Microfinance Investors Show Growing Commitment to Social Priorities
For Immediate Release
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Survey Shows Investors Adapting to Tougher Market
Washington, D.C., October 13, 2010—A growing number of investors in microfinance globally are paying greater attention to environmental, social, and governance (ESG) priorities in their investment decisions, and are increasingly reporting on these issues to their own financial backers, according to a new survey by CGAP.
Despite facing one of the toughest financial environments in more than a decade, many microfinance investment vehicles (MIVs) are placing greater emphasis on the social benefits of their activities while also taking steps to adapt to leaner market conditions.
The second annual MIV Survey by CGAP, based on responses from 90 MIVs, revealed that 40%of MIVs are currently using an environmental exclusion list in their lending processes, and 81% have endorsed CGAP’s Client Protection Principles, compared to 61% last year. The survey showed that 69% of MIVs reported on ESG issues to their own investors, compared to 58% the previous year.
“This is proof that these investors are not only talking about the so-called double bottom line of financial social rewards, but that they are living up to this ideal as well,” “The survey backs the view that MIVs are trying to differentiate themselves not only by their rate of return but the degree of their commitment to social responsibility.”
The CGAP survey also highlighted the resilience of the sector during the recent downturn, with returns and growth both positive albeit at slower growth rates. As of December 2009, there were 91 active MIVs with total assets under management of US$6.2 billion. MIV growth slowed for the third consecutive year, easing to 25% in 2009, from 34% in 2008 and 86% in 2007. MIV fixed income returns eased to 3.9% at the end of 2009, representing significant declines of around two percentage points compared with 2008. For the first time, significant loan loss provisions were recorded (two percent of the direct debt microfinance portfolio) to cover the risk of defaults of distressed MFIs.
Cash positions have also reached a record level at 17% due to the lack of viable investment opportunities. In addition, MIV income is declining, as the more competitive environment is pushing interest rates down and MIV average net portfolio yields have sunk to an historically-low level at 7.9%.
MIV asset managers expect a growth rate around 15% in 2010, the lowest growth rate reported since the inception of the CGAP MIV survey. With record cash positions, some asset managers are scaling back their fundraising.
“Asset managers are focusing their efforts on managing risk and diversifying their investments in the face of ongoing fragility in global markets,” Reille said. “They are tightening their investment policies and monitoring processes. They are renegotiating their loan covenants with distressed MFIs and several asset managers are engaged in debt work outs.”
Other fund managers are also actively searching for investment opportunities in frontier microfinance markets, particularly in Brazil, China, and Nigeria. Others are considering moving up-market and funding small- and medium-sized enterprises or social businesses at the “bottom of the pyramid”.
CGAP expects MIVs to further improve their ESG policies to differentiate themselves and better demonstrate to their investors their commitment to social returns. Finally, the more competitive environment might put pressure on asset management firms to reduce costs. Microfinance asset managers are likely to look for alliances to gain competitive advantage and improve efficiency.
CGAP is an independent policy and research center dedicated to advancing financial access for the world’s poor. It is supported by over 30 development agencies and private foundations who share a common mission to alleviate poverty. Housed at the World Bank, CGAP provides market intelligence, promotes standards, develops innovative solutions, and offers advisory services to governments, microfinance providers, donors, and investors. CGAP works toward a world in which poor people are considered valued clients of their country’s financial system.