Investment in Microfinance Continues to Grow

> Posted by Stephanie Dolan 
Can you ever have too much of a good thing?  When it comes to money, most people say “no”.  However, microfinance investors are finding the opposite to be true – an over-abundance of liquidity was highlighted by the recently-released MicroRate study, “State of Microfinance Investment” as a primary challenge facing microfinance funds (also called “microfinance investment vehicles” or “MIVs”). 
But first, the good news: despite the worldwide recession, MicroRate’s report indicates that investors remain extremely interested in – and optimistic about – microfinance, with MIV assets growing by $1.2 billion to $6 billion in 2009.  According to the report, there are now at least 88 MIVs in existence, a number that has seen continued year-over-year growth. 
In fact, MIVs were so successful in raising money that they are now facing difficulty placing their new funds.  Herein lies the dilemma: funds now hold extremely high, even unsustainable amounts of liquidity, at a time when the MFIs’ demand for funding has declined.  With the economic crisis and slowing growth rates, MFIs no longer need quite as much funding to finance their loan portfolios and operations. 
While the consequences of an over-abundance of liquidity are still TBD, I see this as both an opportunity and a challenge.  On one hand, MIVs could use this period to turn inward, examining and strengthening their staffing, internal processes, and infrastructure while honing their financial products for MFIs; on the other hand, over-liquidity could contribute to a number of potential problems, including over-heating in certain markets and relaxed lending standards.
The report’s findings confirmed a primary concern of the Council of Microfinance Equity Funds (CMEF), an industry association for active investors in microfinance.  In response to its members’ concerns about over-liquidity, the CMEF is actively thinking about and tackling this issue.  Stay tuned for more information on the Council’s upcoming work on over-liquidity.
Learn more about the microfinance investing environment by reading the report here.