Microfinance Commercialization: Financially and Socially Optimal Investments

The paper identifies MFIs that are attractive investments in terms of financial and social returns. These are investments that improve the portfolio in terms of diversification while also performing well on reaching out to the poor.

The paper uses a dataset containing annual data of MFIs. The study indicates that for international equity and bond investors, adding group lending MFIs to a benchmark portfolio is not interesting in terms of risk-return profile. In contrast, it is interesting to invest in MFIs offering individual loans. Overall, MFIs that provide individual loans mainly provide financial benefits, while those focusing on group loans provide more social benefits to investors. Group lending MFIs that are not from Africa or South Asia, however, do offer diversification benefits. Findings seem to suggest that investors that want financial as well as social benefits should not invest in Africa and South Asia. Group lending MFIs from East Asia and the Pacific are particularly interesting for these investors as they score the best in terms of outreach while also offering a valuable contribution to portfolio diversification.