Surveying the Microfinance Investment Scene

Last month the microfinance rating company MicroRate published its latest annual survey of the State of Microfinance Investment.The press release sums it up:

• The lingering effects of the economic crisis led to the lowest growth rate observed in the past 6 years, with total MIV [Microfinance Investment Vehicle] assets growing 12% in 2010.
• [(MIVs')] microfinance assets, however, grew 18%, which reduced some of the excess liquidity that was built up in 2009.
• Low-priced, domestic funding in key countries has been crowding out foreign private capital.
• Latin America & the Caribbean is now in second place behind Europe/Central Asia in terms of the geographic investment distribution - receiving 35% and 37% respectively of total MIV investments.
• Top fund executives predict growth rates of 20--30% for the remainder of 2011 and into 2012.
• Both MFIs and MIVs are giving increasing priority to social performance.

The picture I get is of an industry (i.e., the microfinance investment industry) that is aware of the risks to its business---bubbles, clients becoming newly doubtful about the merits of microfinance---and adjusting. The adjustment is far from perfect, partly because of collective action problems: each firm would prefer that the others exercise self-restraint. Choice quotes:

The oversupply of capital led to a flight to quality and intense competition among funders in certain markets. Consequently, many managers have commented on the possibilities of overheating in countries such as Peru, Kyrgyzstan, and Cambodia.

Of course, the heightened awareness of the potential for overheating may do much to prevent it.

The intense and one-sided media coverage of the events in isolated trouble spots such as India and Nicaragua grossly distorted the public’s perception of the risk and overall health of the microfinance sector. Nonetheless, those headlines did heighten investor concerns with reputation risk and encouraged MIVs to strengthen their social performance criteria and surveillance.

After strong growth during 2009, investments in Sub-Saharan Africa remained flat in 2010. The region represents 5% of all MIV microfinance investments. A great deal of capital has been ear-marked for the region from multiple private and public sources, however, most managers question the absorptive capacity of the region, noting the high incidence of fraud and often low level of development of the local [microfinance institutions].

Sounds like a recipe for trouble.

There is a growing trend to extend [MIVs’] investment activity into related sectors - namely, small and medium enterprises (SME) and supply chain financing. In other cases, larger MIVs are lending to local, non-MFI financial institutions such as banks and cooperatives.

MicroRate notes that the potential oversupply of capital in some markets could lead to an overheated competitive environment and the resulting negative consequences.

But:

MicroRate has a positive outlook for the quality of growth for the MIV industry for the remainder of 2011 and 2012.

For more on the investment scene, visit CGAP.