No.38 Impact Investors in the Microfinance Sector: Empirical Analysis of Debt Investment in Normal and Crisis Periods

The microfinance sector relies heavily on foreign funding sources, making it vulnerable to fluctuations in international capital flows. Moreover, unlike conventional financial institutions, microfinance institutions (MFIs) rely on socially responsible investment from impact investors, including microfinance investment vehicles, development agencies, and governments. This study investigates the patterns of debt investment in Cambodian MFIs from 2017Q1 to 2021Q4, covering the COVID-19 pandemic. We constructed a unique dataset that contains detailed information on debt investment in Cambodian MFIs, such as the amount of debt disbursement, interest rate, maturity, and investor identity. Furthermore, we employed the difference-in-differences approach to examine how debt conditions changed before and after the COVID-19 pandemic. The results revealed differences in investment decision between impact investors and non-impact investors. Impact investors are more likely to select MFIs with broader outreach; however, the debt investments of impact investors are concentrated on large-scale MFIs. Furthermore, we found no robust evidence that impact investors extend loans at lower interest rates than institutional investors. At the same time, investors generally tend to put a risk premium on the interest rate for MFIs with higher outreach; however, we found that impact investors continue to extend debts to MFIs and provide debts at lower interest rates than non-impact investors during the COVID-19 pandemic. The results may suggest that funding from impact investors could serve as a buffer against the negative economic shocks to sustain microfinance businesses during crises in the financial market.

Keywords: Impact Investment, ESG Investment, Microfinance, Financial Inclusion, COVID-19 Pandemic, Difference-in-Differences Analysis