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Microfinance Performance in Financial Markets: The Case of Microfinance Investment Vehicles
Abstract
This chapter is a contribution to a recent restricted literature dealing with the return of microfinance investment in the financial markets. We study the performance of public microfinance investment vehicles (MIVs). Microfinance is an asset class with a double bottom line: social and financial returns have to be generated. Despite a significant currency risk, we find that the integration of microfinance assets diversifies the investor's risks and improves the efficient frontier. We conclude that microfinance institutions, via investment vehicles, are likely to attract capital from socially responsible investors seeking new investment opportunities.
... Until now, a very wide majority of funds have been invested in bonds (Daher and Le Saout, 2014). Two factors explain this phenomenon. ...
Investment in microfinance equity may improve portfolio diversification and attract socially responsible investors.
Commercial investors awoke to the attractive risk-return profile of microfinance in the early 2000s. This paper describes the introduction of capital markets into the microfinance industry with reference to distinct financial products, and with a specific focus on the first commercial collateralized debt obligation, a transaction on which the author was integrally involved. It discusses whether microfinance can develop into a true "asset class" and highlights potential pitfalls as the industry penetrates a commercial investor base.
This paper is the first to draw a global picture of worldwide microfinance equity by taking full advantage of daily quoted prices. We revisit previous findings showing that investors should consider microfinance as a self-standing sector. Our results are threefold. First, microfinance has become less risky and more closely correlated with the financial sector. This convergence might be followed by a decline in the proportion of women borrowers. Second, microfinance and finance shares have equivalent currency exposure. Last, introducing a self-standing microfinance sector presents few diversification benefits. This paper confirms that microfinance has changed dramatically during the last decade.
Financial performance is an important issue even for microfinance institutions, which need sustainability and self-sufficiency in the long run.
This paper investigates investment performance of microfinance investment funds. The examined funds have recorded lower total risk than global stocks and bonds (measured by four benchmark indices) with moderate but stable returns. The analysis revealed that investment in microfinance investment funds that focus especially on debt instruments represents an attractive opportunity for the portfolio diversification as this asset class does not show any positive correlation with global or emerging capital markets. At the same time, it provides adequate risk‐adjusted returns and may be therefore attractive not only for investors with a particular interest in the socially responsible aspect of investment into microfinance.
Santrauka
Šiame straipsnyje nagrinejamos investicijos i investicinius mikrofinansu fondus. Nagrinejami fondai yra žemesnes bendrosios rizikos nei pasaulio akcijos ir obligacijos (apskaičiuotos pagal keturis atskaitos rodiklius) su vidutiniška, bet stabilia graža. Analize parode, kad investavimas i investicinius mikrofinansu fondus, ypač i susijusius su isiskolinimo priemonemis, yra patraukli galimybe verslo portfolio diversifikacijai, nes ši turto kategorija nerodo jokios teigiamos koreliacijos su pasaulio ar naujomis kapitalo rinkomis. Tuo pačiu metu tai teikia adekvačia graža pagal rizika ir todel gali būti patrauklūs ne tik investuotojams, turintiems tam tikru interesu.
First Published Online: 10 Feb 2011
Reikšminiai žodžiai: mikrofinansai, investavimas, fondai, rizika, graža, regresija
This study makes an innovative approach towards rating the profitability of micro-credit. While previous research on microfinance has been conducted through the analysis of individual case studies, this study takes a more widespread look at the financial performance of micro-lending organizations in less developed financial markets. A sample consisting of 24 micro-finance institutions (MFIs) operating in different regions worldwide is observed over a period of up to 9 consecutive years. The influence of both organization-specific and environmental factors on the profitability of their loan portfolios is examined. Furthermore, the capacity of those institutions to generate sufficient yields on their credit operations in order to attract rational foreign investors is rated. For this purpose, the realized credit spreads on MFI-portfolios are compared with spreads observable for exchange-traded USD-corporate bonds exhibiting equal levels of risk. The panel design and the investigation of multiple (partly qualitative) external variables influencing loan portfolio returns contribute to a comprehensive investigation of MFI-performance. Indeed, MFI-specific factors are found to be much more decisive for profitability than any environmental conditions.
This paper empirically analyzes the market efficiency of microfinance investment funds. For the empirical analysis, we use an index of the microfinance investment funds and apply two kinds of variance ratio tests to examine whether or not this index follows a random walk. We use the entire sample period from December 2003 to June 2010 as well as two sub-samples which divide the entire period before and after January 2007. The empirical evidence demonstrates that the index does not follow a random walk, suggesting that the market of the microfinance investment funds is not efficient. This result is not affected by changes in either empirical techniques or sample periods.
After controlling for MFI and country characteristics, we find no evidence suggesting a strong (in magnitude) and statistically significant relationship between changes in GNI per capita (GROWTH) and four indicators of MFI portfolio risk: quality at Risk over 30 Days (PAR-30), Portfolio at Risk over 90 Days (PAR-90), Loan loss Rate (LLR), and Write-off Ratio (WOR). We test the robustness of the models with different specifications that confirm the general result and test for different impact from growth rates according to average loan sizes disbursed by MFIs. These tests suggest that microfinance portfolios have high resilience to economic shocks. Specifically, we found only a significant relationship between growth and PAR-30. We also control for other explanatory variables like size, age, average loan size, and productivity.
This paper addresses the fairness of microcredit interest rates. Since microfinance institutions provide credit for the poor at relatively high prices, the fairness of their interest rates has been repeatedly debated. We first apply Rawls' principles of justice to the case of microcredit interest rates and suggest some limitations related to the hypothesis of rationality of the borrowers and the level of inequality. We then suggest another framework based on the analysis of the distribution of the benefits generated by the transaction to assess the fairness of interest rates. We conceptualize this as the distribution of the bargaining range between the borrowers' and the institutions' reservation price and discuss what these reservation prices could be in the context of microfinance.
This paper investigates investment performance of the most commercially developed microfinance investment funds and it also includes a discussion of major economic characteristics of microfinance investments. When we analyze the relation between microfinance funds' returns and the performance of stock and fixed income markets in developed and emerging economies we find a slightly negative correlation. We show that returns of microfinance investment funds exceed the returns on the market portfolio. Together with reported near-to-zero beta estimates as a proxy for the systematic risk, this means that investment into microfinance investment vehicles may be recommended as a desirable addition to an investment portfolio.
Although the word finance is in the term microfinance, and the core elements of microfinance are those of the finance discipline, microfinance has yet to break into the mainstream or entrepreneurial finance literature. The purpose of this article is to introduce the finance academic community to the discipline of microfinance and microfinance institutions (MFIs). We provide a comprehensive review of over 350 articles and address the issues of MFI sustainability, products and services, management practices, clientele targeting, regulation and policy, and impact assessment.
This paper investigates whether the country-level financial environment in which microfinance institutions (MFIs) have to work affects their operations. In particular, we argue that the efficiency of MFIs is determined by the extent to which financial markets of countries are developed. On the one hand, well-developed financial markets provide an environment in which MFIs are able to flourish and increase their efficiency. On the other hand, however, well-developed financial markets may also substitute for MFIs, which reduces demands for their services, thus potentially reducing their efficiency. Given the fact that the relationship may go both ways, we empirically investigate the direction of the relationship between measures of financial development and measures of MFI efficiency, using data for 435 MFIs over the period 1997-2007.
In this paper, we conduct a comprehensive study of tests for mean-variance spanning. Under the regression framework of Huberman and Kandel (1987), we provide geometric interpretations not only for the popular likelihood ratio test, but also for two new spanning tests based on the Wald and Lagrange multiplier principles. Under normality assumption, we present the exact distributions of the three tests, analyze their power comprehensively. We find that the power is most driven by the difference of the global minimum-variance portfolios of the two minimum-variance frontiers, and it does not always align well with the economic significance. As an alternative, we provide a step-down test to allow better assessment of the power. Under general distributional assumptions, we provide a new spanning test based on the generalized method of moments (GMM), and evaluate its performance along with other GMM tests by simulation.
International capital flows are constrained by a lack of complementary human capital, information asymmetries and transaction costs for small loan sizes. Extant research has provided a myriad of economic and cultural explanations of how microcredit has overcome these. Based on these, the paper develops a simple economic framework that accounts for these behavioral and institutional factors: a discontinuous marginal revenue curve and a U-shaped supply curve of capital for the microcredit environment. It then uses these analytical tools to explain capital flows and interest rates charged by traditional moneylenders. Finally, it uses these tools to present the growth of microcredit and the increase in financial flows and to explain why microcredit interest rates are lower than those of moneylenders, but higher than those of commercial banks to wealthier borrowers.
International commercial banks, institutional investors, and private investors have become increasingly interested in financing microfinance institutions (MFIs). This paper investigates whether adding microfinance funds to a portfolio of risky international assets yields diversification gains. By using mean-variance spanning tests with short-sale constraints, we find that investing in microfinance may be attractive for investors seeking a better risk–return profile. Specifically, the analysis suggests that investing in MFIs from Latin America, or microfinance and rural banks yields more efficient portfolios. In contrast, adding MFIs from Africa or microfinance NGOs to a portfolio of international assets is not beneficial for a mean-variance investor.
We study whether and how the success of microfinance institutions (“MFI"s) depends on the country-level context, in particular macroeconomic and macro-institutional features. Understanding these linkages can make MFI evaluation more accurate and, further, can help to locate microfinance in the broader picture of economic development. We collect data on 373 MFIs and merge it with country-level economic and institutional data. Evidence arises for complementarity between MFI performance and the broader economy. For example, MFIs are more likely to cover costs when growth is stronger; and MFIs in financially deeper economies have lower default and operating costs, and charge lower interest rates. There is also evidence suggestive of substitutability or rivalry. For example, more manufacturing and higher workforce participation are associated with slower growth in MFI outreach. Overall, the country context appears to be an important determinant of MFI performance; MFI performance should be handicapped for the environment in which it was achieved.
Male suicides seem to accompany microfinance growth and penetration.
The authors propose a likelihood- ratio test of the hypothesis that the minimum-variance frontier of a set of K assets coincides with the frontier of this set and another s et of N assets. They study the relation between this hypothesis, exac t arbitrage pricing, and mutual-fund separation. The exact distributi on of the test statistic is presented. The authors test the hypothesi s that the frontier spanned by three size-sorted stock portfolios is the same as the frontier spanned by thirty-three size-sorted stock po rtfolios. Copyright 1987 by American Finance Association.
We propose regression-based tests for mean-variance spanning in the case where investors face market frictions such as short sales constraints and transaction costs. We test whether U.S. investors can extend their efficient set by investing in emerging markets when accounting for such frictions. For the period after the major liberalizations in the emerging markets, we find strong evidence for diversification benefits when market frictions are excluded, but this evidence disappears when investors face short sales constraints or small transaction costs. Although simulations suggest that there is a possible small-sample bias, this bias appears to be too small to affect our conclusions. THE QUESTION OF WHETHER OR NOT an investor can extend his efficient set by including additional assets in his portfolio has recently received considerable attention in the literature. If extension of the efficient set is not possible for a specific mean-variance utility function, the mean-variance...
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