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Microfinance: a wise addition to the conscious investor’s portfolio?

In addition to microloans, microfinance institutions are increasingly offering savings accounts, insurance products and other related services, expanding the range of income-generating activities microfinance enables. When uncoupled from traditional asset classes and offering stability, investment in the maturing microfinance sector can bring healthy returns and add diversity to a portfolio.



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Exclusion from the financial system is generally seen as a major obstacle in the fight against poverty. In 2017, 1.7 billion adults worldwide had no access to a bank account. The vast majority of them live in emerging markets and frontier markets. According to the World Bank, 56% of these are women, and 59% of these women are not part of the working population of their country.

Easier access to financial products, adapting financial services and linking capital markets to working individuals can therefore close a wide gap in overcoming poverty. This is where microfinance, a form of impact investing, comes in.

Microfinance institutions extend loans and increasingly offer savings, insurance and related products to low-income groups and micro, small and medium-sized enterprises to enable income-generating activities and help people escape from poverty.

The growth in microfinance investments is not the only change occurring in the world of financial news—keep on top of it all by downloading our free companion app, Born2Invest.

How can microfinance help in the fight against poverty?

Peter Fanconi, Chairman of Impact Investment Manager BlueOrchard, knows the impact access to capital can have.

“An investment of $1 million over five years can improve the lives of over 55,000 people. These are impressive figures. But, at the end of the day, that’s not what it’s all about. It’s also about people; individual stories about peoples’ families, wishes, hopes and dreams.”

Peter has “seen loans like BlueOrchard’s enable a single mother to start an embroidery business in Colombia.” The founder thus gained financial independence and now employs 20 other women.

A similar loan helped a farmer and beekeeper from Tajikistan expand his business and increase his family’s income without having to move to an urban area. He is one of 42% of BlueOrchard’s end customers who live in rural areas, whose living conditions improved with access to the financial system.

These are just two examples. The positive social benefits of impact investing and microfinance—particularly in terms of poverty reduction—is obvious.

How can investors benefit?

It is obvious that an inclusive financial system is a positive step towards sustainability and the achievement of development goals. In a society with access to financial services, the prospects for entrepreneurship and job creation are better. Such a society can provide people with the tools to improve their livelihoods in terms of financial security, health care and education.

So the social benefits are obvious. But what about financial due diligence and investment returns? The sustainability of a microfinance programme depends on the long-term profitability for investors. If microfinance is not profitable for the investors, this also affects the borrowers of microcredits.

“The potential for stable and competitive returns—together with low default rates—is just one of the factors that are convincing more and more investors to adopt the microfinance model. This is the way to generate returns and do some good,” comments Patrick Scheurle, CEO of BlueOrchard.

Peter Fanconi is also convinced that microfinance offers investors not only attractive returns but also diversification benefits. These play an increasingly important role as economic growth slows down.

“Over the past 20 years, our microfinance activities have generated an annual return of 4.3%. The default rate over the same period was less than 1%. We do not believe that the banks in industrialized countries could match this. It is also particularly important that returns do not correlate with traditional asset classes and have very low fluctuations in value. These features add to the positive social benefits and thus ensure a balanced investment strategy (what we call the “double bottom line”).

What risks should investors be aware of?

Potential risks must be carefully weighed up before investing. The factors outlined below are just some of the questions to ask before investing capital.

  • Does the microfinance institution have formal guidelines for multiple loans?
  • Does the institution disclose to customers the prices, rates and terms and conditions of all financial products?
  • Does the institution follow a code of conduct?
  • Does the institution have formal guidelines for dealing with customer complaints?

Country-specific factors must also be taken into account. Creditworthiness must be checked by means of consistent and repeatable analysis.

It is important to find the balance between a socially positive and a profitable investment. An investor must have the necessary information on social and environmental consequences and returns. On the other hand, it is also important to take into account the reality on the ground—in other words, the limits and capabilities of potential borrowers.

Why microfinance is becoming so popular

The allocation of capital can solve some of the world’s most pressing social and environmental problems. In 2006, the United Nations launched the Principles for Responsible Investment (UNPRI), putting sustainability at the centre of attention. These principles changed the way investors considered sustainability in their investment decisions. According to the UNPRI, ESG factors (environmental, social and governance) are a key aspect of an investor’s responsibility and an important factor in generating sustainable returns.

The UNPRI are extremely influential. The more than 2,300 signatories from more than 60 countries represent over 86 trillion dollars in assets. Nine of the ten largest fund managers in the world are now signatories. ESG factors are playing an increasingly important role.

In 2015, a major step forward in responsible investing was achieved. This year, the UN’s sustainability goals were signed by the global community—all 193 member states of the United Nations. The sustainability goals (also SDG for Sustainable Development Goals) provided the signatories with clear guidelines to end poverty, reduce inequality and protect the environment.

They are based on the United Nations Millennium Development Goals. They were signed in 2000. As precursors to the sustainability goals, they aimed to combat extreme poverty. The Millennium Development Goals focused on access to microfinance as an important aspect of developing inclusive financial systems. Against this background, the UN General Assembly designated 2005 as the “Year of Microcredit” to highlight the relevance of microfinance. In 2006 Muhammad Yunus, who demonstrated how microfinance can lift working poor people out of poverty, was awarded the Nobel Peace Prize.

The established sustainability goals call on the private sector to act. They also make it clear that the global community depends on the private sector to solve its most urgent problems. Both companies and institutional investors are called upon to contribute to the sustainability goals through their business activities, asset allocation and investment decisions. The top priority of the sustainability goals is the global fight against poverty.


(Featured image by Sasin Tipchai via Pixabay)

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First published in Finanz Trends, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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Isaac Atwood is a PR and marketing consultant who has worked with respected names in the financial industry. He has also sat down in many sessions with startups aiming to become the next unicorn. Isaac loves working with CEOs, business executives, and entrepreneurs who wish to enter the following markets: artificial intelligence, cannabis, virtual reality, cryptocurrencies, robotics, wearable and smart tech, and even the much-hyped space race. He is currently managing the brand portfolio of an Asian firm planning for its IPO by the end of the year. While his engagements have taken him around the world, Isaac is proud to call Toronto his home.