lecture - financing microfinance

7/27/2019 Lecture - Financing Microfinance

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Lone Sndergaard and

Ole Dahl Rasmussen

1Poverty and Business - the case of microfinance.

Copenhagen University 12-08-2013


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Agenda What is meant by financing microfinance?

Financial markets and infrastructure

Demand of capital for microfinance

Supply of capital for microfinance Instruments/methodes for financing microfinance

Questions / discussions

16:00 Mads Kjr, MyC4

Other

12-08-2013

Poverty and Business - the case ofmicrofinance. Copenhagen

University 2


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Texts:ABRAMS, J. and STAUFFENBERG, D.V.; 2007. Role Reversal. Are public DevelopmentInstitutions Crowding out Private Investment in Microfinance? MFInsights. Available:http://www.microrate.com/pdf/rolereversal.pdf

IVATURY, G. and ABRAMS, J., 2005. The Market for Foreign Investment in Microfinance:Opportunities and Challenges. CGAP, Focus Note, No. 30. (Pages 16). Available on:http://www.cgap.org/docs/FocusNote_30.pdf

MEEHAN, J., 2004. Tapping the Financial Markets for Microfinance: Grameen FoundationUSA's promotion of this Emerging Trend. USA: Grameen Foundation USA. Available on:http://www.haas.berkeley.edu/HaasGlobal/docs/gfusacapitalmarketswp1004.pdf

KFW and FMO, June. 2007. Reversing the coin. What International Financial Institutionsdo to change the face of microfinance. KfW; FMO. Available on:http://www.microfinancegateway.org/files/40978_file_Reversing_the_Coin_IFI_Paper.pdf

MICRORATE, 2006. Microfinance investment vehicles. An emerging asset class.MFInsights, November. Available on:http://www.microfinancegateway.com/files/38623_file_1Microfinance_Investment_Vehicle_An_Emerging_Asset_class.pdf

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University 3
http://www.microrate.com/pdf/rolereversal.pdfhttp://www.cgap.org/docs/FocusNote_30.pdfhttp://www.haas.berkeley.edu/HaasGlobal/docs/gfusacapitalmarketswp1004.pdfhttp://www.microfinancegateway.org/files/40978_file_Reversing_the_Coin_IFI_Paper.pdfhttp://www.microfinancegateway.com/files/38623_file_1Microfinance_Investment_Vehicle_An_Emerging_Asset_class.pdfhttp://www.microfinancegateway.com/files/38623_file_1Microfinance_Investment_Vehicle_An_Emerging_Asset_class.pdfhttp://www.microfinancegateway.com/files/38623_file_1Microfinance_Investment_Vehicle_An_Emerging_Asset_class.pdfhttp://www.microfinancegateway.com/files/38623_file_1Microfinance_Investment_Vehicle_An_Emerging_Asset_class.pdfhttp://www.microfinancegateway.org/files/40978_file_Reversing_the_Coin_IFI_Paper.pdfhttp://www.haas.berkeley.edu/HaasGlobal/docs/gfusacapitalmarketswp1004.pdfhttp://www.cgap.org/docs/FocusNote_30.pdfhttp://www.microrate.com/pdf/rolereversal.pdf


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Ownership and start-up Exit strategy is a challenges

Financing Capacity building (TA) MIS / IT systems

Management

Financing MFIs loan portfolio Loan capital for MFIs Investing in portfolio (bonds and structured financedeals)

Why is financing microfinance important toyou? (Where will you work? Growing interest. Influences the way on the groundmicrofinance is done)

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Traditional banks approach First deposits accounts Second lending/credit

MFIs approach First credit Second deposits

Questions:1. Why?

2. Where does MFI source capital from?

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1. Common terminology2. Transparency3. Adherence to standard accounting practices4. Regulation by third parties5. Investment rating services6. Fund comparison data7. Insurance8. Liquidity through secondary marketsQuestion: How does microfinance industry look?

*Blended Value Investing: Capital Opportunities for Social and Environmental Impact. World Economic Forum, March 2006.


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University 1012-08-2013 10

Direct investmentsMFIFs

(Indirectinvestments)

Strategic alliances

Instruments

NGOsRural Banks

Credit UnionsNBFIsBanks

MFIs

Loan circles

Individuals

Micro-entrepreneurs

End users

Commercialobjective

Developmentalobjective

Donors

(Multilateral, bilateral,foundations, NGOs)

IFIs

(Developmentagencies)

SRI-funds

Private Investors

(Banks and institutionalinvestors)

Suppliers

Poverty and Business - the case of microfinance.Copenhagen University


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Median, 2005MFI Type Commercial Funding Liabilities

Ratio Deposits to loansRural bank 116.8 91.7

Credit union 97.8 75.8Bank 97.3 54.1NBFI 48.5 -NGO 35.0 -

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Poverty and Business - the case of

microfinance. CopenhagenUniversity 11

Keyindicators Explanation Measurement

Commercial

fundingliabilityAll liabilities obtained at of commercial terms at "market

price" including deposits and commercial borrowings.Ratio = All liabilities with

"market price"/AdjustedGross Loan Portfolio

Deposits toloans

Measure for how much of the loan portfolio is funded bydeposits.

Deposits being the total value of funds placed in anaccount with an MFI that are payable on demand to a

depositor.

Voluntary Savings/Adjusted Gross Loan

Portfolio


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MFI Type andnumber of analyzed

institutionsCapital requests of MFIs

Equity Local currencyloans Hard currencyloans Guarantees

NGO 84 17 46 39 17NBFI 59 25 36 34 15Creditunion 29 8 13 11 8Bank 10 2 4 4 0

Rural bank 8 1 6 0 0Total 190 53 (28%) 105 (55%) 88 (46%) 40 (21%)

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microfinance. CopenhagenUniversity 1312-08-2013 13



Strategic alliances

Instruments

NGOsRural Banks


MFIs

Loan circles

Individuals

Micro-entrepreneurs

End users

Commercialobjective


Donors


IFIs


SRI-funds

Private Investors


Suppliers



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Private Funds IFIs All investors

Financing for

retail

microfinance

providers (MFIs)

$ 511

44%

$ 648

56%

$ 1,159

100%

Financing for

other

investment

funds

$ 126

21%

$ 484

79%

$ 611

100%

Total $ 63736%

$ 1,13264%

Foreign Investment in microfinance (in US$ millions)

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Shift from Concessionary to Hard Funding

0

500

1000

1500

2000

2500

1990 1995 2000 2005

MIVTotalAs

setValue Capital Markets

Concessionary

Funding

$1.5 Billion

From donor funds to private funds.......


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0

10000

20000

30000

40000

1985 1990 1995 2000 2005 2007 2010

MIV Growth by Funding Source

Concessionary Public Commercial

$32B

From donor funds to private funds.......


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1. The supply of funds from foreign investors may exceed demand

from low-risk MFIs.2. Funds tend to target the same top-performing MFIs independent of

the funds objective (mainly social or mainly commercial).

3. MFIFs channel capital from corporate investors, SR investors and

donors and expect a combination of social and financial return.

However, there is a mismatch between the type of fund (non-profitor for-profit) and the MFIs invested in.

This holds back the development of the industry, because the non-

profit social funds does not give MFIs incentive to seek to live up to

the requirements from the financial markets e.g. regarding

information level and because it crowed out private investors

(infrastructure)

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International Financial Institutions (IFIs) are concentrating their loans inthe strongest MFIs, leaving private lenders to look for opportunities

among smaller, riskier borrowers. Thereby, IFIs are competing with

private investments on unfair terms (e.g. lower interest rates, larger

loans, technical assistance) and are hampering the development of the

industry. Firstly, the IFIs early investments helped the MFIs develop into top-

performers, but rather than drawing out and focusing on developing the

next generation of MFIs the IFIs have continued to lend money to the

MFIs when they succeeded.

Secondly, IFI often operate under a dual objective combining financial andsocial return on investments. Microfinance has acquired such a positive

image, that a big exposure in this sector has become an indicator for an

IFIs commitment to development regardless of the MFIs invested in.

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Hard criticism of IFIs (and some MFIFs) directinvestments in MFIs Hard Currency debt

Flocking to invest in top MFIs

Crowding out domestic private capital

MFIFs to small to be commercial ($20-30million)


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Financial gap versus critic of IFIs financing

Does it make sense?

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Strategic alliances

Instruments

NGOsRural Banks


MFIs

Loan circles

Individuals

Micro-entrepreneurs

End users

Commercialobjective


Donors


IFIs


SRI-funds

Private Investors


Suppliers



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Direct investments

Lending capital to an MFI

Advantages?

MFIFs (indirect investments)

Capital in fund that invests (lends) to several MFIs

Advantages? Strategic alliances

Combining different sources of capital and objectives

Advantages?

Outside model Domestic funds

Per-to-Per lending

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Example direct investment:EDFI members direct MFI investments (2006)

1% in MFIs, 49% in investment funds (not just

microfinance)


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Description BIO invests both directly in MFIs (debt) and

in MFIFs (debt and equity) on commercial

Terms.

Instrument Direct investments hard currency loans.(size from 1-3mill)

Participants N/a

MFIinvestments

Mainly Latin American Banks or NBFI MFIs.

Mainly regulated top-performers.

Results Unknown


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e.g. BRAC microcredit securitisation

Description Special purpose trust established in 2006. Thesecuritization enables BRAC to obtain a bettercredit rating and thereby diversify fundingsources, and reduce the assets it held on itsbalance sheet.

Instrument Securitisation (local currency). The receivables

are collateralized at 150 percent to enhance thecredit rating.

Participants 1/3 of certificates purchased by FMO

1/3 of certificates were backed by guaranteesfrom FMO and KfW and purchased by Citigroup

1/3 of certificates purchased by CitibankBangladesh and two local Bangladeshi banks

MFI investments BRAC, large Non-profit MFI, No. of borrowers:4,550,855

Results Close to market rate return


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BRAC (Bangladesh RuralAdvancement Committee),BangladeshType of MFI:Non-profit/NGO established in

1972Financial service:Loans, savings, training andconsulting

As of 31.12.2006Outreach:Number of active borrowers: 4,550,855Depth of outreach:Average Loan Balance per Borrower/ GNI

per Capita (%):13.75% (2005)Portfolio quality:Portfolio at Risk > 30 days Ratio (%):3.76%Write Off Ratio (%): 0.63%Financial sustainability:

Return on Assets (%): 6.90%Efficiency:Operating Expense Ratio (%): 11.18%OtherWomen borrowers: 96.40%

Example: strategic alliance

Example: Strategic alliance


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Example: Strategic alliance

Examples


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e.g. Global Microfinance Facility

Examples

Description US$ 30.1 million 10 year special purposevehicle initiated by IFC and CyranoManagement

Instrument Subordination (3 asset classes)

Participants C-class: IFC

B-class: IFC and KfW

A-class: BIO, Credit Cooperatif of France andprivate investors

MFI investments Mainly Hard currency securities/bonds.

Eastern European (approx 55%) and LatinAmerican MFIs (37%).

72% of MFIs invested in are regulated MFIs

Results Close to market rate return


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Description The Dexia Microcredit Fund (1998). Private,commercial MFIF managed by BlueOrchard andpromoted by Dexia.

Instrument Invests in debt instruments issued by MFIs andissues shares based on that.

Three classes of shares: CHF, USD and EUR.

Participants Invests in Banks, NGOs and NBFIs (approx.33% in each). Primarily located in Latin

America & the Caribbean (22.6%) and inEastern Europe & Central Asia (24.5%).

MFI investments Currently has investments in 75 MFI in 28developing economies investing a total of over

$180 million (newsletter).Results Return close to LIBOR (currency and time)


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Strategic alliances

Instruments

NGOsRural Banks


MFIs

Loan circles

Individuals

Micro-entrepreneurs

End users

Commercialobjective


Donors


IFIs


SRI-funds

Private Investors


Suppliers


Does it matterwhere the money

comes from?

Does itmatter

where themoneygoes?


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Fewer direct investments in MFIs. More investments inMFIFs. More innovative funds and special purposevehicles.

IFIs should leverage private capital (domestic andforeign) through Public-Private Partnerships Securitisation Subordination Equity combined with TA and management support

Education of financial markets (the perceived risk is

larger than the actual risk)

Education of MFIs - Integration into traditionalfinancial system requires better information level andfinancial infrastructure


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150 %

135 %

120 %

105 %

90 %

75 %

60 %

30 %

15 %

45 %

NBFI

50.000

45.000

30.000

40.000

35.000

25.000

20.000

15.000

10.000

5.000

NGO Rural banks Credit UnionsBanks

Outreach

Depth of outreach

Depth of outreach: AverageOutstanding Balance / GNI per

Capita

Outreach:Number of Active Borrowers

Figure 3, Outreach and depth of outreach. Note! Depth of outreach is measured as Average Outstanding Balance/GNIper Capita. A low percentage indicates that the lowest-end of the market is reached. The higher the pillar in thefigure, the better. Source: Data from The Mix benchmark data-set


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Commercial

objective

Developmental

objective

Instruments

Tier 4 MFIs

MFIs

Tier 3 MFIs

Tier 2 MFIs

Tier 1 MFIs

Loan circles,Individuals, Micro-

entrepreneurs

End users

AfriCap(MFIF)Donors

IFIs

SRI-funds

PrivateInvestors

Suppliers

BIO(Direct Investment)

GFM(Strategic Alliance)

BRAC

(Strategic Alliance)

Dexia(MFIF)


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Microfinance Investment Funds - Growth

Yearly Addition of MIVs

0

2

4

6

810

12

14

16

18

1975 1989 1995 1999 2002 2005

# of MIVs


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Quasi-Commercial MIV Portfolios

Commercial MIV Portfolios

3%

97%

Microfinance Development MIV Portfolios

34%

65%1%

Equity Debt Guarantees

37%

63%


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MIV Microfinance PortfolioGeographic Investment Analysis

Round 2 MIVs14 MIVs

Africa8%

Other Regions&

World Wide7%

Latin America

&Caribbean

56%

Asia12%

Eastern Europe17%

Africa Eastern Europe Asia Latin America and the Caribbean Other Regions/World Wide

lecture - financing microfinance

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