various requirements on reporting standards that have influenced the way providers and intermediaries gather and provide information on their operational, financial, and social results. The entry of institutional investors into the field of financial inclusion has been an important development in the evolution of the industry, resulting in microfinance being more in the mainstream of investment alternatives with more standardized reporting, ratings by mainstream rating agencies, and other more formal sector characteristics. Box 16.2 provides an overview of the size of the institutional investor market in microfinance and examples of noteworthy transactions.
Banks Local commercial bank funding to microfinance providers varies significantly by country; in some countries they are not active at all, whereas in others they are key funders in financial services for the poor. They are typically present only when both the local banking industry and the microfinance industry are well developed and/or if government mandates exist. In India, for example, local banks are actively encouraged by a regulation that requires banks to lend to “priority sectors” to help achieve national development goals. Commercial banks invest in microfinance to achieve both commercial and socially responsible
Box 16.2 Institutional Investors in Microfinance The market for institutional investors in microfinance is relatively new. Institutional investors are the fastest growing investment group in microfinance, having increased their outstanding investment in microfinance from US$1.2 billion in 2006 to US$3.5 billion in 2010 (CGAP 2011). A December 2011 survey conducted by J. P. Morgan and the Global Impact Investing Network on “impact investing” as a whole (with microfinance constituting approximately 40 percent of current investment in impact investing) reported that institutional investors who responded to the survey expected to allocate approximately 5 percent of their total investments to impact investing over the next 10 years. A diverse set of institutional players are dedicating investment resources to microfinance. Institutional investors include international banks, pension funds, and insurance companies. For example, in 2006 TIAA-CREF, a leading pension fund with US$453 billion in
combined assets under management, launched a US$100 million Global Microfinance Investment Program. The program has since invested in ProCredit, a German holding company with microfinance banks in 21 developing countries. Similarly, in April 2010, Dutch pension fund ABP invested US$30 million in global private equity fund Grassroots Capital. The investment brought ABP’s total debt and equity holdings in microfinance to US$215 million. The Swiss Post Pension Fund dedicated CHF 130 million to microfinance in 2011 and stated “our analysis of microfinance assets has shown that this asset class fulfills our set selection criteria: it offers an attractive risk/return ratio and can be expected to enhance our portfolio diversification.” Likewise, insurance companies with long-term funding have begun to invest in microfinance. The Sonam insurance company in Senegal has invested in MicroCred Senegal directly.
Source: Reille et al. 2011; Saltuk et al. 2011; Responsible Investor 2012.
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