Risk and Return

Microfinance is a strong tool for sustainable development and can simultaneously provide satisfactory social and financial returns. As such, our experience is that investments in microfinance form an attractive asset class because, to compensate for the high country risks, microfinance offers: competitive financial returns, low systematic risk, low specific risk and high social returns.

I Return
Microfinance funds offer reasonable returns, generally surpassing monetary instruments. Microfinance funds that concentrate more on equity represent an attractive longer-term opportunity with higher upside potential.

II Systematic risk
Microfinance offers lower volatility than traditional emerging market equities or bonds. It is invested in instruments that are not yet quoted on stock exchanges and whose value is not influenced by unpredictable fluctuations in interest rates and credit spreads. Microfinance shows weak correlation to political, economic or even climatic events. The informal sector, where many MFI clients operate, is somewhat independent of the trajectory of the formal economy. Similarly, it is weakly correlated with global financial movements in major markets.

III Specific risk
The leading MFIs are highly solvent and have a low risk profile. Their main assets are loan portfolios of very high quality, as demonstrated by their exemplary default rate, lower than that of many commercial banks. Microfinance institutions have well-diversified portfolios. Credit risk is spread over thousands of micro-borrowers, active in markets with good growth prospects.

IV Social return
By investing in microfinance, an investor contributes to growth and poverty alleviation in emerging economies. The frontiers of international finance are pushed back and a virtuous development cycle of capital accumulation, investment and job creation is encouraged. Better housing, nutrition, health and education are among the most immediate beneficial effects of microfinance on the welfare of micro-entrepreneurs and their families.