Microfinance or the concept of providing small-sized loans to the unemployed poor through recent decades has transformed into an asset class that attracts commercially oriented investors from all over the world. While the majority of them still consist of institutional investors and high net worth individuals, large numbers of people who could potentially profit from a microfinance engagement lack access to appropriate investment products. Simultaneously, only a small fraction of the global funding demand of the microfinance industry is currently being met. This paper demonstrates that, for several reasons, German retail banking clients should be provided with opportunities to engage in this emerging asset class. It is shown that this client group not only can have a significant impact on poverty reduction by closing parts of the immense funding gap, but moreover it is able to gain advantages in terms of portfolio diversification from a microfinance engagement.
Table of Contents
1 Introduction
2 The emergence of microfinance as an asset class
2.1 Historical developments
2.1.1 Micro-credit activities before 1900
2.1.2 The 20th century: The cradle of modern microfinance
2.2 Current state of the industry
3 Accessing commercial microfinance investment
3.1 Direct engagement
3.1.1 The domestic capital markets
3.1.2 Deposits and local equity
3.2 Indirect investment
3.2.1 Securitizations
3.2.2 Investment funds
3.2.2.1 Open-end funds
3.2.2.2 Closed-end funds
4 Financial utility of microfinance investment
4.1 Microfinance investment in a portfolio context
4.2 The relationship of microfinance and the formal economy
4.2.1 Correlation of microfinance with the international economy
4.2.2 Correlation of microfinance with the German economy
5 Is microfinance investment for German retail banking clients?
5.1 Market segmentation
5.2 Legal environment
5.3 Financial regards
5.4 Social aspects
5.4.1 Social return on investment
5.4.2 The potential impact on poverty reduction
6 Conclusion
Research Objectives and Focus Areas
This paper examines the potential for integrating microfinance investment products into the portfolios of German retail banking clients. The primary objective is to evaluate whether such investments can simultaneously offer financial diversification benefits and generate measurable social utility in the form of poverty reduction, despite existing legal and structural challenges in the German market.
- Evolution of microfinance as a distinct asset class.
- Mechanisms for accessing commercial microfinance investment (direct vs. indirect).
- Analysis of the financial correlation between microfinance and the German economy.
- Regulatory environment and market segmentation for German retail investors.
- Methodologies for quantifying the social return on investment.
Excerpt from the Book
2.1.1 Micro-credit activities before 1900
The roots of MC can be traced back to the 18th century, in which the Irish Loan Funds (ILFs) granted micro-loans to tenants reacting to the impoverishment of the country. Inspired by the Irish novelist Jonathan Swift, the British government helped Ireland through its potato famine-plagued history until the 1960s by extending micro-loans through the ILFs. Those represent an early form of Microfinance Institutions (MFIs) operating within a financial system that lacked accessibility for large parts of the society it served. Funded through interest-incurring deposits and retained earnings in addition to donations and interest-free loans the Irish Loan Funds provided an opportunity to participate in the social and financial returns of a poverty reduction program.
According to a documentation of the ILF-system by Piesse (1841), in 1747 Swift and other individuals inspired by him were the first to engage in the ILF bearing at least partially commercial objectives in mind and thereby provided the basis for the following development of MF as an asset class in its own right. With the engagement of the Dublin Music Society, which invested profits from their musical performances into the ILF, non-individual MF investment had already occurred by the mid-eighteenth century. From 1747 until 1844 the invested profits, excluding any kind of additional charitable member donation, enabled the ILF to grant 11,732 loans to struggling tradesmen and manufacturers, each with a size in between GBP 2 and GBP 4, helping to secure the livelihood of a total estimate of 57,250 people.
Summary of Chapters
1 Introduction: Introduces microfinance as an emerging asset class and outlines the research goal of making this investment accessible to German retail banking clients.
2 The emergence of microfinance as an asset class: Details the historical development of micro-credit from the 18th-century Irish Loan Funds to the modern microfinance industry.
3 Accessing commercial microfinance investment: Explores direct investment routes via capital markets and indirect vehicles like securitizations and investment funds.
4 Financial utility of microfinance investment: Analyzes the risk-return profile of microfinance and its empirical correlation with international and German economic benchmarks.
5 Is microfinance investment for German retail banking clients?: Investigates the legal environment, market segmentation, and social dimensions required to offer these products in Germany.
6 Conclusion: Summarizes the findings and emphasizes the need for regulatory evolution to allow German retail clients to contribute to global poverty reduction.
Keywords
Microfinance, Asset Class, Poverty Reduction, Portfolio Diversification, German Retail Banking, Social Return on Investment, Micro-credit, MFI, Securitization, Investment Funds, Capital Markets, Systematic Risk, Financial Inclusion, Market Segmentation, Social Wealth.
Frequently Asked Questions
What is the primary focus of this work?
The research focuses on the feasibility and benefits of incorporating microfinance as a new, commercially viable asset class for retail banking clients in Germany.
What are the key thematic areas covered?
The paper covers the history of microfinance, investment structures (direct and indirect), the financial utility of these assets in a portfolio context, and the specific legal and social implications of offering these products to German retail investors.
What is the core research question?
The research seeks to determine whether a microfinance investment product can simultaneously provide German retail clients with portfolio diversification benefits and contribute effectively to global poverty alleviation.
Which scientific methods are employed?
The study utilizes literature analysis and empirical analysis, including linear regression models and the evaluation of Bravais-Pearson correlation coefficients, to assess the relationship between microfinance indicators and German economic benchmarks.
What does the main body of the work address?
The main body examines the evolution of microfinance, different investment vehicles (securitizations, funds), and critically analyzes the legal, financial, and social constraints and opportunities within the German banking sector.
How can one define the key characteristics of this research?
This work is characterized by its focus on "social return on investment," the distinction between commercial and non-commercial microfinance, and the practical legislative hurdles faced by the German financial industry.
What is the #ICPL unit mentioned in the text?
#ICPL stands for "Number of individuals your investment allows to cross the poverty line." It is a suggested metric to help investors visualize and quantify the social impact of their financial commitment.
Why is the German legal environment a barrier?
The paper notes that until recent amendments, German regulations made it difficult for retail-market-oriented microfinance funds to operate, particularly due to constraints on how funds can grant loans and guarantees without capital market interposition.
- Quote paper
- Robert Schmitt (Author), 2009, Microfinance investments in German retail banking, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/136028
