Asian microfinance investment market in need of regulations

Microfinance Focus, Oct 14, 2010: Providing an overview of the current investment landscape for Asia, a panel of development and investment specialist discussed the expectations, experiences and recommendations of investors in a panel discussion entitled ‘Investing in Asia: Opportunities, Challenges and Impact’ at the Asia Microfinance Forum 2010 today in Sri Lanka.

Liz Larson, Asia Regional Manager, MIX, USA, introduced MIX funding structure Data Set to the audience which MIX has been collecting from across the world for identifying the major markets in each region and their emerging trends. Currently MIX has data on funding liabilities from 9000 transactions from 688 institutions available on its website.

“Asia which has the world’s 70% of microfinance borrowers and also has a lion share of 50% in GLP (Gross Loan Portfolio) is the largest piece of microfinance in any way you slice it”, said Ms. Larson.  “The information available is important to further the interaction between microfinance institutions and funders which ensures greater transparency between the two”, she added.

Over the last few years, growth of non-deposit funding liabilities has been playing an increasing role in the way in which MFIs are funding themselves and MFIs are increasingly looking to borrowers to fund their expansion. Financial and operational expenses were also found to be increasing in the last couple of years as per the MIX reporting.  

In 2008 South Asia received USD 2.2 billion in funding, which again is the largest share when compared to other regions. Financial institutions carry highest interest rate followed by MIVs (Microfinance Investment Vehicles) and Development Finance Institutions are on lending at the cheapest rate in Asia. Ms. Larson however pointed out that most of the funding is still not going to medium MFI who may not be meeting the expectations of investors. She also stressed on the growing need of regulations for the investment environment in Asia.

Giving an investor’s perspective Femke Bos, Fund Manager Triodos Microfinance Fund, Netherlands said, “Having a triple bottom line Tridos invests only in companies which have a positive impact on the economy. Currently Asia is overtaking Latin America in our investment portfolio and most of our investments are deposit taking institutions.

Highlighting some of the challenges that an investor faces while investing in Asia, Ms. Femke said, “Over indebtedness is a major challenge for us. Lack of clear strategy and regulatory framework also makes it difficult to invest in certain institutions. We are long term investors and are here to build long term alliance with microfinance institutions and the sector”.

 “As responsible investors we do ask ourselves as to what makes us different from the other commercial investors and we try that our investments ensure that microfinance institutions deliver on their promise said Michael Rabonza, Investment Officer, Triple Jump, Netherlands

“We look for opportunities where financial services could reach to the poorest and we do measure social performance of MFIs before making investments” he added.

Mr. Ravi Tissera, Director & CEO, LOLC Micro Credit, Sri Lanka discussed the LOMC experience in attracting investors’ interest in microfinance. “The main challenge is maintaining a balance between the commercial and social imperative. We need to have operational sustainability, adopt client protection principles and offer credit plus services along with other such measures to remain commercially viable and socially responsible” he said.

“Working with investors is sometimes fun and sometimes it is not so much fun. It is continuous improving process where we have to keep working together to achieve our objectives”, Ms. Ravi added.

The question whether social investors are looking for any impact while investing in microfinance or are merely investing for returns met with several perspectives from the investors.  Mr. Rabonza of Triple Jump said, “We try to encourage MFIs to look into what they can provide to their clients and how to make their products and service better”.

“We can go for companies which are not giving spectacular results but we can go for companies which have a strong social mission.  We are long term investors and our funds are open ended.  We don’t look for exit strategy at the time of investing”, Mr. Rabonza added.

Ms. Fenke also shared the same view and said that the MFI’s business model is an important factor in determining our investment. “We don’t look for an exit strategy while making an investment. We hold on to the investment for a considerable long period of time and let the institution grow”.

“We ourselves are not listed for the reason of protecting the interest of our bank nor do we expect microfinance institutions to get listed just for providing an exit strategy to their investor”, she added.

As for the dwindling investments from development funders like Tridos and Triple Jump in Indian microfinance sector, Ms. Fenke said, “Valuations of Indian MFIs in my opinion have increased tremendously in recent times with which we are not very comfortable. We have been in a way pushed out by the larger MFIs in India”.

Mr. Rabonza further added that most of the growing MFIs in India are asking for capital money and big funds, as a result, Triple Jump has moved out to the Northern part of the country where MFIs are still struggling and is investing there.

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