FinDev Interview

Why We Chose Not To Invest in Microfinance

East Capital’s Margot Jacobs shares tips for MFIs on becoming more attractive for investors
Margot Jacobs, East Capital

Margot Jacobs is Senior Advisor on the private equity team at East Capital, an independent asset manager specialized in emerging and frontier markets. She has over 20 years’ experience in the banking sectors of Russia and Eastern Europe. Margot will be a featured speaker at the upcoming 7th Annual Central Asian & Caucasus Microfinance Forum.

Gateway: East Capital specializes in investments in emerging and frontier markets. What do you look for when choosing investments? What types of industries do you invest in? Are there any industries that you would describe as having similar characteristics to the microfinance sector?

Margot: The majority of East Capital’s investments are made through our mutual funds, which buy traded securities. We invest in shares of companies from pretty much all sectors of the economy. We look for companies with long-term, sustainable growth perspectives and responsible owners. We have owned shares in many companies in the financial sector, and our only true Private Equity Fund is East Capital Financials Fund, which invests directly in the banking sectors of Russia, Kazakhstan, Georgia and Ukraine. I would say that within the financial sector we’ve seen many companies which share some of the characteristics of microfinance.

Gateway: We understand that during a recent investment period, you were considering several MFIs as possible investments, but ended up deciding not to invest in this sector. Can you share with us what attracted you to microfinance in the first place, and some of the reasons you decided not to invest?

Margot: We looked at a couple of microfinance organizations during the Financials Fund’s investment period. What attracted us was the dynamic development of the organizations in question, their ability to profitably lend to a niche of borrowers that was ignored or underserved by banks. The primary reason we decided not to invest was the concern about the sustainability of funding models.

Gateway: What in particular caused concern about their funding models?

Margot: With regard to the MFIs we reviewed but didn't invest in, the answer is fairly simple: they had long-term hard currency debt from IFIs, and needed to move to funding in local currency to reduce their asset/liability mismatch, but were prohibited by law from taking retail deposits. This left them with few viable sources of local currency funding.


In order to get the attention of investors, it is important to show that you can both grow your business and consistently show good profitability.

Margot Jacobs

Gateway: For MFIs which are seeking investors, what kind of advice would you give them to make their institution more attractive for new investors? What are some of the anticipated risks when investing in MFIs and what actions can those institutions take to reduce such risks?

Margot: In order to get the attention of investors, it is important to show that you can both grow your business and consistently show good profitability. This requires expertise in targeting the right client base and in analyzing the creditworthiness of each potential borrower without needing a large, expensive infrastructure. For the MFIs I have analyzed, the main risk or challenge has been how to fund the business, since these MFIs did not have banking licenses and therefore could not take retail deposits.

Gateway: How important does East Capital consider corporate governance, and what kinds of lessons have you learned about best practices over the years that would be relevant to microfinance institutions?

Margot: Our experience as investors has taught us that corporate governance is extremely important. Among other things, good corporate governance allows investors to receive important information about the company in a timely fashion, as well as allowing minority investors to nominate representatives to the Board of Directors so that their interests can be represented. Organizations that can demonstrate good corporate governance have easier access to funding and capital, and often enjoy higher levels of customer loyalty as well.

Competent and effective management teams are, in our experience, eager to establish good corporate governance practices since they know that increased transparency, well-structured decision-making and appropriate compensation programs will work to their benefit in the long run. Moreover, we have seen that organizations within the financial sector that introduce environmentally and socially friendly policies enjoy not only better employee morale but also a better reputation among clients.

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