MIV Survey 2008 - High growth and improving returns for microfinance funds

October 3, 2008    

Microfinance, with its focus on providing financial services to the world poor is increasingly of interest to socially responsible investors. Contrary to sub-prime, microfinance is a low credit risk, high transaction cost business with robust earning records.

Microfinance investment vehicles (MIVs) are private investment funds that play an increasingly important financial intermediation role between foreign investors and microfinance institutions (MFIs). A new CGAP survey looks at evolving opportunities in microfinance for the investor community.

The survey identified 91 funds with $5.4 billion in assets under management (AUM). The market for institutional investors in microfinance is in an early, high growth phase and investments have more than doubled since last year. The survey highlights that 75% of these investments are in fixed income, but equity investments are growing rapidly. In 2007, equity investments grew by 95% and seven new equity funds were created. Investments are primarily directed towards Eastern Europe and Central Asia (45%) and Latin America (32%) although South Asia and Africa are on the rise (+ 164% and 119% respectively).

Microfinance funds’ returns have improved significantly and compare favorably to other investments in emerging markets. Average net return for fixed income funds is 6.3% (compared to 5.8% in 2006) and gross IRR for equity funds is 12.5%.

The survey reveals a surging appetite among institutional investors as a source for MIV funding. Their share of MIV funding jumped from 14% to 41% in just 3 years. This rapid growth - as evidenced by new investments from leading pension funds such as TIAA-CREF and ABP - is likely to continue as SRI investors seek to expand their allocation for emerging market and alternative assets.

MIV Disclosure Guidelines
In 2006, CGAP was asked by the International Finance Corporation (IFC) and other investors to help develop reporting guidelines for the microfinance investment industry. This first edition of CGAP’s Microfinance Investment Vehicle Disclosure Guidelines is the result of 18 months of extensive consultation and a consensus building process among 35 industry and capital market experts, representing banks, fund managers, rating agencies, and investors.

The MIV Disclosure Guidelines build on best practices for investment fund reporting and provide a standardized reporting framework to analyze fund performance. CGAP is currently working with industry leaders on a second edition that will incorporate lessons learned on financial performance disclosure standards and add social and environmental performance information.