Commercial Microfinance Funds (#MIVs): Origins of Impact Investment

How does investor money find its way into #microfinance and impact investment? One business model – the closed-end stand-alone quasi #VC fund – predominates. Following is some background on how this came to be the case. Note that there are other business models – notably Triodos Bank and Oikocredit in the Netherlands and IPC/Procredit in Germany – but these are non-replicable exceptions to what has become generally accepted practice for channeling money into microfinance and social enterprise.

Once upon a time, the practitioners of micro-credit discovered that the poor will manage their finances responsibly (very high on-time repayment rates) when they actually have access to finance. In 1991, a well-governed, successful Bolivian non-profit decided to create a bank in order to scale client outreach. The shareholders, who received a banking charter in 1992, included 4 international NGOs, 4 local banks, the Inter-American Investment Corporation (IIC) and a small group of visionary Bolivians. If you’ve read a bit about microfinance, you may recognize the institution I’m describing as BancoSol, now one of the world’s most respected and successful microfinance institutions (MFI).

By 1994, leading micro-credit NGOs through-out Latin America were looking to replicate the BancoSol experience by transforming into or creating in parallel a microfinance bank in their home country markets. Raising enough capital to meet minimum regulatory requirements was, however, virtually impossible. With one two-year-old success story as “proof of concept”, private sources of early stage risk capital for commercial microfinance were nowhere to be found.

In response, the international shareholders of BancoSol created ProFund, the first commercial microfinance investment vehicle (MIV) ever launched. They also went out and hired an excellent person, Alex Silva, to run the fund, who fortuitously was based already in Latin America, San José, Costa Rica, to be precise. Alex successfully raised US$22 million, but because Costa Rica lacked functioning capital markets and other investment infrastructure, ProFund was incorporated in Panama, soothing investors but adding a layer of cost, regulation and audit complexity. (Disclosure: I have known and worked for and with Alex Silva over many years, but his track record of achievements is proof that I am not being biased in using the word “excellent” here. Alex asks that I also point out that his staff, Sponsors and Directors all played important roles in the success of ProFund).

ProFund went on to become, according to IFC, the third highest performer across all Latin American private equity and venture capital funds in the 1994 vintage year. That number, in case you are curious, was a roughly 7% IRR. Omtrix, the company created by Alex Silva to house the ProFund management team, went on to develop small niche funds that could generate a demonstration effect, attracting more capital into priority areas of microfinance. The Emergency Liquidity Facility (ELF) was created so that MFIs hit by natural disasters could quickly tap into reserves after an event. Access to liquidity lets MFI’s remain in operating, helping to support economic recovery at the vulnerable base of the pyramid (BOP). A Short-term Liquidity Facility (STLF) was next, addressing temporary liquidity needs of the sector in general. A fund to support the growth of an MFI equities secondary market, Antares, was launched as well. Amazingly, Alex and his small team were able to launch and deliver ground-breaking performance on low management fees and very small fund sizes, in part due to synergy-based strategy.

Several of ProFund’s sponsors went on to create Africap, the first pan-African MIV ever launched, opening a new region to commercial microfinance. Over the next decade or so, nearly 100 MIVs were organized and funded on a global basis, about 80 of which are still in operation today. On one level, the US$ 6.4 billion invested in commercial microfinance today suggests that early financial innovators like ProFund and Africap had powerful demonstration effects. On another level, however, the results are less encouraging:

1. Around 35% of the money in commercial microfinance still comes from the public sector, so of an estimated US$ 4.6 trillion in sustainable investment (2010 SRI data from US-SIF, 2009 Core SRI data from Eurosif) in sustainable investment, only 0.05% represents private sector investment in microfinance;

2. Roughly 82% of all MIV funding is available in the form of debt. That means almost $1.2 billion in potential equity capital for microfinance, which sounds ok until you think about how much capital you would need to invest to serve the roughly 3 billion or so un-banked and under-banked. Certainly it would take more than the roughly US$ 2.60 per capita that’s available now!

3. After 17 years, only a handful or so of firms have managed to grow into billion dollar (or near) microfinance asset managers. In other words, almost two decades in, most of the microfinance industry’s leading intermediaries would only now be considered “emerging asset managers” by global investment banks and institutional investors. The supposed organic growth process, whereby a talented individual or two launch a fund, build a team and a track record, launch a second fund and so on is NOT generating significant scale for commercial microfinance intermediation, which has significant implications for the development of the broader impact investment theme. Yes, the organic route may be tried and tested in mainstream finance, but that doesn’t mean that it is the only – or the most appropriate – path for creating responsible and successful multi-bottom line investment managers.

Economies of scale matter. The poor need access to finance, but the financiers who would serve them need access to capital markets. Worried that interest rates to the poor or the costs of renewable energy at the village level are too high? Borrowing a lesson from turnaround leaders, a good place to start addressing the problem would be by cutting the cost of financing. International sources note that the cost of setting-up, capitalizing and managing a non-exchange traded international fund is too high, in some cases reaching close to 50% of each dollar invested. Plenty of room for improvement there! Lower cost means you can offer a similar or better return to your investors while lowering the price point on outward investment products for ventures with social impact (VSIs) Delivering higher returns to investors will attract more money and greater economies of scale for impact investment. Reducing price points enables portfolio companies to offer more affordable goods and services to the BOP. Win-win, really, as long as no one gets greedy.

How do we help impact investment achieve scale when microfinance still falls short after 17 years? Tune in tomorrow for six ideas that could make a difference.

Learn more:

For more data on the commercial microfinance industry, see MicroRate’s 2011 “State of Microfinance Investment” report at

Additional information on US socially responsible investment can be found in the US-SIF “2010 Report on Socially Responsible Investing Trends in the US” at

Additional information on European socially responsible investment can be found in the Eurosif “European SRI Study 2010”



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