Micro and SME Finance Market Outlook 2018
responsAbility’s outlook about markets, risk-return profiles, impact
To demonstrate responsAbility’s leading position as a private investor in micro and SME (MSME) finance, the following paper has been created.
- In 2018, global economic growth will accelerate, driven by developing markets.
- The recovery in commodity prices will be beneficial for growth and portfolio quality in major commodity exporters.
- Using a newly developed methodology, responsAbility has mapped key micro and SME finance markets in terms of financial sector coverage and medium term potential for cross-border financing.
- This analysis shows that most key markets, even those that are relatively mature, have considerable remaining potential for growth.
- Using a track record of nearly 15 years, responsAbility has compared historic default and loss rates to those shown by Moody’s for different rating tranches.
- The result: MSME finance debt portfolios display similar historic loss rates to securities rated Ba3 by Moody’s.
- Spreads for investments in such portfolios are in line with or higher than those of listed securities with a similar risk profile.
- The study also introduces a methodology for impact measurement based on the United Nations’ Sustainable Development Goals.
- Together, the rating system and impact measurement are designed to provide investors with transparency on the risk-return profile of our offering and the impact of the portfolios measured according to the UN Sustainable Development Goals (SDGs).
GLOBAL GROWTH LED BY DEVELOPING ECONOMIES
Micro and SME finance in the developing world operates in markets that typically have little connection to the day to day volatility of mainstream capital markets. Nevertheless, the long term influence of global economic fundamentals can still be felt by MSME finance institutions.
Different growth trajectories in key economic partners, or changes to prices for key exports, will affect GDP growth and currency performance. This in turn can alter the profitability and portfolio quality of the MSME financial sector.
FINANCIAL SECTOR DEVELOPMENT
PROGRESS AND POTENTIAL
The last decade has seen extraordinary progress in terms of increasing financial inclusion and promoting financial sector development. Between 2011 and 2014, the proportion of the world’s adult population with an account at a financial institution grew from 51 % to 62 %, an increase of around 700 million people.
Market Outlook – Mapping potential in key markets
To show current market coverage for the financial sector, we can focus on two dimensions: depth of credit provision (shown by credit to the private sector as a percentage of GDP) and breadth of financial inclusion (proportion of the adult population with an account at a financial institution).
Closing the data gap
In previous years impact investing has struggled against the perception that development investments are riskier compared to “traditional investments” or even “sustainable investments” (socially responsible investment, green bonds etc.).
Sovereign ratings now widely used
In some areas this has changed – most MSME markets now have a sovereign rating, while the quality of regulation has improved considerably, including in relation to the disclosure of information, requirements for external audits, capital adequacy requirements etc.
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