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Will Microfinance Institutions Ever Be an Asset Class on Wall Street?

By Eric Meyer

Last Friday at the Chicago Microfinance Conference, a group of investors explored the issue of microfinance investments and capital markets in a session entitled “Microfinance and Wall Street: Will MFIs ever be an Asset Class?” The conversation revolved around two primary questions: has the perception of institutional investors changed with the financial crisis, and would MFIs be able to absorb the resources that would be available if microfinance gained popularity among these investors?

The five panelists were: Paul Blyth, CFO of Microplace; Peter Bremberg, manager of IFMR Capital; Carlos Castello of ACCION International; Patrick T. Fisher, founder and president of Creation Investments Social Ventures Fund; and Roger Frank, managing partner of 13 Advisors LLC. They noted that as an industry, microfinance has experienced meteoric growth in emerging markets over the past 6 years. According to the Microfinance Information Exchange (MIX), the sector averaged 39% in annual asset growth between 2004 and 2008, reaching nearly $40 billion in total assets at the end of this period. Despite its growth, the microfinance industry pales in comparison to other financial sectors in the developed world, resulting in perceptions that microfinance is a “fringe activity” among many investors – especially in the US. For example, the $40 billion in total assets reported to the MIX in 2008 accounts for just over 1% of the $2.7 trillion in assets held by Bank of America during the same time period.

Furthermore, the recent financial crisis has helped characterize the microfinance industry not as a uniform asset class, but rather as a widely varied set of like-minded financial institutions (at best). Microfinance institutions vary enormously in terms of their geographic location and respective markets, their regulatory status, their size, their loan products, and the capacity of their management and staff. Furthermore, the rapid growth that many microfinance institutions achieved during the period leading up to the crisis effectively masked certain inadequate lending practices which lent to that growth. These inadequacies were realized as growth slowed from reduced funding and credit delinquencies rose in the industry during the course of 2009. Although these events haven’t scared off investors, they have motivated many MFIs to look more closely at risk management in their firms in order to achieve safe growth in the future.

Although I admit the above to be a cautionary tale, it is not as gloomy as it seems. The microfinance industry as a whole is still seeing positive returns, asset quality is stabilizing, and the panel noted that the industry is well positioned for growthin 2010. With regard to microfinance as an asset class, however, it was clear that my panel did not see the world’s capital markets rushing to their checkbooks to sponsor MFIs just yet. Because the industry is so small relative to other financial sectors and widely dispersed across the globe, increased capital funding is likely to come to specific microfinance markets that demonstrate a high level of transparency and accountability. This is perhaps most true of India, whose government the panelists regarded as having very high regulatory standards. In addition, the IPO of India’s biggest microfinance bank, SKS, is set to occur sometime within the next few months, which will drive transparency of MFIs within the market competing for funding.

Ultimately, the panelists concluded that the microfinance industry still has a way to go before Wall Street dives in, but it was clear throughout the conference that microfinance and the capital markets were on everybody’s mind. In order to achieve access, however, the microfinance industry must strive towards increasing its transparency and building capacity in its staff to effectively attract – and then effectively manage – capital when it eventually comes through the door.

Opportunity staff members have written blog posts on a variety of panels at the Chicago Microfinance Conference. Read our posts on technology and microfinancemicrofinance in the US and microfinance’s ability to break the cycle of poverty.

-Eric Meyer, Associate of Risk Management, Opportunity International

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