At present, microfinance is changing from a sector driven mainly by a commitment to a social bottom-line to one more responsive to the demands and interests of private capital and customers. Traditional NGOs dedicated to microfinance have begun to transform themselves into licensed banks and non-bank financial intermediaries to gain access to public funds or small savings deposits. At the same time, some established commercial banks and finance companies have recognized the potential of micro-credit to enhance their product mix and bottom line. Encouraged by the successes of MFIs, many credit unions have begun to reinvent, or at least reinvigorate, themselves and are seeking to regain their leading role as suppliers of a full range of financial services to the poor. Even more striking, the world's largest banks, including Citigroup, Deutsche Bank, Commerzbank, HSBC, ING, ABN Amro, and Morgan Stanley, are entering this “double-bottom line” industry.
Greater involvement of the capital markets is likely necessary for microfinance to reach its full potential. Estimates of MFI annual growth rates range from 15% to 30%, thus suggesting a demand of somewhere between $2.5 billion and $5.0 billion for portfolio capital each year in the immediate future, with $300 million to $400 million in additional equity required to support such lending. But even these estimates could be too low if expansion continues at the exponential rates seen recently in larger MFIs. In short, it is clear that microfinance will need significant amounts of financing in the coming years.
Much of the demand will come from a handful of institutions. According to the Consultative Group to Assist the Poor, there are now as many as 10,000 microfinance institutions worldwide. But less than 1% are considered economically viable, and just 150 to 200 are estimated to be serving the vast majority of clients. These top-tier MFIs, all of which could be described as having taken a “commercial approach,” share a number of other important features: A range of products developed specifically for their clientele; ability to operate in competitive environments; and consistent maintenance of a portfolio at risk of less than 5% and repayment rates of 97-98% or higher.
Securitization—the repackaging of loans into tradable securities—is likely to be the quickest route for the microfinance industry to gain investor acceptance as an asset class and access to mainstream capital markets. In April 2006, Morgan Stanley arranged the BlueOrchard Loans for Development 2006-1 transaction—an almost $100 million collateralized loan obligation (CLO) backed by unsecured senior loans to 21 MFIs in 13 developing countries in Latin America, Eastern Europe and Asia. The largest of its kind to date, and the first to be arranged by a major international investment bank, the BOLD transaction showed that standard securitization techniques can be used to allow the mainstream capital markets to invest in the microfinance industry.
Microfinance and Capital Markets
♠ Posted by Emmanuel in Development
at 5/19/2007 03:13:00 AM
I am (fashionably?) late to this article on how microfinance initiatives can be bolstered by the development of capital markets according to Morgan Stanley: