Social Impact Investing

Impact Investments:
An emerging asset class
Global Research
29 November 2010
Table 23: Microfinance penetration
rates currently above 20%
Penetration rate = # of borrowers/# of
poor adults
Country
Penetration
rate
Bosnia and
Herzegovina 60%
Mongolia 42%
Montenegro 29%
Vietnam 28%
Bangladesh 28%
Paraguay 24%
Mexico 24%
Sri Lanka 22%
Morocco 21%
Cambodia 21%
Source: MIX Market, J.P. Morgan.
Choosing Target penetration rates: 20% over 10 years
In choosing the target penetration rate we aim to capture a healthy potential rate of
growth over the next 10 years. Anecdotally, some of the markets with penetration
rates higher than 20% (Table 23) are exhibiting symptoms of multiple lending and
significant over-indebtedness. Since high growth can result from lending more to the
same population rather than increasing the penetration into new markets, we prefer to
target a more conservative growth estimate. Targeting a lower penetration rate than
might be achievable over the coming years can allow the companies to tackle the
costs of accessing new customers in new regions, increasing their market penetration
in a more gradual way.
Sizing the market: $176bn could capitalize the market over 10 years
Once we have identified the target penetration rate, we can apply the calculations in
Table 24. We start with the calculation from Equation 1 for each country’s
microfinance sector (using the MIX data set, which represents about 80% of the
market) and determine the potential investment capital for each country (excluding
any countries for which the penetration rate is already higher than 20%). Adding
these up gives the $150bn of potential invested capital for the MIX data set (line 1) 92 .
Table 24: Microfinance market sizing
USD bn Calculations Assumptions
1 Potential invested capital for MIX data set 150 Sum of country data using Equation 1 as at 2008, using 20% target penetration rate
2 Potential invested capital for global MFIs 187 Line 1 / 80% as at 2008, MIX data represents 80% of global MFIs
3 Potential invested capital for global MFIs 269 Line 2 ( (1+20%)^2 as at 2010, applying global growth rate of 20%
4 Percentage currently funded by the private sector 66% From the CGAP 2010 MIV Market survey
5 Private sector investment opportunity 176 Line 3 ( Line 4)
Source: J.P. Morgan. We omit any countries where current penetration rates are higher than 20%. Private sector market opportunity is the sum of the sum of investments from private individuals,
private institutions and fund-of-fund MIVs. The investments surveyed by CGAP reference in Line 4 are MIV investments, which we take as a proxy for MFI funding sources.
Then, we scale line 1 by 80% to capture the part of the market not represented by the
MIX data (line 2), and we grow that amount by 20% annually 93 to bring the potential
invested capital for global MFIs to a 2010 number: $269bn (line 3). Finally, we
apply the percentage of investment that comes from private sector investors (66% as
determined by CGAP 94 , line 4) to find that the potential private sector investment
opportunity in microfinance is $176bn. As with the other sectors, we take this to be a
number representative of the currently unfunded market opportunity over the next 10
years.
We note at this point that we have aimed to size the potential opportunity for
microfinance such that the market does not fall down the path of indebtedness and
multiple borrowing that we have recently seen in markets that have undergone very
rapid growth. The potential market could clearly be bigger than our estimate, but we
hope that growth in this sector will remain driven by the social mission and avoid
putting borrowers into challenging debt situations. Indeed, the recent problems in
India highlight the critical need for strengthened credit risk management and
regulatory frameworks.
92 How many borrowers and MFIs exist, A Gonzalez, MIX, December 2008.
93 According to CGAP, growth in microfinance investment vehicles (MIVs) slowed in 2009 to
25% from 34% in 2008. Since we are analyzing microfinance institutions (MFIs) and not the
vehicles that invest in them, we will be slightly more conservative and use the lower 2009
growth rate as our proxy for the MFIs.
94 CGAP 2010 MIV Survey.
62