How Do International Networks Manage Grants, Investments and Loans to their Partners and Affiliates?

This study discusses the changing role of various networks that support the growth of microfinance institutions (MFIs) world wide. The initial participation of these was as grants, soft loans and revolving fund loans, but with commercialization of microfinance the focus has shifted to loans, loan guarantees and equity.

While making the choice for the financial support, the key consideration for networks includes;

• Ascertaining the ownership of the MFI assets;
• Determining the responsibility and recourse of the network in case the loans or grants are not used as designated;
• Taking into account the law - The US tax laws seek consolidation in PVO if it is a majority owner of partner;
• Considering the currency risks - Networks are sensitive to the currency risk and try to minimize it to the best extent possible.

The study examines the experiences of various organizations that have used different financial instruments:

• CGAP and World Vision provide grants under extremely tight conditions and at times in tranches to ensure leverage;
• Pro Mujer loans are provided after the MFI has submitted three years projections and has shown strong growth in its past and future projections;
• Guarantee funds are extensively used to facilitate access to local resources and to mitigate foreign currency risk;
• Equity is used to create stronger partnership with affiliates and to play an active role in governance.

The study concludes that while a broad spectrum of choices is available to make investments by the network, the two major criterions that determine the choices of the instruments are:

• Legal structure of the MFI;
• The network's strategy.