Increasing Commercialisation of the Microfinance Sector

Dual-Objective Investment and Financial Opportunities The socially responsible investment (SRI) market has grown tremendously over the last few years. The Social Investment Forum13 estimates that the SRI market in the US represents 11.4 (or 2.16 trillion) of the 19.2 trillion in investment assets under professional management in the United States. According to the same study, socially responsible investing is an investment process that considers the social and environmental consequences of...

Uncertain Demand for Equity

Regulated MFIs will continue to seek more debt than equity from foreign sources despite a possible decline in the relative demand for foreign debt as a percentage of liabilities. These institutions' high levels of equity capital will lead them to increase their liabilities rather than raise new equity as they attempt to reduce their overall cost of funds. NBFIs reporting to The MicroBanking Bulletin have a 2.9x (2.9-to-1) average debt-to-equity ratio and specialised microfinance banks main 18...

Risk Stripping and Gearing to Increase Yields

There are two ways - risk stripping and borrowing - for investors to capitalise on gearing or leverage without falling victim to moral hazard caused by excessive risk, specifically through the unexpected erosion of capital. Risk Stripping or Federative Investment The first requirement in risk stripping is to draw a line between financial and social yields. The financial yield is the objective of institutional investors. The social yield is the objective of soft investors such as IFIs...

Mitigating Currency Risk

Hedging A strategy used to offset market risk, whereby one position protects another. Traders and investors in foreign exchange hedge to protect their investment or portfolio against currency price fluctuations, First FX www.firstjx.com . Every risk can be mitigated by an appropriate hedging strategy. Hedging mitigates currency risk and takes many forms. Common methods used to mitigate currency risks are Hedging mechanisms are described in papers footnoted below that also offer examples of...

Setting Key Criteria for the Success of the MFIF Industry

Three factors should govern the criteria used to evaluate the performance of microfinance investment funds and their managers in order to achieve good governance, transparency and accountability for investors. First, MFIF firms should be judged by the same professional criteria as other investment houses active in capital markets. The culture of the microfinance industry is fundamentally credit driven most microfinance investment managers have little investment experience or knowledge of modern...

The Concept of Limits

While an individual MFI's business model may enable it to create an extremely diversified portfolio, a limit system is required to ensure that an MFIF has at least a minimum degree of portfolio diversification. Limits are expressed as a percentage of total capital and include the maximum investment allowed in any single MFI, in a single country, and also in a single region in order to reduce spill-over risks from neighbouring countries. A fund is always less diversified than an MFI, but this...

Defined Liability and Institutional Funds

Defined liability and institutional funds include pension funds, insurance funds, trusts and other funds managed by or on behalf of a private institution. The pension fund assets of OECD countries exceed US 8 trillion. Insurance funds in the US control over US 3 trillion.10 These funds invest in a wide variety of instruments, though regulation and fiduciary practice tend to limit most investment to high-grade, tradable securities. Some very large funds buy higher risk assets, such as venture...

Private Investors Motivation for Maintaining Target Group Orientation

If equity is sold to a private investor, will mission drift occur, and if so, how can it be avoided Neusch tz 2004 recommends that development finance institutions sell their shares to the right investor, i. e. a strategic investor who will not abandon the original business purpose because there is a common set of values and objectives between private investor and public seller.11 If a buyer subsequently changes the character of the microfinance institution, he could be obliged to repay all or...

Corporate Governance

Corporate governance of MFIFs may be less important in controlling risk than it is in direct investments in MFIs. But participation in governance remains a focus of DFIs because it allows some control of investment policy and procedures. Some DFIs will be satisfied by board representation, while others, mostly those with large exposures, want to exercise additional control through membership in investment committees. Depending on the requirements of the investors and of the group of investors,...

Defining the Asset Class Where Does Microfinance Belong in the Investment Universe

Strangely, key features of the microfinance investment universe have led some specialists to classify this asset class as money market plus. Key features that mis-leadingly suggest such a definition include little or nil volatility, like money market instruments predominately short term, with an average duration of 18 months, seldom exceeding the 36-month short term limit 4 the cash nature of the business with a high transaction turnover due to short duration and the low default record. For...

Names Acronyms and Abbreviations

Other than Microfinance Investment Funds Consultative Group to Assist the Poor Cordaid CreSud DB MDF DID - Fonidi DID - Guarantee ACCION Gateway Fund AfriCap Microfinance Fund ACCION Investments in Microfinance Alterfin c.v.b.a. ASN-Novib Fonds AXA World Funds - Development Debt Fund Belgian Investment Company for Developing Countries BlueOrchard Microfinance Securities I, LLC Calvert Social Investment Foundation Community Deutsche Bank Microcredit Development Fund D veloppement International...

Introduction to Part II

Chapter 6 consists of Mark de Sousa-Shields' exploration of the asset allocation strategies of local and international investors. He finds that their behaviour is broadly similar, which implies that a global market for microfinance investment could be possible. But microfinance is not yet sufficiently well described, and its risk and return characteristics are not yet well-enough understood to attract large numbers of investors. However, numerous sources of funding are likely to become...

References

CGAP Focus Note Nr 25 - Foreign Investment in Microfinance Debt and Equity from quasi-commercial investors - January 2004. Dexia Micro-Credit Fund - Annual Report as of 31st December 2003. Goodman, Patrick International Investment Funds Mobilising Investors towards Microfinance - ADA Luxembourg - November 2003. IPE Dutch pension funds fail IMF stress tests - www.IPE.com - 30th September 2004. MicroRate The Finance of Microfinance - September 2004 MicroRate amp IDB Technical Guide - Performance...