The Gray Ghost Fund is a $75 million, for-profit fund of funds focused exclusively on investments in microfinance funds that supply capital – debt and equity – to microfinance institutions (MFIs) around the world. One of the purposes of the fund is to demonstrate the viability of microfinance as an alternative investment option.
Bob shared with the audience some of his insights as an investor in microfinance. In addition, he described some of his observations on trends in the industry.
1) Microfinance institutions are profitable
Across the world there are an increasing number of MFIs that are not only self-sustaining but profitable as well. MFIs these days have greater access to capital – majority of which is provided through debt funding. These profits are attracting a new breed of investors and new sources of capital to the microfinance industry. Realization that there is money to be made in microfinance is also resulting in more competition in the industry. Several new microfinance institutions are cropping up in countries all over the world where for a long time there have been only a few major players.
2) The debt side is getting crowded
Currently there exist approximately 80 microfinance investment funds – most of which offer debt funding to MFIs. Most of these funds promise a financial as well as a social return to their investors.
3) Default rates are low
Most studies show that default rates are low for a majority of MFIs. The industry needs to get better at not only focusing on default rates but also showing how microfinance loans have impacted economic and social aspects of borrowers’ lives and their families.
4) Increased role of commercial banks in microfinance
Commercial banks in many countries are moving downstream and are looking to offer microfinance services as they realize that microfinance can be a profitable business. At a country level most of the money made available to MFIs comes from local banks. Under the service company model – which is gaining popularity, an MFI (structured as a non-financial company) does most of the work of promoting, evaluating, distributing loans and collecting repayments, but the loans themselves sit on the books of the bank. In return for its services, the bank pays the MFI a fee.
Bob stressed the increasing need of a good CFO’s for microfinance institutions – professionals who can advise CEO’s of MFIs on risk management, various fund structures etc.
5) Innovation in financial services
As the microfinance industry gets more sophisticated and mainstream banks and other financial institutions get involved, many of them are taking the microfinance loan relationships that they have built with borrowers and trying to transform them into broad based financial services relationships. Today, loans are just one example of the various products that are offered to microfinance clients. Many MFIs all over the world have developed innovative products like savings, insurance, mortgages and even microfinance-remittances programs.