Microfinance Funds: Still growing – with increased focus on social transparency

September 17, 2009    

So far, microfinance funds – or investment vehicles (MIVs) – have been relatively unscathed by the financial crisis that has wreaked havoc on the world’s financial systems. While emerging market funds have experienced a 20 percent sell-off, the top 10 microfinance investment funds grew by 32 percent in 2008. 

Not only are MIVs still growing at a steady clip, a new CGAP survey found that despite the difficult economic climate, MIVs are emphasizing environmental, social, and governance goals.

What financial crisis?

In an upcoming Brief, CGAP will release final results of an MIV survey showing that, by the end of 2008, there were 103 active MIVs with portfolios totaling US$6.6 billion. MIVs represent more than half of the total foreign capital invested in microfinance, and 80 of them – representing an impressive 93 percent of total MIV assets – participated in the survey.

MIVs grew an average of 31 percent in 2008. “Though this is much lower than the previous year’s 72 percent,” says CGAP expert Xavier Reille, “Microfinance was one of the few asset classes that saw positive returns in 2008.” Eleven new microfinance funds were created in 2008, and five were started in the first semester of 2009. Indeed, so far in 2009, total assets under management has increased by 8 percent, reaching US$2.6 billion in June. Asset managers forecast growth for this year will reach 29 percent. “These growth levels are really quite extraordinary, given the current economic conditions, and demonstrate the clear commitment of social investors in particular to microfinance as a double bottom line investment,” says Reille.

MIV trends – Still a hard currency, fixed-income business
“In fact,” says Reille, “Beyond the slowing growth rate, the MIV landscape didn’t change all that much in 2008.” The choice of investment instruments remained largely the same, with debt continuing to dominate. Most of the funds were invested in fixed income (75 percent) and in hard currency (80 percent). But equity investments are growing fast at more than 47 percent.

Fund allocation by region also held steady, with Eastern Europe and Central Asia accounting for the largest share – almost 50 percent – followed by Latin America (29 percent). Investment in Africa remained marginal, representing less than 7 percent of the total MIV portfolio.

MIVs are mostly funded by private investors, but public investors are catching up. Private capital (both from retail and institutional investors) accounts for 66 percent of MIV funding, while public investors contribute 21 percent. However, “as a result of the global crisis, public investors are becoming more active setting up new emergency liquidity funds to support cash-strapped MFIs,” says CGAP expert Jasmina Glisovic-Mezieres. “The retail market remains socially oriented as well: these investors are funding microfinance both because of and in spite of the crisis.” Some retail funds, like responsAbility, grew by over 100 percent in 2008. Investment is still very concentrated, with the top five funds accounting for 53 percent of total investment.

Strong environmental, social, and governance reporting

Beyond the continuing growth of MIVs, perhaps the biggest news to come out of the survey was on environmental, social, and governance reporting (ESG). Based on the Principles for Responsible Investment developed by a United Nations-convened investor group, “ESG reporting is becoming a hot topic for the funds,” says Glisovic-Mezieres. “This was the first time ESG indicators were included in CGAP’s survey, and we were delighted to discover a strong double bottom line orientation among the funds.”

According to the survey, more than 60 percent of participating MIVs report ESG information to their investors, and 65 percent have trained staff in these issues. What’s more, 60 percent of MIVs have also committed to the Client Protection Principles for microfinance, developed by CGAP and ACCION’s Center for Financial Inclusion. Though a focus on the environment is relatively new for these funds, 12 percent of reporting MIVs already compensate for their carbon emissions, while 41 percent have “environmental exclusion lists” — minimum environmental standards and practices. These lists often define activities that cannot be financed because of environmental risks.

Harder times to come?

The full effect of the global crisis and its triple shocks—economic contraction, currency depreciation, and scarcity of credit—should become clearer in the second half of 2009. “But the results of this survey give plenty of reason to expect that microfinance funds will continue to grow, especially public and socially oriented retail investors,” says Reille. “The growth may be slower – probably between 10 and 35 percent – but there’ll be growth nonetheless.” And that’s good news.