Accounting for Market Risk in Microfinance Investments

Abstract

The financial attractiveness of investing in microfinance is also receiving attention from academics and practitioners, in addition to the social impact it may have. As most microfinance institutions are not publicly listed, existing research relies on accounting-based return series to determine the diversification characteristics of publicly listed microfinance institutions relative to other asset classes. This prior studies use accounting-based risk measures as a proxy for market-based risk measures. We document that for a sample of publicly listed microfinance institutions accounting-based and market-based risk measures have low correlation. Hence, using accounting-based risk measures might underestimate the (market) risk embedded in investing in microfinance institutions. In addition, we show that mean-variance spanning tests using accounting-based returns overstate the added value of microfinance institutions in investment portfolios. Taken together, our results indicate that previous research on the attractiveness of investments in microfinance institutions are exaggerated.

Keywords: Accounting-beta, Market-beta, Microfinance, Responsible investing

JEL Classification: G11, G30, M41