Social Impact Investing

Impact Investments:
An emerging asset class
Global Research
29 November 2010
MFIs vs. MIVs
Investment flows into microfinance
primarily through:
- Microfinance institutions (MFIs)
that provide microfinance loans to
end clients
- Microfinance investment vehicles
(MIVs) that collect funding from
investors and invest into MFIs
While some of the data we use in
this exercise references MIVs
rather than MFIs (which we use as
proxies), we focus in this section
on sizing the potential capital that
could be deployed to finance the
MFI market.
Focus on microfinance
The microfinance sector is one of the most developed of the impact investment
sectors notwithstanding recent problems related to excessive growth. The modern
microfinance industry launched in the early 1970’s with separate initiatives in
Bangladesh and India 90 , and has benefited from the development of infrastructure
and data histories that have yet to be as well established in many of the other impact
investment sectors. The Consultative Group to Assist the Poor (“CGAP”) has
produced extensive market research, and the Microfinance Information eXchange
(“MIX”) has collected a significant data set that they believe captures 80% of
microfinance institutions globally.
Microfinance sizing methodology
In order to make use of the extensive data collected on the sector, we built a
methodology that extrapolates from the current market size. We start with a list of
country-by-country data from MIX, including total assets, total deposits, and
penetration rates 91 . Using this data, we follow the calculation shown in Equation 1.
Equation 1: Calculating potential invested capital
⎛ Current invested capital
⎞
Potential invested capital = ⎜
× Target penetration rate⎟
- Current invested capital
⎝ Current penetration rate
⎠
where
Current invested capital = Total assets - Total deposits
Source: J.P. Morgan.
Our starting point is the current invested capital, which we define as total assets
minus total deposits, since we assume the deposits are sourced locally rather than
from impact investment. Then, in the bracketed part of the equation, we scale up the
current invested capital to the amount it would be in case penetration rates hit 100%.
However, given we think a 100% penetration rate is neither attainable nor healthy,
we set a target penetration rate of less than 100% and scale down by this amount. We
have also assumed a simplified set of two funding sources: invested capital and
deposits. As the market matures, the MFIs will grow to access more diversified
funding sources. In the future (and for some, currently) there may be access to
interbank lending, repurchase or “repo” transactions, or even central bank funding.
For the time being, we assume that these funding sources are not being accessed.
90 In Bangladesh, BRAC was founded in 1972 and Grameen a year later while SEWA also
began microfinance programs in India at the same time.
91 See Appendix VI: Notes on market sizing for full data set.
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