Investment Philosophy of the Company
The Company aims principally at offering investors an exposure to the microfinance industry. Microfinance can be defined as the provision of financial services to economically active poor populations in developing countries. By giving access to capital to people excluded from the formal banking sector and economical arena, one opens up an opportunity of virtuous cycles of financial security, savings and growth. Micro and small entrepreneurs can work to stabilize their cash flows, create jobs and improve their living standards.
Microcredits have proven to be an unequalled means of providing assistance for self-development to micro-entrepreneurs in developing countries around the world. The fact that microcredits are given on commercial terms has proven to contribute to sustainable and long-term development by stimulating grassroot entrepreneurship, raising family living standards and reinforcing self-esteem.
Microfinance can also be seen as an investment opportunity with a double bottom line. The Company targets Microfinance Institutions ("MFIs") that offer financial and business advisory services to micro-entrepreneurs and which are both financially sound and profitable. They do not however necessarily have the legal status of a bank. By helping these institutions grow and sustain their clients' demands, investors achieve both a social and a financial return, the latter being uncorrelated to traditional asset classes and thus acting as an effective diversification tool on portfolio level.
An Efficient Portfolio Diversification Instrument
Moreover, microfinance investments represent an efficient portfolio diversification instrument as it has been demonstrated by many researches to be uncorrelated with global financial markets. Many reasons are suggested to explain this :
First of all, the funding MFIs need to run their credit operations is still small compared to the volumes traded on the international financial markets. In addition, most MFIs try to raise local funding in priority from local deposits of the poor or from other local sources which have a low sensitivity to interest rates applicable in international markets. A liquidity stress on the international financial markets will therefore have less effect on their funding and related operations.
On the other hand, the market MFIs serve is composed of micro-entrepreneurs mostly active in the informal sector of the emerging countries. A global recession of the economy will therefore have less effect on their client's activity and related credit needs. Evidences from Colombia, Bolivia and Indonesia indeed have shown that the performance of MFIs remained insulated from turmoils in the local banking sector.