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Growth prospects for microfinance institutions outlined in research report


The microfinance sector is beginning to realize its growth limits, given the risks posed by client over-indebtedness in several countries, according to the 2011 Global Microfinance Valuation Survey conducted by J.P. Morgan and the Consultative Group to Assist the Poor (CGAP). CGAP is an independent policy and research center housed at the World Bank that specializes in lower income finance.

The new report, “Discovering Limits,” finds that growth prospects for microfinance institutions (MFIs) slowed in 2010, with MFI valuations reversing a four-year growth path and book value multiples falling slightly.

The third annual report boasts the largest microfinance data sample ever collected, according to Christina Leijonhufvud, head of J.P. Morgan’s Social Finance group.

During a recent call to present the report’s findings, Global Equity Research Analyst Frederic de Mariz said investors are beginning to question political risks in several of the most active microfinance markets, including Pakistan, Nicaragua and India.

“Before – and even during – the global financial crisis, microfinance attracted a lot of investors because of its high growth prospects,” said de Mariz. “In 2010, investors became less focused on the growth prospects for institutions and more concerned about political and systemic risks.”

The report notes that new MFI IPOs aren’t likely in 2011, given that the market is still recovering from a recent IPO that disappointed investors in India. SKS, the largest MFI in India, went public in August 2010 and raised $350 million. The stock (SKSM IN) has decreased by 60% since its offering, though, according to Bloomberg data as of August 1, 2011, due to the crisis faced by the microfinance sector in that country and in the state of Andhra Pradesh in particular.

De Mariz said several noteworthy microfinance trends emerged from CGAP’s data:

*$205 million in private equity investments were made in 2010 – the second-best year since 2005 – with Latin America representing 56% of total private equity investments. Peru is one of the most active markets for microfinance private equity.
*Secondary investments are overtaking primary investments, representing 70% of total investments in 2010. That means private equity investors are able to exit their investments, representing a positive sign for the liquidity of the market as a whole.

“Valuations have been driven by characteristics of each country and each company,” de Mariz said during the call. “A lot depends on regulatory frameworks on the country level … microfinance institutions that can influence their regulators to increase transparency and to implement stronger credit bureaus will be the winners.”

The data for the research considered two samples. The first one looked at 238 private equity transactions conducted since 2005, representing roughly $800 million in private equity investments. The second dataset consisted of information sourced from 11 listed low-income financial institutions that share similarities with microfinance institutions serving the bottom of the economic pyramid.

This report is part of an award-winning series of research conducted by J.P. Morgan’s Social Finance team.

Read the full “Discovering Limits” report.


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