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Figure 1. Evolution of the Funding of the Microfinance Sector

Private Donors

Private donors such as foundations and NGOs funded by corporations and private individuals have been paramount in the development of microfinance. They have been involved with microfinance for many years, directly supporting and creating MFIs in developing countries and transition economies through grants, donations, technical assistance and subsidies. They then gradually started to provide subsidised loans at little or no interest. Some private donors have advocated interest rates closer to market conditions for the most mature MFIs they finance.

Development Agencies

Bilateral and multilateral agencies include international financial institutions (IFIs) and development finance institutions (DFIs). Governments and supranational bodies created these development banks and other institutions to promote sustainable development in emerging countries. Development agencies have been instrumental in the promotion of MFIs, initially directly through grants, subsidised loans and equity participations.

As the microfinance sector matured, specific vehicles such as ProFund and LA-CIF were set up by development agencies and private donors to share experiences and to diversify their risks. The shareholders and lenders to these first generation MFIFs were exclusively these kinds of institutions.

Private Individuals

Before the mid to late 1990s there were very few avenues for investment in microfinance by private individuals. Incofin, established in 1992, and Alterfin, created in 1994, as Belgian cooperatives enlisted private investors as shareholders. In 1995 the Calvert Social Investment Foundation launched its Community Investment Notes that were available to private investors either directly or through broker-dealers. Another possibility was created by the Fonds International de Garantie (FIG) in Geneva, established in 1996.

The real breakthrough for private investors in microfinance was the Dexia Micro-Credit Fund launched in 1998 in Luxembourg and marketed actively since 2000. It offered all the advantages of a true investment fund similar to a traditional money market or bond fund but with a definite advantage: this fund combined a social return with a potential financial return.

Since then other dual objective investment funds have been set up, offering both a social and a financial return, targeting private individuals as investors:

• Although created in 1996, ASN-Novib, a Dutch investment fund, was opened to private shareholders in 2000.10

• Investisseur et Partenaire pour le Développement, a Mauritius investment company, was created in April 2002 by French entrepreneurs.

• Triodos Bank established the Triodos Fair Share Fund in the Netherlands in

2002 to build upon the expertise it gained in managing two microfinance investment funds, one for the DOEN Foundation and other one for the Hivos Foundation. The Triodos Fair Share Fund is targeted primarily at private individuals in the Netherlands.

• The responsAbility Global Microfinance Fund was founded in November

2003 by four Swiss banks and a social venture capital fund at the initiative of responsAbility Social Investment Services Ltd, Zurich. The promoter of this Luxembourg fund is Credit Suisse.

• Microvest I, LP was founded in 2003 by three non-profit organisations:11 CARE, MEDA and SCDF, all based in the United States of America.

• Impulse, a Belgian fund, was recently launched at the initiative of Incofin.

10 Information published on Novib's website: www.novib.nl.

11 CARE - Cooperative for Assistance and Relief Everywhere; MEDA - Mennonite Economic Development Association; SCDF - Seed Capital Development Fund.

Institutional Investors

Institutional investors in MFIFs are certainly the most promising for the future of the sector. Institutional investors comprise pension funds, insurance companies, mutual and investment funds and other large-scale investors. A few pension funds are already investors, but institutional investors remain limited in microfinance, probably engaging only for image and visibility reasons or under the influence of a dual objective decision maker. Institutional investors are under extreme performance pressure and usually have limited understanding of microfinance. Bringing them on board is a slow process, but will accelerate as they understand the advantages of investments in microfinance.

There are two interesting examples of traditional investment funds that invest in microfinance either directly of through dedicated investment funds.

• The Calvert Social Investment Fund family invests between 1 % and 3 % of selected mutual fund assets in Community Investment Notes issued by the Calvert Social Investment Foundation. The proceeds from these notes are invested mainly in the United States but also in microfinance in developing markets. The total microfinance portfolio is US$ 16.7 million.

• The AXA World Funds - Development Debt is a sub-fund of AXA World Funds, a Luxembourg fund sponsored by AXA Investment Managers. This sub-fund participates in the sustainable development of emerging economies, mainly through the purchase of debt instruments from development financial institutions, but also by investing up to 10% of the sub-fund in commercial paper issued by MFIs. As of mid-September 2004, € 1.22 million out of total assets of € 19 million were invested in certificates of deposit issued by Latin American MFIs. As this sub-fund grows, so will the microfinance portion.

These two examples show that traditional investment funds can invest some portion of their assets in microfinance, either directly or through dedicated investment funds. AXA has a small team of professionals specialised in microfinance investment. For other institutional investors that do not wish to develop their own microfinance expertise, microfinance investment funds are a convenient tool to make such investments by diversifying their risks

Summarising, a useful start has been made. The investment funds mentioned above are usually targeted at institutional investors, but progress is slow. The microfinance industry has to interact with traditional capital markets to understand fully the requirements and concerns of the market. Two recent structures using subordination tranches offer a pioneering example, as described in Table 4.

The senior noteholders of the Global Microfinance Facility are protected by the first and second loss tranches which must equal at least 50 % of the senior tranche. The BlueOrchard Microfinance Securities I deal protects OPIC, the issuer of the senior notes, by the subordinated tranches and share capital, which is approximately one-third the size of the senior tranche. The senior notes are guaranteed by the

Table 4. Pioneering Deals: Global Microfinance Facility and BlueOrchard


Global Microfinance Facility Ltd (established in 2004)

BlueOrchard Microfinance Securities I, LLC


Cyrano Management SA

BlueOrchard Finance SA Developing World Markets Microfinance Grameen Foundation USA

Type of structure

Cayman Islands investment company

SPV (special purpose vehicle) in the form of an LLC


10 years

7 years


$30.1 million

$40.1 million (first closing on 29 July 2004)

Funding structure in subordination order


Charitable Trust: $ 1,000

Sponsors & investors close to MF*: $ 1.25 million: MFI Commitment Reserve: $ 95,000

1st loss tranche

Promoters: $2.1 million

Investors with MF experience: $ 3.555 million

2nd loss tranche

IFC, KfW: $ 8 million

Dual objective investors: $ 3.67 million

3rd loss tranche


Institutional and private investors: $ 2.2 million

Senior Note Holders

BIO, Crédit Coopératif, other commercial investors: $ 20 million

An institutional investor and an investment fund: $ 29.3 million of Notes issued by OPIC with a US Government guarantee

* MF = microfinance

* MF = microfinance

US government. Since the surveys were conducted a second issue was launched, bringing the total assets of the BlueOrchard Microfinance Securities I & II to $ 87 million.

These two examples represent a major evolution in structuring microfinance investment vehicles that appeal to commercial institutional investors. Their investments are safer than most of the other microfinance investment funds because of their subordination tranches. Their return is roughly in line or only just above investment-grade debt securities. These issues are well publicised, acquainting commercial investors with microfinance.

Commercial institutional investors are gradually turning their attention to microfinance. This type of investor should provide the bulk of the financing for micro-entrepreneurs worldwide as microfinance continues to innovate, to become known by traditional capital markets and to create structures that protect and maintain social goals.

Distribution of Microfinance Investment Funds Based on Their Objectives

The various types of MFIFs' are distinguished primarily by their objectives. The main factor is the balance between the financial objective and the social objective. What types of investors are attracted? What terms are offered to MFIs? Which MFIs are targeted?

Microfinance investment funds can be classified in three main categories:

• Commercial microfinance investment funds,

• Quasi-commercial microfinance investment funds,

• Microfinance development funds.

The commercial and quasi-commercial funds are usually set up as traditional investment funds or investment companies. Their aim is to provide a financial return to socially responsible and commercial private and institutional investors, while maintaining key social and development objectives. The main distinction between these first two categories is the nature of the investors targeted.

Commercial Microfinance Investment Funds

Commercial microfinance investment funds, listed in Table 5, would clearly target private and institutional investors. Development agencies and private donors would appear only as initial investors or as facilitators in structures with subordination tranches. These funds would be actively distributed by the original promoter as well as by external distributors.

The nature of the investors targeted by commercial investment suggests that these funds have clearer objectives than others. A commercial institutional investor will want to understand precisely the investment it is making, the financial return it can expect, and which MFIs are financed. The quality of the information provided in offering memoranda, prospectuses or annual reports very much depends on the targeted investors. For example, development agencies and private donors may not require such transparency and clarity in their official documentation.

Table 5. Commercial Microfinance Investment Funds

• ASN-Novib Fund

Global Microfinance Facility

• AXA World Funds - Development Debt

Gray Ghost Microfinance Facility

Impulse (Incofin)

• BlueOrchard Microfinance Securities I,



responsAbility Global Microfinance

• Dexia Micro-Credit Fund - Blue


Orchard Debt Sub-Fund

Triodos Fair Share Fund

Very few microfinance investment funds, for example, provide adequate and sufficient information on their financial return, their cost structure, their total expense ratio and their loan loss provisions. This low degree of information makes it very difficult for traditional investors to compare such an investment with their mainstream investments. It also makes it difficult to compare microfinance investment funds. As commercial investors become more active in microfinance, the quality of the information provided will also improve.

Commercial funds mainly invest in loans. Funds investing in equity participations are held largely by development agencies and private donors. As the market matures, equity funds will also target institutional investors.

Quasi-Commercial Microfinance Investment Funds

Quasi-commercial microfinance investment funds (or "commercially-oriented" microfinance investment funds) also have clearly stated financial objectives but are currently targeting mainly private donors and development agencies. A fund such as ProCredit Holding (formerly IMI and which is really a financial holding company) will become a commercial MFIF as it solicits institutional investors, probably within the next two to three years.

The distinction between the two categories above does not give any indication of the profitability of each investment fund. Some quasi-commercial investment funds have actually fared significantly better than the commercial funds over the last few years, essentially due to their higher proportion of equity holdings.

Microfinance Development Funds

Microfinance development funds, such as those listed in Table 7, are commonly cooperatives or non-profit entities. Their aim is to make capital available to MFIs through sustainable mechanisms to support their development and their growth without necessarily seeking a financial return. The investors in these structures essentially seek a social return with the aim of maintaining the real inflation-adjusted

Table 6. Quasi-commercial Microfinance Investment Funds

• Accion Investments in Microfinance

Investisseur et Partenaire pour le

• Africap


• Global Commercial Microfinance

La Fayette Investissement

Consortium (Deutsche Bank)

La Fayette Participations

• ProCredit Holding

Latin-American Bridge Fund

• (formerly IMI AG)



ShoreCap International


Table 7. Microfinance Development Funds

Accion Gateway Fund



Fonds International de Garantie (FIG)


Hivos-Triodos Foundation

Calvert Social Investment Foundation -


Community Investment Notes

Kolibri Kapital ASA



Deutsche Bank Start-up Fund

Opportunity Transformation

Deutsche Bank Microcredit


Development Fund

PlaNet Finance - Revolving Credit

Développement International


Desjardins - Partnership Fund

Sarona Global Investment Fund

Dvt Int'l Desjardins - Guaranty Fund


Dvt Int'l Desjardins - FONIDI Fund

Triodos-Doen Foundation

value of their original capital if possible. This objective usually translates into favourable financial conditions to MFIs, usually subsidised or provided below market rates. Technical assistance may be provided by related institutions. The main investors would be private donors and development agencies as well as private individuals and corporations. These funds do not usually provide grants and donations to MFIs because doing so would deplete capital.

Due to the nature of their investor base and their social approach, microfinance development funds are very complementary to commercial and quasi-commercial microfinance investment funds. These funds should probably prepare MFIs for access to capital markets by focusing on those approaching sustainability, including greenfield institutions. As MFIs become sustainable, commercial investment funds should take over by providing larger resources on market terms. There would obviously be overlaps in this process but one can only question the necessity for a development fund to continue funding Banco Sol, for example, which clearly no longer needs below market funding. These resources could be usefully redeployed to MFIs which are at the stage that Banco Sol was at several years ago, rather than competing with funding that is increasingly commercial.

Categorising Funds by Overall Risk Profile

MFIFs can be classified according to two dimensions: the investment profile of the underlying investors, and the risk profile of the underlying investments.

All the MFIFs surveyed are shown on Figure 2 according to the type of their average investors and according to the funds' objectives. On the horizontal axis,

Microfinance Development Quasi-Commercial..

Funds MFIFs

Commercial MFIFs

Accion Gateway Fund DID-FONIDI OTI

Africap Accion AIM


La Fayette Participations La Fayette Investissements

ProCredit Holding AG

DID Partnership

ADA-Luxmint DID Guaranty

ShoreCap International PROFUND

Incofin Inv& Partenaire pour le

SIDI Développement

Hivos-Triodos Found. Sarona Global Inv. Fd Triodos-Doen Found. Oikocredit Alterfin

Gray Ghost MicroVest responsAbility Global Microfinance Fund Triodos Fair Share Fund

Deutsche Bank MC Dvt Fund Planet RCF

FIG LABF Etimos CreSud

ASN-Novib Fund Calvert Comm. Notes LACIF

Dexia Micro-Credit Fund BlueOrchard MF Secs Global MF Facility AXA WF

Private Development Private Commercial ^ . ,


Donors Agencies individuals Investors

Investment Profile of underlying Investors in the Funds

Figure 2. Risk Profile of Microfinance Investment Funds (MFIFs)

the most commercial investment funds are towards the right, the least commercial or most development oriented towards the left. These two elements, financial and social, are not opposed but place different emphasis on these two objectives.

The risk profile is determined by the proportion of equities, loans and guarantees in the investment funds' portfolios. The actual percentages can be found in the appendix.

The most commercial funds invest primarily in debt instruments or guarantees. For example, the responsAbility Global Microfinance Fund and the Triodos Fair Share Fund each have a small portion of equity investments. Considering their total size, the equity investment of all the commercial investment funds is negligible. This indicates that the commercialisation of microfinance is still in its very early days.

Categorisation of Microfinance Investment Funds by Size

Most microfinance investment funds are below the size required for sustainability, which is at least $/€ 20 million. Sponsors of traditional investment funds usually consider that the minimum sustainable size is at least $/€ 20 -30 million. As shown in Table 8, more than 76 % of MFIFs are smaller than US$ 20 million. Of the 9 funds that are larger than US$ 20 million, 5 are commercial or quasi-commercial. The most commercial funds, together with ProCredit Holding have recently grown the fastest. Although ProCredit Holding's private institutional shareholders (other

Table 8. The 38 existing MFIFs by Asset Size - Market Share and Number

Size of Microfinance Value of % of asset

Investment Funds MFIFs market Number of % of MFIFs

Table 8. The 38 existing MFIFs by Asset Size - Market Share and Number

Size of Microfinance Value of % of asset

Investment Funds MFIFs market Number of % of MFIFs

(Total Assets)

($ million)



< US$ 5 million




26.3 %

US$ 5-10 million


4.5 %



US$ 10-20 million





> US$20 million










than its founding members) represent a very small portion of its capital12, this fund operates like a commercial institution, which contributes to its substantial growth.

The funds which have grown the most are those actively distributed. The key to success in the traditional investment fund market is distribution, which is the access to the final investor. This market is moving increasingly to an open architecture where promoters sell each other's funds, to the benefit of the largest and most profitable funds. Promoters of traditional investment funds are constantly examining their range of funds to determine whether it would be more profitable to close down small funds and sell similar funds from other providers.

The current volume of commercial microfinance investments funds is small, and at the same time there are many other investment funds which are not viable on their own and which require subsidies in one form or another. Consolidation may be helpful, but mergers may be difficult due to the nature of these funds. Instead investment funds which are structured to be attractive to commercial investors, both private and institutional, need to be more actively distributed. Such funds are building a necessary bridge between the microfinance sector and the commercial sector. Even if such an investment fund is small it "simply" needs to be actively distributed to the targeted investors. An example is the Triodos Fair Share Fund, launched in December 2002 and targeted essentially at Dutch private investors. Although it was still small in June 2004 (€ 4.9 million), its investment portfolio (microfinance and trade finance) grew by 376 % in one year and its total assets increased by 253 %. It more than doubled to € 12.2 million as of September 2005. It is certainly on the right track to become sustainable within the next year or two.

12 www.procredit-holding.com - shareholder structure as of September 2005: 27.2% held by founding members IPC and IPC Invest; 35.1 % held by a foundation, Doen Foundation, and an NGO, Fundasal; 35.9% held by Development Finance Institutions; 1.8% by two new commercial investors: responsability Global Microfinance Fund and Andromeda.

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