Valuing Microfinance Institutions

This paper outlines the importance of valuations in the present context of the microfinance sector. The author makes a case for the need of valuations by stating the growth prospects for microfinance through infusion of equity.The paper explains valuations as follows:

• Valuations play an important role in attracting more investment in microfinance since:
  • They objectively measure financial performance of MFIs, making data amenable to comparison across MFIs;
  • They help in communicating value in a better way to investors;
  • They will help in mergers and acquisitions leading to a more rationalized sector.

• Methods of valuations are decided on the basis of:
  • Position of the owner and the entity being valued;
  • Valuations methodologies such as Book Value Multiplier and Discounted Cash Flow (DCF);
  • Qualitative and quantitative considerations for valuation.

The paper also presents the findings of a survey conducted by Opportunity International among members of the Council of Microfinance Equity Funds to understand valuations in the sector:

• It found that the DCF methodology is most widely employed and investors prefer usage of more than one method to allow for cross-checking.

The paper concludes by suggesting initiatives to encourage valuations in the sector:

• Standardize data capturing and recording methods in MFIs;
• Widely disseminate valuation methodologies;
• Have greater transparency;
• MFIs improve marketing effort to attract investment.