Investment in Microfinance Equity: Risk, Return, and Diversification Benefits

This paper takes full advantage of daily quoted prices of microfinance stocks from their issuance, and draws a global picture of worldwide microfinance equity from the viewpoint of a profit-oriented investor. We construct microfinance country equity indices and an international global microfinance index. We analyse the changes in these indices, which we assess in reference to comparable indices for the financial sector and also to national indices. Our findings show that microfinance has resumed its close correlation with the financial sector since 2001. In terms of risk exposure, estimations of the Capital Asset Pricing Model demonstrate that microfinance shares exhibit higher market beta than conventional financial institutions, and have equivalent currency exposure. We also examine whether adding microfinance to international asset portfolios improves the investor's risk-return performance. While the inclusion of microfinance equity has indeed been a major source of diversification in the 1990s, its impact has diminished in recent years. Still, optimal portfolios invested in countries where microfinance equity is available may contain up to 20% of stocks from MFIs.