Microfinance: An emerging investment opportunity

DB Research has published an interesting paper on microfinance as an investment opportunity:


Uniting social investment and financial returns

"Socially responsible investments (SRIs) rank high on investors’ agendas today. SRIs have risen sharply to USD 2.3 tr in the US and to EUR 1.0 tr in Europe in recent years.

Amongst all SRIs, microfinance investments increasingly attract institutional and individual investors due to their double bottom line. While they allow investors to adopt a social investment strategy geared toward poverty alleviation they offer an attractive risk-return profile at the same time.The microfinance sector currently has an estimated total loan volume of USD 25 bn. Yet, it is unable to serve more than a fraction (~100 m) of today’s total sector demand of roughly 1 bn micro-borrowers.

This situation translates into an immense funding gap estimated at around USD 250 bn. In order to narrow this funding gap a greater involvement of capital markets is one key medium-term priority. Since 2004, international public and private-sector investors have more than doubled their investments to USD 4.4 bn in 2006. Microfinance constitutes an emerging investment opportunity for institutionals and individuals alike. Investors have barely started to explore its full potential.

By 2015, we expect institutional and individual investments in microfinance to rise sharply to around USD 20 bn. The underlying assumptions are that (1) microfinance will gradually evolve into a niche investment product that will increasingly attract retail investors and benefit from the general strong rise in SRIs. Furthermore, it will appeal to a wider range of commercial investors as it might even be conducive to investors’ portfolio diversification. (2) A critical mass of MFIs will over time become capable of absorbing foreign funding."


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