New funding avenues for MFIs  

By Soumendra K Dash

 Business Standard Online, June 22, 2008


Integrating microfinance with mainstream financial systems will allow greater access to capital needed by MFIs, ensuring faster service.

In India, a majority of the population lacks access to basic financial services. Microfinance institutions (MFIs) have emerged as key players to meet the demand of the underbanked. For the past few years, the MFI sector has been performing impressively with a CAGR of 76 per cent. Intellecap 2007 and Sa-Dhan 2007 reports suggest that in the next decade, the potential microfinance-client base will reach 300-400 million, with an annual demand of Rs 25,000 crore by 2012.

Of the total credit demand of Rs 1,35,000 crore, MFIs are currently meeting as little as 5 per cent, thus reflecting that services offered by MFIs and the funding they receive from donors and investors are yet to reach their full potential. There is scope for many MFIs and investors to enter the sector and cater to the large microfinance market.

Integrating microfinance with mainstream financial systems will allow greater access to capital needed by MFIs, ensuring faster service. As microfinance evolves and becomes more complex, so will its funding sources. Apart from traditional sources like loans from banks and grants from donors, securitisation, investment funds and bonds are other options that can be tapped to meet funding requirements. This phenomenon is already being observed in the international scenario.

In many countries, especially Bolivia, Peru and Mexico, dependence of MFIs on donors has reduced and they are tapping financial markets. Some have issued bonds, tapped various investment funds and even approached the capital markets through IPOs.

Compartamos is an MFI in Peru that issued bonds in 2002 and 2004 for $15 million and $44 million respectively. The first bond issue in 2002 was rated mxA+ by Standard & Poor; no credit enhancement was provided. The second bond issue was backed by a guarantee from the International Finance Corporation and was rated AA by local affiliates of Standard & Poor and Fitch. Mibanco in Peru also issued bonds worth $6 million in 2002 with a 12 per cent coupon rate for two years, with a credit enhancement provided by a 50 per cent guarantee by USAID.

Other funding sources for MFIs across the world also include securitisation through which an MFI pools the receivables from loans and sells it to a third party. This mechanism allows it to raise money at a cheaper interest rate than what it borrowed from banks without collateral. Deutsche Bank in Germany placed a $84-million "db Microfinance-Invest Nr.1" securitisation of subordinated micro-credits in September 2007, benefiting 21 MFIs in developing and emerging market countries. Blue Orchard's 2006 collateralised debt obligation (BOLD-2006-1) raised $99.1 million backed by loans to 21 top tier MFIs in 13 countries: It was the first microfinance collateralised loan obligation (CLO) arranged by an investment bank. It was followed by BOLD 2007-1 supplying $110 million to 20 top- tier MFIs in 12 countries and was the first rated microfinance CLO with a rating by Standard & Poor's.

Investment funds have also emerged as a funding option for MFIs the world over. ACCION International created investment funds to provide equity and quasi-equity capital of $19.5 million to MFIs in Latin America, Caribbean and Africa in 2003. MicroVest One's global investments fund, MV1, has placed more than $28 million in debt and equity investments with 24 MFIs in 16 countries.

MFIs have also accessed the capital market through IPOs. In April 2007, Compartamos became the first Latin American MFI to offer equity through an IPO and raised $468 million and got listed on the Mexican Stock Exchange. Similarly, Financiera Independencia raised $300 million in funds through an IPO in November 2007 and got listed on Mexico Stock Exchange.

In contrast, MFIs in India are in a transition and are gradually tapping other funding sources apart from the traditional ones. Currently, there are a few players, including private investors, funding various microfinance institutions in India; new entrants will fill in the gaps and help this sector grow. However, there are some constraints in accessing different sources of funds. These include regulatory hurdles, lack of investor confidence and of publicly-available information about MFIs.

There have been instances in the microfinance sector in India wherein MFIs have raised funds from other avenues that include securitisation and investment funds. In the largest individual microfinance securitisation between ICICI Bank and SHARE, ICICI paid $4.3 million for 25 per cent of SHARE's loan portfolio; first loss guarantee was provided by GF-USA. On May 15, 2007, a major investment was made in SHARE by Legatum Capital (a Dubai-based privately-owned finance firm), committing $25 million. Simultaneously with Legatum, there was a $2 million investment by Aavishkaar Goodwell Microfinance Development in SHARE. The combined capital infusion in SHARE, $27 million, makes it the largest deal in the Indian microfinance sector. Other investments in MFIs in India involved Sequoia Capital (the Silicon Valley-based venture capital fund) investing $11.5 million in SKS Microfinance. Funds have also been created by other investors, which include Bellwether, Lok Capital, Michael and Susan Dell Foundation and Unitus, in India to make equity investments in MFIs.

The microfinance sector in India is growing fast. However, there are concerns that must be addressed in order to make this growth fast, effective and sustainable. MFIs need to scale up their capacity in terms of suitable systems and procedures and strengthen their management capability to deploy funds accessed by them on a sustainable basis. The success of Banco Compartamos and Financiera Independencia of Mexico in raising funds through IPO provides enough indication of future potential to MFIs in India.

Soumendra K Dash is chief economist, Credit Analysis & Research Limited. The views expressed here are personal