Retail investors, high net worth individuals, and institutional investors all invest in microfinance institutions. Public donors and investors, including multilateral and bilateral donors and development finance institutions, provide the majority of cross-border funding of microfinance. However, private funders, such as microfinance investment vehicles (MIVs), are also growing their commitments in recent years.
Investment opportunities often depend on the investor’s risk appetite, social and/or financial motivations, regulatory restrictions, and other types of investor preferences such as a regional focus.
2. How can I invest in microfinance?
Retail investors now have a range of MFI investment opportunities. While a retail investor can invest directly in traditional funds or microfinance investment vehicles only in a few countries, a growing trend is to make investments through online platforms such as Kiva, Zidisha, Rang De, MYC4, or Babyloan.
The investment opportunities available to you will depend on the rules and regulations where you live, the amount you wish to invest, your appetite for risk, and your asset allocation objective – for example, what percentage of your portfolio is allocated to debt versus equity.
Institutional investors and high net worth individuals, who make much larger investments than retail investors and follow a strict set of investment objectives, can access additional investment opportunities which require large minimum investments in the millions of dollars.
3. How are ratings used to help vet microfinance investments?
MFI ratings and assessments help investors decide where to put their money. Different types of ratings and assessments – credit risk ratings, global risk assessments, mini assessments, and social ratings – serve different purposes.
A credit risk rating quantifies the statistical probability that the MFI will be able to meet its debt servicing obligations. A global risk assessment provides a broader assessment of an MFI’s operations and prospects. A mini assessment is a rating of a young MFI that is too small, or too young, for a full-scale credit risk rating or global risk assessment. A social rating is a rating of the social performance of a microfinance institution, which investors can use to compare institutions so that they can direct their funds to help achieve specific social, ethical and/or financial goals.
Investors use these reports, in varying degrees, as part of their due diligence process, which provides a picture of an MFI’s profitability potential. Details such as an MFI’s level of profitability and management stability, as well as the key opportunities and challenges, are expressed in a rating or assessment report.
With the increasing need for MFIs to demonstrate the impact of their actions, standards and metrics have been developed to assist and rate MFIs. In 2012 the Social Performance Task Force (SPTF) launched the Universal Standards for Social Performance Management. The Universal Standards bring together strong practices implemented successfully throughout the industry in one comprehensive manual. SPTF has also published Guidelines on Outcomes Management for Investors, which goes beyond social performance.
SPTF aims to harmonize the tools and standards investors use to reduce reporting burden of MFIs, though many investors also have their own tools. ALINUS is a social data collection tool which uses a set of indicators based on the SPTF's Universal Standards for investor due diligence and monitoring.