Investing in Financial Inclusion

Abstract

This thesis examines the systematic risk of investing in microfinance institutions and its financial attractiveness relative to other socially responsible investments. The thesis analyzes if the low relationship between the global economy and financial inclusion was still consistent before and during the pandemic, which could offer portfolio diversification benefits for investors. The empirical analysis examined 335 microfinance companies from the MIX market before the pandemic from 2013 to 2018. Most privately listed microfinance institutions' annual return on equity did not exhibit a significant relationship with capital market indices except for microfinance institutions from Latin America and the Caribbean. Also, the microfinance institutions' financial performance appears to be affected inversely by regional gross domestic product growth except for microfinance institutions from Latin America and the Caribbean. Moreover, the empirical analysis examined the monthly excess returns of the Symbiotics microfinance indices against various capital market indices with a focus on environmental, social, and governance (ESG) impact from January 2017 to December 2021. During the pandemic, the Symbiotics Microfinance Investment Vehicle Debt Index’s beta estimates exhibited a positive relationship with global and environmental, social, or governance-focused capital market indices. However, the beta estimates were below 0.02, which is a low relationship with the capital markets. Also, the Symbiotics Emerging Sustainable Finance Index's monthly excess returns of 13 publicly listed micro-financial institutions exhibited a significant relationship to the market movements of the global and ESG capital benchmarks during the pandemic. Moreover, most beta estimates were more sensitive to the global and ESG capital benchmarks when investing equity in microfinance institutions. It can be claimed that COVID-19 impacted financial inclusion due to the strict lockdowns, which hindered their clientele in obtaining and repaying their financial services. Consequently, this affected the financial performance of the microfinance institutions and caused high volatility, notably in the Symbiotics Emerging Sustainable Finance Index. As a result, digital technologies accelerated during the pandemic for micro-financial institutions to deliver financial services at much lower operational costs and to an increasing number of clients, enabling economies of scale and improving profitability, ceteris paribus.