Foreign Capital Investment in Microfinance:

01 May 2011

Despite the financial crisis, in the past four years foreign investment in microfinance, including both debt and equity, has quadrupled to reach US$13 billion. This growth has been driven as much by public institutions as by an increasing number of private institutional and retail investors. Indeed, microfinance investing has become the flagship of the rapidly growing impact investment movement.

However, the deterioration in microfinance institution (MFI) performance and the rising risk of client over-indebtedness in several markets have tarnished the sector's reputation. No longer can microfinance investment be assumed to be a do-good, low-risk, safe haven.

This Focus Note examines foreign investment in microfinance at a critical juncture in the industry, exploring the current investor landscape, including the role of development finance institutions (DFIs) and the growing interest of retail investors. Also highlighted are the decline in fixed-income returns, and the rise of equity investment, as well as the outreach and social performance achieved by foreign capital.

This Focus Note concludes by calling for more transparency on the performance of microfinance asset managers. In a more difficult and competitive market environment, foreign investors need to more carefully assess the capacity of fund managers, their commitment to social performance, and the quality of their investment processes.