Chennai: The hallmarks of a mature microfinance investment market will include ready availability of high-quality information about MFIs (microfinance institutions), a wide range of investors, and active trading with ease of entry and exit, says Elisabeth Rhyne in <b>‘Microfinance for Bankers and Investors’ </b> (www.tatamcgrawhill.com). When that happens, MFIs will be able to raise funds at favourable costs that accurately reflect their risk and return profiles, she adds.
“The biggest issue in market creation is getting the right information into the hands of prospective investors… When <i>The Economist</i> took its first serious look at microfinance in 2005, it complained about the lack of data and the obscure metrics that meant something to microfinance mavens but nothing to standard investors.”
MIX or the Microfinance Information Exchange is one of the antidotes to the problem; and most ‘authoritative’ data on the industry, performance benchmarks, and individual MFIs now come from this.
The vast majority of international investment in microfinance takes place through MIVs or microfinance investment vehicles, informs Rhyne. These are debt and/or equity funds that specialise in microfinance and sometimes other forms of social investing. She sees the growth of MIVs as a significant part of the larger phenomenon of ‘impact investing,’ which encompasses renewable energy, community development, and other investible activities with social or environmental benefits.
“The first MIV, the equity fund ProFund, was created in 1995 by socially responsible investors and international finance institutions (IFIs). It invested $20 million in 10 MFIs in Latin America, closing out in 2005.”
When ProFund wrapped up, exits were very hard to find, resulting in valuations steeply discounted for illiquidity, the author recounts. Now, however, there are options such as IPOs (viable for a handful of top MFIs), buyouts by new strategic investors, and M&As (mergers and acquisitions).
For some time to come, microfinance will occupy a privileged position, benefiting from the capital markets while still supported by socially oriented actors, Rhyne foresees. “And because that kind of position will nurture the expansion of the industry, it is good news for the progress of financial inclusion.”