Microfinance provides financial services to individuals and businesses in developing countries who often find themselves struggling with poverty, and with no access to conventional banking services. Humanitarian agencies and non-profit organizations are the traditional supporters of microfinance, but over time, funding sources have diversified. In fact, microfinance is now attracting the attention of a variety of investors such as credit unions and non-bank financial institutions. Currently, funding comes from customer deposits, commercial lending and access to capital markets via asset-backed securities.
Interest in microfinance, especially for businesses, has surged among investors, particularly those seeking greater portfolio diversification. For proof of this, we can look to the Microfinance Fund Index, which offers a more attractive risk-return ratio than other investment classes or principle market indicators. Also worth noting is the fact that the performance of this index shows a low correlation with the yields of the main market benchmarks; this translates into higher portfolio diversification.
The clear social benefits intrinsic to microfinance, together with an interesting risk-return profile, make this investment space fertile ground for research. Our investigation focuses on the risks and returns of microfinance as an investment category. We also examine its correlations with both global and local market benchmarks.
Specifically, our study:
This research project was sponsored by Mikro Kapital S.p.A., one of the top ten microcredit companies recognized by the Bank of Italy, based on Article 111 of the Consolidated Banking Act. Mikro Kapital S.p.A. plays a major role in the national microcredit space, supporting startups and entrepreneurial activities that are not yet bankable, as well as people and families who can’t access traditional credit channels to cover their daily expenses because they don’t have adequate credit history.
Thanks to support from Mikro Kapital S.p.A, our research team was able to take a deep dive into the impact of this specific asset class in relation to the entire domain of microfinance.
Microfinance stands out as a unique investment category, offering the opportunity to generate financial returns through interest and dividend payments while taking a more balanced risk position. At the same time, microfinance helps reduce poverty, promotes financial inclusion and supports sustainable development. These aspects mean that microfinance investments are in line with the principles of ESG investments, which prioritize producing positive social impacts along with financial returns.
This study delves into the performance metrics of the Microfinance Fund Index compared to traditional financial benchmarks, highlighting how the Fund reacts to adverse market conditions and the implications for portfolio diversification and risk mitigation strategies. In our analysis, we take a deep dive into the strategic benefits of integrating microfinance investments into global financial portfolios, scrutinizing index returns, volatility patterns and correlation coefficients with major market indices. We argue that microfinance channeled into business projects involves a lower risk compared to microfinance focused on basic needs. This is primarily thanks to its approach of using startup capital as collateral, which improves the chances for partial recovery of investments in the event of default.
We conducted our research on several levels:
Focusing on the diversification effect, we developed four hypothetical portfolios, starting with a balanced portfolio and progressively increasing the share of microfinance. Our analysis demonstrates that integrating microfinance investments boosts overall portfolio returns and reduces risk at the same time. We corroborated this trend both at the overall index level and for all its individual components.
These findings suggest that beyond offering competitive returns compared to other asset classes, microfinance investments can also help decrease total portfolio risk through diversification, while generating a positive social impact on communities.
Overall, our empirical analysis spotlights the potential of microfinance as an asset class, given the unique combination of returns, diversification, social impact, risk management and low correlation with other asset classes.
Specifically, the results of our study highlight the potential benefits of microfinance investments, especially with an eye to portfolio diversification. In particular, we’ve drawn the following conclusions.
Leveraging the Sharpe ratio (the most widely used measure of risk-adjusted return), we find that the Microfinance Fund Index gives consistently positive results and lower risk than the leading market benchmarks, despite the highly volatile macroeconomic environment we saw in 2020, 2021 and 2022. What’s more, thanks to its low correlation with major asset classes, microfinance investments can guarantee unique diversification benefits to investors.
The Alternative Securitization Fund managed by Mikro Kapital had even more impressive financial performance during the reporting period, offering impressive returns with relatively low volatility. This fund also manifested a negative correlation with major asset classes and a positive correlation with emerging markets, making microfinance an attractive option for investors seeking effective diversification and superior returns.
Admittedly, the data refer to a relatively short time horizon (2020-2022). But it’s worth noting that this period was a unique one marked by major market disruptions (the COVID-19 pandemic, the war in Ukraine). This makes the resilience of microfinance during these unprecedented crises even more remarkable.
The timeframe of our analysis paves the way for further promising developments by indicating directions for future research. In fact, replicating this study in an expanding market can provide thought-provoking insights not only about risk, but returns as well. Since our study shows the unique resilience of this asset class during times of macroeconomic turbulence, it will be interesting to investigate how performance changes when markets are growing, and what kind of returns investors can expect.
Un percorso formativo che assicura lo sviluppo di una conoscenza delle metodologie di analisi e previsione dei risultati trasversale alle tre anime delle funzioni AFC (Amministrazione, Finanza e Controllo).
Definire modelli quantitativi che migliorino e supportino in modo efficiente le attività di analisi, valutazione e decisione nell’ambito della finanza aziendale.
Padroneggiare strumenti e processi e affinare le soft skill utili alla funzione di controllo direzionale nel contesto di un’impresa sostenibile.
