Investment Intel by Jakub Krivan #7: DUE DILLIGENCE IN MICROFINANCE

Do you know what exactly happens with your money when you invest? You should. And your investment products should try to make it easy for you with transparent mechanics, thorough scrutiny and careful evaluation. 

What is due dilligence and why it matters Generally speaking, due dilligence is a review of various financial data of an investment product to confirm it complies with the required levels of financial viability, risk security and more. Such data is collected, analyzed and then used by investors to make informed decisions about where to put their money.

In microfinance, well-managed assessment systems are not optional. With hundreds of microfinance institutions, or MFIs, administering the actual distribution of financial resources to end clients, careful evaluation of their reliability is required for the whole thing to work.

There are several criteria used by investment and risk managers to watch and evaluate past performance as well as future outlook of particular MFIs. But which really do matter? Find out below.

Future outlook: qualitative criteria When looking at MFIs to be incorporated into a microfinance product, managers usually use qualitative evaluation of the institution's structure. They look at things like who runs the institution, how long it's been in business, what it offers to its clients, how it manages its budgets and how it reports its results.

All of these should be considered before the MFI becomes part of a microfinance fund in order to keep the risks low and growth steady.

Past performance: quantitative criteria On the other hand, when looking at how MFIs have performed in the past, managers turn to quantitative indicators such as efficiency, financial performance and the impact MFIs have on the society. These criteria serve to compare different MFIs in time based on hard data, which is then used to manage and improve the microfinance product.

The Takeaway All things considered, in microfinance you should always be looking for products that:

1. Collect structured data about their MFIs
2. Use transparent evaluation criteria for assessment
3. Have dedicated managers to continuously ensure performance

So – instead of dozens of criteria required to evaluate MFIs, you are lucky to only have three to decide which microfinance product to trust. After that, it’s just a matter of preference.

Every investment bears a risk. The basis for investments is the presently valid prospectus, the current versions of the key investor document (“KID” or “KIID”) as well as the annual report (and/or the semi-annual report), which are available free of charge at the respective management company. No assurance can be given that the investment objectives are achieved.