Research & Analysis

Microfinance Investment Vehicles

Foreign capital investment in microfinance is surging. Cross-border investment has more than tripled in the last two years to reach US$1.4 billion in 2006. Two main players are driving this phenomenon: international financial institutions (IFIs)-the private-investment arm of public development agencies-and private investment funds, known as microfinance investment vehicles (MIVs).

IFIs have played an important role in commercializing microfinance by providing seed capital to young microfinance institutions (MFIs) and bridging the gap between grant funding and domestic funding. IFIs were behind the creation of most of the early MIVs, which offered IFIs a more efficient way to invest in the sector than direct MFI investments. Now, MIVs are gaining ground and finding other investors, including private investors.

A new CGAP survey shows that while IFIs’ microfinance portfolio (including investment in MIVs) more than doubled from US$1 billion in 2004 to US$2.3 billion in 2006, MIV portfolios grew more than threefold during the same period, from US$600 million to US$2 billion.

This note summarizes the survey findings and explores the implications of the rapid growth of MIVs for the microfinance industry. This Brief is based on two studies conducted in the last quarter of 2006: a CGAP study on IFI microfinance portfolios and a joint CGAP-Micro Rate research on MIV trends.