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 basisfor access to global capital markets and performance-driven investors in theirsearch for efficient portfolios. Our empirical tests generally show very lowcorrelations between the performance of microfinance institutions and global andnational market performance measures, suggesting that microfinance portfoliosmay constitute a distinct asset class that can have useful portfolio diversificationvalue.

Keywords: microfinance, systemic risk, poverty alleviation