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Microfinance investment vehicles – Asset growth, performance and investment outlook

With 154 million customers worldwide, microfinance is one of the growth markets in financial services. According to microfinance rating agency MicroRate Incorporated and the Consultative Group to Assist the Poor, there are around 100 active private microfinance investment vehicles (MIVs) worldwide, managing $7 billion. But with a total of 1.5 billion potential customers, microfinance funding is far from its peak: Industry analysts see a potential funding gap of $265 billion.

MIV asset growth and composition through 2010

Assets managed by MIVs grew 12% in 2010, marking a significant slowdown from previous growth levels (+22% in 2009 and +50% annually from 2005 to 2008).

One of the main reasons for this slowdown in asset growth was the crowding-out of foreign capital by low-priced, domestic funding in key countries.

Geographic distribution of microfinance investments

The majority of microfinance investments (73%) went to Latin America, the Caribbean, Europe and Central Asia in 2010. While investments in South Asia remained at 2008 levels, the East Asia & Pacific region experienced a large growth rate of 30%, led by strong demand in the Philippines and Cambodia.

Investment outlook

MicroRate sees the slowdown experienced in 2009 and 2010 as a result of the financial crisis, which also helped investors to get a more realistic view of the returns and risks in microfinance and the effect of regulatory interventions.

MIV managers believe that the growth rate will rise to 30% – 35% again; however, a potential oversupply of capital in some markets could lead to strong competition with the known negative consequences in credit markets, like falling interest rates and rising default rates.

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