Microfinance and Social Investment

This paper puts a corporate finance lens on microfinance. It observes that microfinance aims to democratize global financial markets through new contracts, organizations, and technology. It explains the roles that government agencies and socially-minded investors play in supporting the entry and expansion of private intermediaries in the sector.

The authors consciously blur the traditional dividing lines between nonprofits and for-profits and focus on the relationship between target markets, ownership rights and access to external capital. Key issues discussed in the paper are:

• Analysis of the current microfinance landscape, placed in the context of the Indian microfinance crisis of late 2010;
• Rationale for financial markets to fragment into clusters served by formal and informal financial institutions;
• Motivation for some profitable institutions to continue as nonprofits even though there is a strong push for commercialized microfinance;
• Application of the above mentioned ideas to the Indian microfinance crisis of 2010.

The paper concludes that maintaining a balance of social and financial goals is tricky. The authors suggest that the future of microfinance rests with the ability to align both social and financial objectives. Finding the right path also requires a more rigorous “corporate finance of microfinance.”