Shedding Light on Microfinance Equity Valuation: Past and Present
40 Pages Posted: 17 Jun 2015
Date Written: February 1, 2009
This report provides benchmarks for valuation of microfinance equity, both private and publicly listed. We use a unique sample of 144 private equity transactions and 10 publicly listed microfinance institutions. MFIs will certainly be affected by the financial crisis ricocheting across the globe, but we believe that the sector is fundamentally sound. Larger institutions, especially those with diversified funding sources, such as retail deposits, are best positioned to manage the effects of economic and financial contraction. Valuations may change, but we believe the long-term outlook for equity investment in microfinance is positive. Investors should not value MFIs the same way they value traditional banks. We highlight five characteristics that differentiate MFIs from traditional banks, and justify a slightly different valuation approach: a double bottom line that aims for both social and financial returns, excellent asset quality, high net interest margins (NIMs), high operating costs, and longer term funding available from developmental investors. We focus our analysis on book value and earnings multiples, and also on the residual income method.
Keywords: Microfinance, Valuation, Private equity
JEL Classification: G15, G21, E51
Suggested Citation: Suggested Citation