Agra, India, October, 23 2008 - Over the past five years, microfinance has become one of the fastest-growing sectors in the global economy, as an estimated USD 5 billion of cross-border investment has flowed from the developed world into microfinance institutions worldwide.

The funds originally came almost exclusively from the public sector, from charitable institutions and socially responsible investors.  Today’s investments in microfinance have been generated increasingly by those seeking a market rate of return on their investment, including the world’s largest commercial and investment banks, institutional investors and hedge funds and other  specialty investors. But this is not the end of the story, not by a long shot. The microfinance sector is growing exponentially and experts expect that an additional US$40 to US$50 billion of debt and equity capital will flow into this sector over the next five to seven years, most of it from traditional value-seeking investors.

The growth of traditional institutional investments to the microfinance sector is directly correlated to the dramatic growth and the related high collection rate on its loans.  In addition, most industry experts agree that the microfinance business model has worked well and are pressed to find many examples of Microfinance Institution (MFI) failures, unusual in a fast-growing and nascent business sector.  The sector has grown exponentially over the last decade, and particularly the last five years. In 2007, there were more than 10,000 MFIs serving approximately 150 million customers worldwide. The annual growth rate of the microfinance sector is estimated to exceed 50 per cent. Again, much of this growth has been fuelled by one key factor: the worldwide default rate on microloans is generally believed to be under 5 per cent. Among top-tier MFIs, that rate is approximately 2 per cent. This amazing success – combined with the perception that the potential customer base of an MFI located in almost any developing world country is not even close to being exhausted – is part of what has fuelled the recent rush of traditional value-seeking investors to the microfinance sector.

With the world population of those living below the poverty line estimated to exceed 2 billion, it is clear that MFIs have only begun to scratch the surface of their potential market. Investors believe that the reach of the microfinance sector can be expanded dramatically and that, with more capital, MFIs will be able to do their jobs more efficiently and profitably.

Although the concept and the investments in microfinance are growing at an amazing pace, what surprises us most is the low level of retail investors buying shares of microfinance institutions. Possibly a reason to this is the lack of microfinance institutions listing on stock exchanges combined with low investor awareness of this asset class. The real mainstreaming of microfinance will come around the day retail investors find value in the model and support the financial inclusion of a large under banked population across the globe.