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Accounting for market risk in microfinance investments

Author

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  • Lieveke Helwig
  • Laurens Swinkels

Abstract

Microfinance is primarily designed to have social impact. However, little is known about the financial attractiveness of investing in microfinance. Most microfinance institutions are private instead of publicly listed on a stock exchange. Hence, existing research relies on accounting-based returns to determine the diversification characteristics of microfinance investments relative to other asset classes. These prior studies use accounting-based risk measures as a proxy for market-based risk measures. We document that for a sample of publicly listed microfinance institutions, accounting-based and market-based risk measures have low correlation. Therefore, using accounting-based risk measures might underestimate the (market) risk embedded in investing in microfinance institutions. In addition, we show that mean-variance spanning tests that use accounting-based returns of microfinance institutions overstate the added value of microfinance institutions in investment portfolios. Taken together, our results indicate that previous research on the attractiveness of investments in microfinance institutions could be exaggerated.

Suggested Citation

  • Lieveke Helwig & Laurens Swinkels, 2015. "Accounting for market risk in microfinance investments," International Journal of Sustainable Economy, Inderscience Enterprises Ltd, vol. 7(4), pages 262-279.
    • Handle: RePEc:ids:ijsuse:v:7:y:2015:i:4:p:262-279
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    Cited by:

    1. Faisal Mustafa & Ambreen Khursheed & Maham Fatima, 2018. "Impact of global financial crunch on financially innovative microfinance institutions in South Asia," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 4(1), pages 1-11, December.

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