Microfinance as a socially responsible investment

PhD ceremony: Mr. R.J. Galema, 16.15 uur, Aula Academiegebouw, Broerstraat 5, Groningen

Dissertation: Microfinance as a socially responsible investment

Promotor(s): prof. B.W. Lensink, prof. L. Spierdijk

Faculty: Economics and Business

Over the last two decades microfinance has transformed from a sector that was primarily nonprofit-dominated to a sector in which commercial microfinance institutions serve ever more borrowers.Due to this process of commercialization also investors have started to take an interest. This thesis attempts to answer a number of questions related to socially responsible investment (SRI) in microfinance in particular, as well as SRI in general.

First, are socially responsible investors worse off by investing responsibly? We find that even though SRI has an effect on stock prices, investors are not worse off by investing socially responsibly. Second, why would socially responsible investors want to invest in microfinance? We find that especially investing in commercial microfinance institutions allows investors to obtain portfolios with a higher expected return and a lower variance. Third, if investors invest in microfinance, how could they best trade off financial and social benefits? We find that there is a trade-off between mean, variance and outreach to the poor, and that this trade-off is especially pronounced for investors that want to hold portfolios of microfinance institutions that have very high outreach to the poor. Fourth, what is the effect of powerful CEOs on microfinance risk? We find that powerful CEOs increase risk. Finally, what is the effect of debt enforcement institutions and credit information on microfinance insolvency risk? Surprisingly we find that inefficient debt enforcement decreases insolvency risk, while the depth of available credit information increases insolvency risk.