Contact:
Jeanette Thomas
Communications Manager
jthomas1@worldbank.org
1-202-473-8869

Microfinance funds' investment in microfinance institutions (MFIs) is soaring--tripling in the last two years to reach $2 billion in 2006. CGAP today released results of a new survey that shows that there are 74 specialized microfinance funds, with 16 new funds created in 2005, and 14 in 2006 alone. In addition, CGAP found a huge increase in direct investment in MFIs reaching 1.5 billion in 2006 from international financial institutions--the private-sector arm of public agencies, such as the IFC, German KFW, and Dutch FMO.

"There are many more ways to invest in microfinance than there were a few years ago," says Xavier Reille, CGAP microfinance specialist and the author of the report. "The increase in investor interest since our last survey surprised even long-standing market participants like us. When I started out in microfinance, it was dominated by public donors. Today we see a far more diverse picture, with international financial institutions, and a whole new crop of philanthropists and social investors gaining in importance. What is striking is to see the increasing interest of institutional investors , such as the pension fund TIAA CREF, up from just 5 percent market share in our 2004 survey to 17 percent today."

Some clear leaders are emerging amongst the specialized funds, according to the report: Procredit, a holding of microfinance banks based in Germany, has a microfinance portfolio of over $390 million in 19 subsidiaries; Oikocredit, a cooperative society based in Holland intermediating funds for social investors, has $260 million invested in 307 institutions; BlueOrchard, a fund management company with a focus on microfinance big caps, has already arranged four international collateralized loan obligations with leading MFIs and manages several funds, such has the Dexia Microcredit fund; and ResponsAbility, a Swiss-based asset management company, manages two of the fastest growing debt funds.

Microfinance has garnered a lot of attention over the past few years, especially since the Nobel Peace Prize was awarded to Muhammad Yunus last year. CGAP warns that while new investor enthusiasm is very positive, high expectations carry dangers, too. There are still challenges to work through, such as the lack of exit mechanisms for investors and the difficulty of hedging foreign exchange risks for both funds and MFIs. "Some of the funds and IFIs are quickly adopting instruments from mainstream investment banks to cover those foreign exchange risks, which is welcome," says CGAP CEO Elizabeth Littlefield. "The ultimate aim, of course, is for MFIs to raise the bulk of their capital on the domestic markets through savings mobilization and local capital markets where they exist. In the meantime, however, growing MFIs need capital before they are able to be licensed to accept deposits, and the investment funds are playing an important role in bridging this capital gap."

Microfinance investment funds are very diverse in their size, business model, commercial orientation, legal structure, and regulatory framework, says the report, but they tend to concentrate their money in a limited number of large MFIs and more developed emerging markets. And transparency is an issue: "The funds universe is still very opaque," says Reille. "We need to establish performance standards and introduce greater accountability amongst fund managers to promote sound investments. Social and financial reporting standards and rating agencies are playing an increasing role. This is still a young business, but as it matures, greater transparency will be key to ensuring its healthy growth."

The survey was conducted by CGAP in the last quarter of 2006 with input from Microrate. For more about the survey and microfinance investment vehicles, see the CGAP Brief "Microfinance Investment Vehicles".

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About CGAP
www.cgap.org

Housed at the World Bank, the Consultative Group to Assist the Poor (CGAP) is a resource center for the microfinance industry, setting standards, offering technical and advisory services, training, and information on best practices, in addition to providing funding for innovative projects. Its 33 members - including bilateral, multilateral and private donors - are committed to building more inclusive financial systems that work for the poor. In 2004, the G8 endorsed CGAP's Key Principles of Microfinance.