IMPACT INVESTING: EXPLORING MICROFINANCE AS AN OPTION

Abstract

Championed for its ethos of 'doing good while doing well’ is impact investing. Impact investing has received widespread attention, with the global market reaching over $1 trillion in assets under management and attracting diverse stakeholders, from mainstream financial players to governmental organizations. Impact investments aim to generate financial returns while having a positive impact, mainly social or environmental. Among various forms of impact investing, microfinance stands out as an option. Microfinance is about providing financial services such as loans, insurance, and savings to low-income individuals and small-scale entrepreneurs excluded from traditional banking systems. While microfinance is widely regarded as a form of impact investing, few studies delve into the rationale behind this classification. This research addresses this gap by aiming to explore whether microfinance investments can yield financial returns and have an "impact," thus solidifying microfinance's status as an impact investment.

This study adopts a mixed methods approach, incorporating systematic literature review, content analysis, and case study analysis. By shedding light on the ability for microfinance investments to “kill two birds with one stone”, this research finds that for-profit microfinance showcases both profitability and positive social impact, elucidating its place in impact investing. This study highlights that traditionally microfinance institutions were non-profit entities, but the sector has witnessed a commercialization, with microfinance shifting into for-profit entities and programmes. This transformation has enabled microfinance to enter capital markets and become profitable. In fact, the findings of this study suggest that for-profit microfinance is profitable for its impact investors. Furthermore, microfinance is celebrated for its ability to have a positive social and economic impact. However, this study finds that measuring "impact" in impact investing remains a challenge as the development of standardized measurements in the industry is yet to emerge, due to the evolving definition of impact investing. Despite this challenge, this research, drawing on academic and practitioner insights and two case studies, finds that microfinance does, in fact, have tangible social and economic benefits.