Should We Invest in Microcredit? A Financial Analysis of Microcredit from a USD-Investor's Perspective

This study makes an innovative approach towards rating the profitability of micro-credit. While previous research on microfinance has been conducted through the analysis of individual case studies, this study takes a more widespread look at the financial performance of micro-lending organizations in less developed financial markets. A sample consisting of 24 micro-finance institutions (MFIs) operating in different regions worldwide is observed over a period of up to 9 consecutive years. The influence of both organization-specific and environmental factors on the profitability of their loan portfolios is examined. Furthermore, the capacity of those institutions to generate sufficient yields on their credit operations in order to attract rational foreign investors is rated. For this purpose, the realized credit spreads on MFI-portfolios are compared with spreads observable for exchange-traded USD-corporate bonds exhibiting equal levels of risk. The panel design and the investigation of multiple (partly qualitative) external variables influencing loan portfolio returns contribute to a comprehensive investigation of MFI-performance. Indeed, MFI-specific factors are found to be much more decisive for profitability than any environmental conditions