Does Microfinance Form a Distinctive Asset Class? Preliminary Evidence

Abstract

Microfinance is arguably one of the most effective techniques for poverty alleviation in developing countries. Although traditionally supported by nongovernmental organizations and socially-oriented investors, microfinance has increasingly demonstrated its value on a stand-alone basis, typically exhibiting low default rates combined with attractive returns, encouraging greater commercial involvement. This paper addresses a related issue whether microfinance represents a distinct financial asset class, thereby forming the basis for access to global capital markets and performance-driven investors in their search for efficient portfolios. Our empirical tests generally show very low correlations between the performance of microfinance institutions and global and national market performance measures, suggesting that microfinance portfolios may constitute a distinct asset class that can have useful portfolio diversification value.