Post by Dave Zellner and Juan Lois, Founder, MacroVision Solutions
For faith-based organisations seeking to align their investments with their mission while generating meaningful financial returns, microfinance presents a compelling opportunity that is often misunderstood.
Investors here can play a vital role in expanding financial inclusion while earning market-rate returns through strategic partnerships with microfinance institutions (MFIs) that extend loans to entrepreneurs and low-income households (typically excluded from, or underserved by, the mainstream financial system) in developing economies. The resulting working capital can be used to start or expand a business, increase income, and ultimately can help alleviate poverty and improve lives.
While there is a long history of institutional investors that have successfully invested in microfinance, many faith-based and secular organisations have historically hesitated to invest in microfinance, operating under two key misconceptions. First is the belief that such investments necessarily require concessionary capital—funds deployed at below-market rates to achieve social impact. Second is the perception that microfinance focuses solely on social impact, overlooking its significant role in addressing climate challenges in developing markets.
A maturing industry
The reality is far more nuanced and promising. The microfinance industry has matured significantly over the past three decades, with many MFIs now operating as regulated financial institutions with professional management, robust risk controls, and strong track records of loan performance. These institutions not only serve millions of entrepreneurs but increasingly support climate resilience and environmental sustainability in developing countries.
Consider Developing World Markets (DWM), a pioneer in microfinance investment management having deployed nearly $3 billion in impact investments since its founding. More than half of DWM's portfolio companies (52%) offer financial products specifically focused on climate or environmental themes.
The most common, offered by 37% of portfolio companies, are loans focused on reducing greenhouse gas emissions through energy efficiency or renewable energy, followed by loans for sustainable agricultural practices, offered by 33% of companies[1]. This demonstrates how faith-based investors with climate-related investment objectives can consider microfinance as a compelling addition to their return-driven toolkit.
Choices for FBAOs
Faith-based organisations can participate in microfinance investment through several channels, each offering different risk-return profiles. While some may choose to provide concessionary capital to support early-stage MFIs or reach the poorest borrowers in challenging markets, many established MFIs offer investment opportunities that generate market-rate returns commensurate with emerging market risk, typically ranging from 5% to 12% annually, depending on the investment structure and local market conditions.
Professional fund managers play a crucial role in connecting institutional investors with high-quality MFIs. These managers conduct thorough due diligence, monitor portfolio performance, and manage currency risk – key considerations for international microfinance investment.
In addition to DWM, other notable microfinance fund managers include BlueOrchard Finance, responsAbility Investments AG, and Triodos Investment Management. These institutions manage diversified portfolios of MFI investments across multiple countries and regions, providing institutional investors with professional oversight, diversification benefits, and risk management.
For faith-based organisations considering microfinance investment, it's important to address the structural challenge that many face: the absence of dedicated emerging markets (EM) allocations in their strategic asset allocation. A practical solution is to consider broader global mandates that allow for a specific portion of the portfolio to be derived from EM-based investments. When pursuing this approach, it's crucial for faith-based investors to ensure their investment managers have the specific capability and expertise to make microfinance investments.
A natural alignment
The transformation of entrepreneurs' lives through microfinance aligns naturally with faith-based organisations' missions to serve communities and promote human dignity.
Key benefits of microfinance investing include:
The opportunity to earn attractive risk-adjusted returns while generating positive social impact
The ability to drive climate mitigation and adaptation solutions in regions that need it most
Access through specialised investment managers via either dedicated EM/impact mandates or as part of broader global mandates
Many leading MFIs maintain strong financial performance while serving low-income entrepreneurs effectively. Key factors contributing to this include historically high repayment rates among microfinance borrowers (often exceeding 97%), interest rates that reflect local market conditions and operating costs, sophisticated risk management practices developed over decades of operation, and scale economies that enable efficient service delivery.
Where to begin?
Faith-based organisations can start their microfinance investment journey by engaging with experienced fund managers to understand available opportunities and align investment options with their specific requirements for financial returns and social impact. Many successful faith-based investors begin with senior debt instruments, which offer lower risk and predictable returns, before potentially expanding into subordinated debt or equity investments.
As more faith-based organisations understand these opportunities, their increased participation can help expand both financial inclusion and climate resilience globally while demonstrating that prudent investment management and impact can work hand in hand. The microfinance sector continues to evolve, offering increasingly sophisticated investment options that can meet the financial, environmental, and mission-driven objectives of faith-based institutions.
If your faith-based organization is considering microfinance investments, FaithInvest can help by providing guidance on incorporating such practices into your investment policy and guidelines statement. Contact us at info@faithinvest.org.
Disclosure
FaithInvest is an international nonprofit organisation that empowers faith groups to invest in line with their beliefs and values. FaithInvest is not authorised by the Financial Conduct Authority or the SEC and does not provide financial or investment advice. Information provided on FaithInvest’s website or its other communication channels does not constitute financial or investment advice. If you wish to receive any form of financial or investment advice, please consult a qualified and independent financial advisor. You should conduct your own due diligence in relation to any investment opportunities or strategies you choose to pursue. FaithInvest does not promote any specific investments or opportunities and cannot therefore accept responsibility for any specific financial or investment decisions you make following participation on its website platform. For more information please visit FaithInvest.org.
[1] Developing World Markets 2024 Impact Report: https://dwmarkets.com/wp-content/uploads/2024/07/Developing_World-Markets-Impact-Report-2024.pdf