The Role of International Capital Markets in Microfinance

This paper discusses the entry of commercial mainstream investors into microfinance and the likely evolution of capital markets funding for microfinance. The paper states that:

• In recent years, international capital markets have begun investing in microfinance;
• Collateralized debt obligations (CDOs), private placements and direct securitizations of microloans have raised approximately $500 million;
• Private sector debt and equity microfinance funds are now controlling more than $2 billion;
• Although traditional microfinance funders are behind most of this investment, private sector institutional investors are increasingly seeking full market returns;
• These mainstream commercial investors are driving the opening of capital markets to microfinance.

The paper examines:

• The need for capital markets funding in microfinance;
• The case of Blue Orchard Microfinance securities (BOMSI) –a CDO;
• The growing participation by commercial investors;
• Commercial equity investment in microfinance.

The paper concludes that:

• It would be wise to question the sustainability of capital markets investment in microfinance;
• Although there are many constraints to growth, financial products will eventually become more numerous, standardized, and fitted to capital market norms;
• Commercial investment in microfinance will have both positive and negative effects;
• The focus of microfinance on “banking the unbanked” gives it a unique profile of risk and reward that can draw institutional investors seeking diversification and absolute returns.