Trends in microfinance investing

Funds investing in MFIs, commonly known as microfinance investment vehicles or MIVs, have grown dramatically in both number and size over the past several years. CGAP and Symbiotics report that there were 103 MIVs active in 2008, up from only 23 in 2000, and despite constraints imposed by the financial crisis their total assets grew by 31% in 2008.

At a recent panel discussion hosted by the Microfinance Club of New York, panelists offered their perspectives. One of the more provocative ideas concerned the fact that MIV investment is highly concentrated: one estimate is that only 250 of the roughly 10,000 microfinance institutions worldwide are “investable.” They are the large commercial micro lenders created primarily by downscaling banks and by the formalization of NGO lenders.

But another path to commercial scale is consolidation. In other words, if mergers and acquisitions increased in the microfinance sector, more existing institutions could become eligible for commercial investment. Commercialization is a well-documented trend in microfinance, and consolidation can’t be far behind. It could offer benefits to both institutions and borrowers.

Still, it raises one immediate concern. Microfinance institutions structured as NGOs tend to be smaller and more reliant on subsidized funding, but their average loan sizes are smaller. Usually, average loan size is interpreted as a proxy for the poverty level of customers, so if non-commercial micro lenders become scarce the supply of loans for poorer customers might dry up.

Another factor in loan sizes, however, is lenders’ capacity, and it might be that the average borrower wants (and can repay) larger loans than lenders can offer. This could help explain the issue of multiple borrowing debated earlier this year. It also could mean that consolidation will lead to a better match between supply of and demand for loans. But while consolidation might make the average borrower better off, the danger is that relatively poorer borrowers—those who can’t afford larger loans—will get left behind. Since MIVs don’t typically monitor the poverty level of borrowers served by the institutions they invest in, the onus will be on donors and others committed to serving the poor to make sure that doesn’t happen.