Microfinance: the Challenge of Accessing Global Capital Markets

Résumé du document

The main theme of this project is the facilitation and development of microfinance, which is the "provision of loans, savings, insurance, payments, and other basic financial services to low-income groups? . The project is dedicated to identifying and evaluating existing options for microfinance institutions (MFIs) who wish make use of the funds to take advantage of the huge potential market for microfinance. This topic is particularly important as the current lack of funds remains as the major growth constraint for the microfinance industry. Global capital markets would enable MFIs to raise capital at lower rates. The following three sources of commercial financing are then outlined and evaluated in the context of MFIs: bonds, securitization and (quasi-) equity. However, though microfinance can be profitable, investors remain reluctant to invest in MFIs. We will identify the main concerns preventing substantial investment in this sector.

Extraits

[...] The underlying risks are then shared between the MFI and the investors. Such a transaction offers two main advantages: It dramatically reduces the financing costs of the MFI compared to traditional loans from commercial banks. Indeed, international investors do not bear the business risk anymore and can more easily diversify away the remaining idiosyncratic risk attached to the loan portfolio. As microfinance as an asset class is weakly correlated with the global economic environment, we can expect that investors will require a much lower risk premium than for high-yield bonds for example. [...]

[...] p.21 Imboden (2005), p Imboden (2005), p Imboden (2005), p Meehan (2005), p The Futurist (1999), p Meehan (2005), p. iii. CGAP (2004), p 1. Tulchin (2004), p 4. Fehr (2004), p 5. Solnik (2003), p Adapted from a July 2004 $40m bond issue by Blue Orchad Securities to support MFIs. For further details see: www.blueorchard.ch/en/microfinance_capital_markets.asp. Meehan (2005), p 10. Tulchin (2004), p 1. Fehr (2004), p 5. Meehan (2005), pp 13-14. Meehan (2005), p15. [...]

[...] Most investors have never been exposed to microfinance and have little knowledge of the financial systems where MFIs typically operate (i.e. under-developed countries). On the one hand, we could think about this concern as a reasonable one. However, on the other hand, international financial markets do not offer many so-called “free-lunches”. When a profit opportunity arises on a risk-adjusted basis, investors usually react very rapidly even if they first have to acquire expertise in a new field. We therefore think this lack of expertise is no longer an excuse for a general misunderstanding of the risk-return profile developed above. [...]

[...] Microfinance: The Challenge of Accessing Global Capital Markets "Micro finance is not charity. It is a way to extend the same rights and services to low-income households that are available to everyone else. It is recognition that poor people are the solution, not the problem. It is a way to build on their ideas, energy and vision." Kofi Annan, United Nations Secretary General EXECUTIVE SUMMARY The main theme of this project is the facilitation and development of microfinance, which is the “provision of loans, savings, insurance, payments, and other basic financial services to low-income populations”[1]. [...]

[...] Fehr, D. and G. Hishigsuren (2004). “Raising Capital for Microfinance: Sources of Funding and Opportunities for Equity Financing”, working paper n°2004-01. Imboden K. (2005). “Building inclusive financial sectors: the road to growth and poverty reduction”, Journal of International Affairs. Vol.58, No.2. p Meehan, J. (2005). “Tapping Financial Markets for Microfinance”, Grameen Foundation USA Publication Series. Solnik, B. [...]