Research & Analysis

Foreign Investment in Microfinance

Microfinance institutions (MFIs) will be able to serve massive numbers of the poor with high-quality financial services only when these MFIs have tapped commercial sources of funding and deposits. Commercial and quasi-commercial foreign investment is one growing and potentially important source of funds for promising MFIs. For MFIs that are eligible to receive it, foreign investment can help achieve scale by mobilizing local investment and improving management and governance. A recent CGAP study on the volume of foreign investment in microfinance has revealed that foreign public and private investors have allocated US$1 billion to microfinance and have already committed about US$680 million to MFIs through debt, equity, and guarantees.

Foreign investment is defined in the study as quasi-commercial investment in equity, debt, and guarantees, made by private-sector funding arms of bilateral and multilateral donor agencies (development investors), and by socially motivated, privately managed investment funds financed by both public and private capital (social investment funds). Although social investment funds are smaller than development investor funds, they are growing dramatically. Both types of investors generally take a commercial approach in the rigor of their investment analysis and monitoring, but are not fully commercial in the sense of trying to maximize profit. They take greater risks and accept lower returns than purely profit-maximizing investors. The study excluded grants, soft loans from traditional donor agencies, and all domestic sources, such as commercial bank loans, bond issues, and deposits.