Disintermediating Avarice: An Inquiry into Commercially Sustainable Microfinance
This paper examines alternative commercial sources of microfinance that eliminate the profit motive by operating without bank intermediaries.
The current need for microfinance greatly exceeds the amount that can be raised from charitable donors. Given the high interest rates of commercial banks, the paper highlights the need for enabling capital markets to directly fund microfinance loans. It presents securitization as a disintermediation mechanism, and discusses concepts of regenerative and transformative securitization. Regenerative securitization refers to securitizing an MFI’s donor-funded microfinance loans to regenerate funding for the MFI. Transformative securitization refers to funding new microfinance lending through capital markets.
The article points out several challenges to commercially sustainable securitization of microfinance loans and suggests measures to manage them. Challenges include:
- Moral hazards, agency costs, and conflicts with agents;
- Information failure and over reliance on complex models;
- Transaction costs of regenerative securitization;
- Legal regime deficiencies;
- Institutional infrastructure deficiencies;
- Risk of loss due to payment delays or defaults.
