MFI Equity: An Investment Opportunity for the Broader Public?

Microfinance institutions (MFIs) provide financial products to the economically active poor (EAP), a market segment underserved by mainstream financial institutions. Traditionally, credit in the form of livelihood (or business) loans has been the focus for MFIs. In recent years some MFIs have extended their product offering to include savings accounts, home improvement loans, education loans and a range of insurance products. This Chapter explores one aspect of the capital dilemma faced by the microfinance industry: the role of equity investment from the broader public. Equity is the cornerstone on which regulated, for-profit MFIs can build sustainable liability structures to support growth. Many parallels can be drawn between the investment opportunity presented by equity in early stage or “second generation” MFIs and private equity, or more precisely venture capital. Microfinance investment funds (MFIFs) focused on equity investment in second generation MFIs present a potentially attractive investment opportunity not dissimilar to that of emerging market venture capital funds. The corollary is that such MFIFs appeal to niche investors. The challenges faced by MFIFs across the investment lifecycle in part mirror those of emerging market private equity funds, but are in some respects unique. Despite these challenges, MFIFs are increasingly taking ownership in MFIs around the world, providing clear evidence of a continuing evolution of microfinance away from philanthropy towards a sustainable commercial industry.