Raising MFI equity through microfinance investment funds

Abstract

Microfinance institutions (MFIs) are increasingly addressing the traditional financial market to fund their continued growth and to better serve their clients. In its early days, the microfinance sector was essentially driven by non-profit organisations and official development agencies. Over the last few years, these institutions, together with a few new entrants in the sector, have set up an increasing number of investment structures to fund MFIs. Common usage in the microfinance industry is microfinance investment fund as the generic term to identify all corporate investment structures (such as holding companies for example) which have been set up to provide equity and/or debt financing to MFIs, with investors acting as shareholders or as lenders. This paper builds upon a study prepared by the author on microfinance investment funds (MFIFs) for the 2004 KfW Financial Sector Development Symposium held in Berlin in November 2004. This initial study presented an overview of microfinance investment funds with their main features and characteristics. This paper focuses on those investment funds which invest all or a part of their assets in the equity capital of MFIs A number of investment structures were initially created as vehicles to provide funding to development initiatives, such as MFIs. Oikocredit was for example established in the Netherlands in 1975 to make development-oriented investments in church-related institutions. It was only in the mid-1990s that the first commercially focused investment structures emerged, targeting MFIs such as Profund, launched in 1995. The original promoters of these investment vehicles were developmentagencies and non-profit organisations. All these initiatives had a com- mon goal: to increase the development impact by investing collectively in a diversified pool of MFIs. This approach afforded clear advantages to these development investors, notably the sharing of costs and experience. Today the investors in these funds are still mainly the original participants in the microfinance industry: non-profit organisations and development agencies. Institutional investors such as pension funds and insurance companies remain largely absent while private individuals have shown some interest, but this is still quite limited. Recently, though, an increasing number of MFIFs are being set up to mobilize the traditional capital markets, clearly targeted to these commercial investors. It is interesting to note that the most commercially oriented investment funds invest almost exclusively in debt instruments of MFIs, whereas the funds promoted by development-oriented institutions have a greater mix of investments with equity as well as debt products © 2009 Springer-Verlag Berlin Heidelberg.