Proceedings of the German Development Economics Conference, Hannover 2010 36
The microfinance sector has been going through profound changes in the last decades: It evolved from a donor-based community, driven by philanthropic objectives, to a high growth market that is today attracting commercial investors who seek social impact and a competitive risk-adjusted return. However, recent discussions in the sector about the assumed financial strength and resistance of microfinance institutions further triggered by the impact of the global economic and financial crisis on the microfinance sector as well as the increasing criticism about irresponsible business practices and limited impact on poverty reduction led to the question if the sector continues to evolve into a mainstream asset class. On the one hand the integration of microfinance institutions (MFI) into capital markets makes investments in the sector more attractive for mainstream investors, as the management of the investments turns more professional. On the other hand the correlation of the performance of MFIs with local and global market movements increases and makes diversification of an investor's portfolio less likely.