MFI Capital Structure Decision Making: A Call for Greater Awareness
This CGAP Brief summarizes findings of study on MFI capital structure decision-making processes. It makes recommendations for optimizing MFI balance sheets. The broad range of financing sources that MFIs have at their disposal today complicates decisions about capital structure. MFI capital structure decision-making is often opportunistic and reactive. Better capital structure decision-making will minimize risk, maximize financial flexibility and encourage long-term solvency of MFIs. Microfinance managers who have made strategic decisions to diversify funding and limit currency risk have been successful in reducing their proportion of cross-border funding. Study findings indicate that MFIs seek guidance on:
- Factors and costs to consider in determining borrowing options and capital structure and in selecting equity investors;
- Financial analysis, risk management, and treasury management;
- Transformation and capital markets.
The Brief recommends that cross-border funders should be aware of the impact of their funding on development of domestic markets. It states that part of their goal should be to build institutions and domestic financial systems that provide a wide range of services for the poor. It recommends that donors use additional investment to help local financial institutions evaluate existing options and make domestic sources of funding accessible.
