Can Microfinance Reduce Portfolio Volatility?

Paper
Date Published: 
Dec 2008
Author: 
Krauss, N. & Walter, I.
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Can microfinance provide advantages of portfolio diversification?

This paper examines the correlation of microfinance with international and domestic market performance measures. It states that a low correlation would form the empirical basis for MFI access to capital markets and performance-driven investors in their search for efficient portfolios. The paper presents a discussion on:

  • Institutional transformation of MFIs from donor-driven NGOs to market driven financial institutions;
  • Empirical analysis of the systemic risk of MFIs;
  • Relative market risk of MFIs to other potential emerging market investments.

The study finds no statistically significant relationship between MFIs and global market movements. However, MFIs exhibit highly significant correlation to all parameters regarding domestic GDP, demonstrating that they are not detached from their domestic economies.

The results suggest that MFIs may have useful diversification value for international portfolio investors wanting to mitigate country risk. For domestic investors, however, microfinance investments do not seem to provide significant portfolio diversification advantages. The paper suggests that the difference in market risk between microfinance and other emerging market institutions is based on lower capital market dependence, lower operational and financial leverage and low international exposure of microfinance clients.

Type: 
Paper