Microfinance Institutions and Diversification Benefits to Global Investors

Abstract

Microfinance institutions (MFIs) are major providers of financial services to millions of low-income borrowers in developing countries. MFIs are appealing investment opportunities for both profit and impact investors, offering attractive returns and serving as potentially useful vehicles for diversifying from global financial markets. We employed mean-variance spanning tests to examine these potential diversification benefits of including MFIs in globally diversified portfolios. Our results revealed that the magnitude of diversification benefits depended on the short sales restrictions assumption. When investors were allowed to go short on MFIs, adding MFIs greatly expanded the mean-variance frontier to the left. However, when investors are not allowed to go short on MIFs, the diversification benefits declined significantly. For profit-oriented global institutional investors, actively traded and large capitalized MFIs presented an attractive investable asset class to include in their portfolios. For socially responsible investors, listed MFIs represented an attractive venue to achieve their social aims while at the same time potentially benefiting from expanding their mean-variance efficient frontier to the left. An interesting finding was that even with short sales restrictions, euro and yen investors are expected to receive greater diversification benefits than USD investors.