Foreign Investment in Microfinance: Debt and Equity from Quasi-Commercial Investors (Focus Note No. 25)

Publication Date: Jan 2004
Published by: Consultative Group to Assist the Poor (CGAP)
Document Type: Paper

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A growing source of funds for promising microfinance institutions

This paper states that commercial and quasi-commercial foreign investment is a growing and potentially important source of funds for promising microfinance institutions (MFIs). Foreign investment can help achieve scale by mobilizing local investment and improving management and governance.

The major findings of the paper, from the information and data gathered from various development investors and survey of social investment fund, are:

• Social investment funds have committed about 79 percent of the foreign investment that has been allocated by region.
• Most foreign investment is made through debt instruments, although social investment funds, particularly the new ones, are more equity-oriented.
• Foreign investment in MFIs is predominantly in hard currency.
• The new social investment funds appear to be more equity-focused than existing ones, with a projected split of 60:40, equity to debt.
• Development investors are focused on Eastern Europe and Central Asia while social investment funds have allocated more than half of their capital to Latin America and the Caribbean.

The paper explores the possible choices available and concludes that:

• Further research is required to better categorize social investment funds and analyze their performance.
• Although foreign investment can play an important role in improving governance, catalyzing local financing, and increasing MFI transparency, these benefits are not evenly distributed.
• The volume of commercially-oriented foreign investment in microfinance will only increase and reach deeper markets as investors and MFIs adopt greater transparency and standardization.
• Increasing the transparency of social investment funds is essential if they are to begin intermediating between profit-maximizing private investors and MFIs.