Engaging the Financial Sector
This paper examines the need to engage the commercial sector in microfinance.
The untapped market potential for microfinance is estimated to run into several hundred billion dollars. Donors, international financing institutions and social investment funds have so far provided International sources of capital for microfinance. Microfinance specialists agree that the sector needs to tap into international commercial debt and equity capital in order to fulfil its growth potential, Given microfinance's profitability and strong returns on equity, it is surprising that the private sector has ignored the microfinance market until now. Factors that have prevented commercial capital from investing in microfinance include:
- High perceived risk and illiquidity of equity investments in microfinance;
- Perception that interest rates for debt investments in microfinance do not sufficiently reflect risk;
- Relatively high transaction costs of microfinance investments.
It is crucial to increase the average size of transactions for microfinance investments to remain competitive for commercial investors. The emergence of larger, more mature MFIs can catalyze the entry of private sector into microfinance. It could also be achieved by applying innovative financing techniques such as securitization of MFI credit portfolios and emission of local bonds.
