Building Effective Financial Structures for Fast-Growing MFIs

This paper assesses the role of equity investment as a way of raising private and institutional capital in microfinance institutions (MFIs). The paper draws on examples from all over the world and studies:

• Incentives to change traditional funding sources;
• The challenges presented by new funding sources;
• The regulatory requirements;
• The reasons that attract equity investors to invest in MFIs.

The paper observes that:

• Equity investments are normally directed toward leading MFIs structured as corporate entities with share capital and a track record for operating efficiency and financial viability;
• Equity investment is not yet relevant for small MFIs unless they are strongly committed to business principles and approach from initial stages;
• Persistent skepticism from the business community about the viability of the underlying business model limits the number of investors;
• The secondary market for MFI shares is still rather illiquid, making any equity investment in an MFI a long-term investment with no readily available exit option.

Finally, the paper points out that:

• Donors and socially minded investors (as also some private investors) are expected to continue to play a leading role in the provision of equity financing to MFIs;
• Commercial investors may play an increasing role as the industry matures and aid agencies pull out;
• External investors are expected to play a critical role in the development of a sound corporate governance structure through specialized expertise and access to international best practices.