The Potential for Social Investment in Microfinance and Small Enterprise in Developing Countries

Why are socially responsible investors hesitant to invest in emerging markets?
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This paper argues that although socially responsible investment (SRI) has had significant ties with emerging market issues, there has been little intermediation of capital from developed to emerging market countries. The paper examines the reasons and offers probable conclusions.

The paper states that:

  • The modest amount of social investment in emerging markets belies a high degree of interest in MFI investment opportunities;
  • There is significant latent demand among both individual and institutional social investors for investments in MFIs and small and medium sized businesses.

The paper looks into the reasons why so few funds are invested in the emerging market despite high levels of potential demand. It finds a lack of:

  • Adequate financial intermediation;
  • Information on emerging market countries;
  • Fund management capacity;
  • Social and environmental impact measures that can be benchmarked against other investments;
  • A regulated investment vehicle.

The paper concludes that:

  • If proper risk assessments are made, SRI return expectations are not out of reach of the potential return of good MFIs;
  • There is a lack of strong demonstrable interest among MFIs to source SRI capital;
  • Also, MFI efforts to cultivate social investment interest have not met expectations primarily because of challenges of achieving scales sufficient to cover start-up and development costs and regulatory barriers.

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