> Posted by Danielle Piskadlo, Senior Program Specialist, CFI

After a couple of turbulent years in the microfinance sector, things are finally calming down and settling into a “new normal.” This new normal looks quite different from the old normal but may also be a more realistic and sustainable state. MicroRate’s recently released 7th annual survey and analysis on Microfinance Investment Vehicles (MIVs), The State of Microfinance Investment 2012, explores this new normal. Below are reactions to some of the report’s findings.

New Normal Growth. The growth rate of MIVs has settled into an average of 13 percent per year since 2009, versus an average of 74 percent during the preceding three years, according to the MicroRate survey. As MIV growth is less than the overall MFI growth reported on the MIX Market (approximately 20 percent) MIV funding appears to be decreasing as a share of overall MFI funding. Development Finance Institutions (DFIs) still make up the largest percentage of funding to MFIs but their level of support may be peaking and their funding, as a percent of total funds for microfinance, may reduce in the years to come.

Debt to Equity. The demand for equity and subordinated debt is huge and continuing to grow, mainly coming from mature MFIs. More MIVs are moving away from debt toward equity, being driven in part by a desire to be more involved in governance, to play a larger role in risk management, and because the regulators are requiring more capital. Also, fund investors increasingly want to know how much of a fund’s return is coming from debt versus equity. Some of the larger DFIs need to disburse large amount of funds, so they have to make debt investments, leaving an unmet demand for equity.

Beyond Microfinance. Microfinance may eventually merge into the larger finance arena as more commercial players move into lower income markets. At the same time, some microfinance-focused investment funds are moving into areas beyond microfinance, such as housing, fair trade, agriculture, and technology – mostly with debt.

De-concentration. The desk-driven investment approach doesn’t work; investors need a presence on the ground. This need may be driving the de-concentration of funds towards the regions. However, there probably should be a movement of greater consolidation among funds to capitalize on synergies and shared back-office expenses. And the start of this consolidation can be seen in the recent acquisitions by Bamboo Finance of Accion Investments and by MicroVest of Minlam.

Sub-Saharan Africa. A few countries are getting saturated with loans, and MIVs should be moving into new and riskier areas, such as sub-Saharan Africa, because MIVs are well placed to manage these riskier markets.

Competition. MIVs are facing increasing competition from local banks, especially in Latin America. In the past, the majority of funding was international, and MFIs had to take hard currency loans. Now, the cost of funding for MFIs has come down significantly as has the availability of local loans. Many MFIs can raise deposits from the public, and this has become a major source of local currency funding for MFIs. Offering a USD loan to an MFI is now a non-starter in many places in Latin America, as MFIs have many funding choices and are no longer price-takers. On the upside, as MFIs grow and have cheaper funding sources, their clients are paying less and getting better service. But what does this mean for MIVs? With more open markets, MIVs can no longer compete on rates alone and will need to evolve to offer better service. Some MIVs are embracing this evolution. But MIVs also need to be careful about not investing in markets trending toward over-indebtedness.

Image Credit: MicroRate

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