The Market for Foreign Investment in Microfinance: Opportunities and Challenges

This paper attempts to address some key questions about foreign investors and the demand for their services. The paper states that:

• Private foreign investment in microfinance institutions (MFIs) is less than a quarter;
• Very little of this investment is really commercial;
• A total of 505 MFIs have received foreign investment - it has been concentrated as large investments in a small number of licensed and regulated institutions in Latin America and Eastern Europe/Central Asia;
• It appears that the supply of funds from foreign investors exceeds the demand from low-risk MFIs;
• As MFIs continue to grow and absorb more funding, domestic sources seem likely to become more prevalent, particularly for regulated MFIs;
• Many MFIs seem to be taking on hard currency debt, because the interest rates appear lower, without factoring in the foreign exchange risk they are thereby creating.

The paper concludes that:

• Foreign investors would add more value to the market if they were able to tolerate more risk and work with less-well-established MFIs;
• Those funded with public money are best-positioned to take additional risk;
• Regulated MFIs should be helped to access more local funding;
• MFIs and investors need to be aware of the foreign exchange risk inherent in hard-currency loans.