Bridging the Gap to the Microfinance Promise: A Proposal for a Tax-exempt Microfinance Hybrid Entity

This Note proposes the creation of a hybrid legal entity called a microfinance limited partnership (MLP). MLPs can build upon the capabilities of nonprofit and for-profit MFIs and provide a supplemental solution to high MFI interest rates.

The paper explores the concept of an MLP which combines legal entity forms and tax-exemption. It draws insights from U.S. and U.K. law, where hybrid entities have been created for social enterprise. The paper states that the MLP:

• Will help MFIs to expand services by attracting new sources of equity capital, decreasing operating costs and interest rates;
• Helps address the interest rate problem that can harm the industry as well as poor borrowers;
• Is a for-profit entity that improves social welfare by providing financial services to the poor and redistributing wealth;
• Is as entitled to tax exemption and implicit government subsidy as a nonprofit charity;
• Deserves government subsidy for its role as a conduit for redistribution of the world’s wealth from the richest to poorest.

Governments can support development by creating a legal entity like the MLP, providing the regulatory framework needed to support it and exempting it from tax.