 percent of MIV investors are socially responsible investors or foundations. 36 percent are IFI investors and 17 percent are institutional investors with a double bottom line (expecting both financial and social returns). According to the authors, 86 percent of MIVs manage less than USD 20 million in funds. The average MIV investment in an MFI is just USD 1 million compared to the average IFI’s investment of USD 3.1 million. Financial returns from most MIVs are close to US money market rates and range from 2.6 percent to 5.1 percent.
Next, the authors describe the MIV market as “concentrated in many respects.” The top 10 MIVs account for 67 percent of total MIV portfolios. A few of the top MIVs are BlueOrchard, with USD 450 million managed, Procredit Holding AG, with USD 390 million managed, and Oikocredit, with USD 270 million managed. 25 percent of all MIV investment is concentrated in 10 MFIs. Furthermore, 81 percent of MIV investments are in Eastern Europe, Central Asia, or Latin America. The authors also explain how competition amongst MIVs has created niche market investment strategies or structures. For example, some funds target smaller MFIs, others offer equity funding, some are country-level, and some funds invest in other funds.
The authors conclude that the rapid increase in foreign private capital is an opportunity and is a positive indicator of investor confidence in the microfinance industry. Yet, growth of MIVs will also create numerous challenges. First, there are a large number of MIVs pursuing a limited number of MFIs. Consolidation is necessary to increase fund efficiency. Second, many MIVs lack transparency and a shared performance standard. Both are critical to the success of acquiring private investment. Finally, the authors believe the microfinance industry should pursue the growing pool of “socially responsible” private investors looking for double bottom line returns, as these investors represent a huge opportunity for growth.
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