Research & Analysis

The Market for Foreign Investment in Microfinance

Many microfinance institutions (MFIs) in developing and transition economies have received foreign funding, especially the larger MFIs. Most of that funding has consisted of grants or highly subsidized loans from donor agencies, including such bilateral donors as Agence Française de Développement or the US Agency for International Development, and multilateral agencies such as the United Nations Development Programme or the World Bank. In recent years, these bilateral and multilateral donors have provided approximately US$0.5–1.0 billion annually in grants and soft loans for microfinance by CGAP estimates.

However, since 2000 there has been a rapid growth in foreign investment by various agencies and funds that tend to be more commercially oriented, such as the Dexia Microcredit Fund and MicroVest. By mid-2004, this group of actors had invested a total of nearly US$1.2 billion in about 500 MFIs. The equity, loans, and guarantees that they offer to MFIs are typically less subsidized than grants and loans from traditional donors. These “foreign investors” and the demand for their services are the subject of this paper, which surveys the market and addresses some key questions.