Foreign capital investment in microfinance : balancing social and financial returns

Abstract

This new investment stream is good news for microfinance providers. Microfinance needs a broader capital market to secure the funding required to scale up outreach and serve a greater number of financially excluded, low-income people. It is tempting to believe that this investment boom signals the entrance of mainstream commercial investors seeking to maximize, risk-adjusted returns. Hedge funds, Videoconferencing (VCs), and other big investors are seeing huge profit potential in tiny loans reads a headline from a recent Business week. However, the reality is that, so far, the bulk of private investment in microfinance has come from investors with a social orientation alongside their financial motivations. Microfinance is a very attractive proposition for a growing segment of socially responsible investors. The Socially Responsible Investment (SRI) market is huge, with over US$4 trillion in assets. The emerging markets share accounts for a meager US$5 billion, but this is growing fast. The SRI world comprises a wide spectrum of investors with differing expectations, from those willing to receive below-market returns to those seeking competitive returns within the context of a social mandate. SRIs are attracted to Microfinance Institutions (MFIs) because MFIs are double bottom-line institutions that seek to have a positive social impact alongside financial returns.

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