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Private Equity Players Eye Microfinance Institutions
By admin September 26, 2018

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For many years, poor people living in rural areas have struggled to find ways to finance their livelihood. In 1978, Grameen Bank was set up in Bangladesh to provide microcredit to impoverished people without collaterals and higher interest rates. This is the most famous example of microfinance. Today, microfinance institutions (MFI) operate all over the world, with the highest density in south Asia and the lowest in Latin America. In 2017, microfinance companies served 29 states and 563 districts in India, according to the latest Bharat Microfinance Report. Other developing countries, such as China, have also established their rural microcredit systems through rural financial reforms.

Notably, private equity (PE) firms, which are known for their active investments in the private sector, are demonstrating increasing interests in microfinance innovators in recent years.

This August, top private equity firm TPG Capital announced its investment of $100 million in Five Stars Business Ltd, a Chennai-based microfinance company offering loans to small businesses in India. The clients of Five Stars Business Ltd include street vendors, small stores and self-employed individuals. The same month this year, Warburg Pincus, also one of the largest private equities in the world, was reportedly in talks to acquire a significant minority stake in Fusion Microfinance, a non-banking financial company (NBFC) which aims to provide underprivileged women with financial access and economic opportunities.

Some microfinance institutions backed by private equity are taking further actions. ASA International, a Bangladeshi-Dutch microfinance lender became Europe’s first publicly-listed microfinance institution and secured a £313 million valuation this July by ringing the bell at the London Stock Exchange.

Equity investments are becoming more and more significant in NBFC and microfinance institutions and larger institution investors are joining the game. In India for example, equity investments in NBFC and microfinance institutions grew about 40% in from 2017 to 2018, according to a Microfinance Institutions Network (MFIN) report. This could lead to a win-win result for both the private equities and the MFI.

There are a few reasons why private equities are attracted to microfinance. First, the increasing demand from the governments and the public requires institution investors to take Environmental, Social and Governance (ESG) factors into their strategic considerations. Such moves enhance companies’ public images as sustainable investors. Second, by investing in microfinance, private equity investors can tap into a group of customers who are long neglected by traditional financial services and could potentially foster more innovative local businesses in emerging markets.

For MFIs, the participation of private capital is a good news as well. Private equity investment can have a positive impact on MFIs by narrowing the gap of insufficient traditional grant-led funding, and providing valuable commercial networks and operation support to the MFIs.

In spite of the positive impact, there are some concerns about unintended consequences that could harm the microfinance business. For example, the pursuit of short-term exit and high return on investment from private capital may distort the lending and distributing strategies of the microfinance companies.

The participation of private capital diversifies the funding sources of microfinance institutions and accelerates the scaling of such practices. Overall, this can be a great opportunity for microfinance companies to foster a more sustainable and inclusive financial environment in developing countries.

 

Sources/Read More:

Emerging Markets Continue Progress in Light of Struggle

The Bharat Microfinance Report 2017

TPG leads $100m funding for Five Star Business Finance; Norwest, Sequoia join round

Warburg Pincus in talks to invest up to $100m in Fusion Microfinance

Microlender ASA International’s listing to give £313m valuation

Micrometer, June 30 2018


Thanks for sharing !


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