Microfinance Investments and IFRS: The Fair Value Challenge

Demand for microfinance products clearly exceeds supply: over 2.5 billion people, or 83% of the global market, lack access to financial services. One constraint that prevents microfinance institutions (MFIs) from reaching more customers is their lack of access to refinancing. Given the scarcity of donor funds and the limits of long-term domestic funding sources, MFIs seeking funding are increasingly turning to international private capital markets. The hurdles MFIs face in attracting private capital are complex and profuse. Industry-specific characteristics, including size, a dearth of regulation, lack of internationally-recognized ratings, and location in developing and transition countries impede MFI access to international capital markets. MFIs must also overcome the challenges of attracting private capital to a new asset class. Microfinance does not fit neatly into institutional investment mandates, few institutional investors have microfinance expertise in-house, and the perception of microfinance as a risky asset class, as well as the high cost of thorough analysis relative to investment size, may discourage due diligence. Moreover, the total potential volume of institutional investors’ portfolios of microfinance instruments is very large relative to the limited number and small size of such investments. This may limit institutional investors’ ability to reap the benefits of diversification – and may contribute to prohibitively high transaction costs.