Abstract
This paper examines the main approaches taken in valuing a Microfinance Institution (MFI). A survey of the Council of Microfinance Equity Funds revealed that, whilst many of its members use a Discounted CashFlow (DCF) method, most favour a multiple of Book Value approach to valuing MFIs, with some reluctant to pay a premium to current Book Value. This paper recommends the use of a DCF or, where it is not feasible, an Earnings Multiple method. A number of qualitative factors are also identified as being important in any valuation exercise. Given the potentially crucial role that valuation may play in the future development of Microfinance, it is suggested that the collection of more data on transactions conducted by MFIs would aid the debate on which methodology to use. The paper also argues for more transparency in how MFIs are run and improved marketing of their shares to investors. The paper concludes that, on balance, the prices paid for financially sustainable and regulated MFIs may be at too great a discount to those applied to a commercial bank, based on an analysis of the characteristics that distinguish such MFIs from banks. At the very least, MFIs should take a more commercial approach to their own valuation, if they are to access the additional sources of funding, that are essential for the industry to grow, at a fair price.
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