Microfinance lending survives, diversifies, despite Eurozone crisis

CGAP’s take on development finance is generally a bit too abstract for me, but its recent report, “How Have Market Challenges Affected Microfinance Investment Funds?” has some interesting nuggets. To me, the main takeaways are these:

Total assets of the 10 largest Microfinance Investment Vehicles (MIVs) grew by 7.2 percent in 2011, above the 4.1 percent growth rate in 2010, but still below precrisis levels (e.g., 31 percent in 2008 and 23 percent in 2009)…Although support from investors remained relatively strong, some fund managers interviewed noted that raising private investor capital has become more challenging, mostly due to the negative developments and publicity in several microfinance markets, as well as economic weakness in several European economies.


The SMX Index showed about the same returns in 2011 as in 2010, at 2.5 percent for U.S. dollars and 2.6 percent for euro investments. These are well below that of earlier years when returns of 5 percent were feasible. Nonetheless, the 2011 yields still provide a risk premium above the six-month LIBOR (0.7 percent) and the six-month EURIBOR
(1.6 percent).

Notice the absence of the B-word: BUBBLE. I don’t expect these fund managers to tell CGAP that part of the growth in pre-crisis years was indeed a bubble but anyone who was anywhere near this scene during that period would be kidding himself to deny that the growth wasn’t fueled at least in part by outsized hype. Next up:

This increase in growth rates is mainly driven by the increased microfinance institution (MFI) demand for capital, particularly for local currency loans…several of the largest MIV managers now have a third of their global portfolios effectively in local currency, and some have significantly higher levels (e.g., Oikocredit at 56 percent). Some MIVs and Development Financial Institutions (DFIs) have made it a deliberate strategy to provide local currency funding in poorer and less developed regions, such as SSA. For instance, 72 percent of Triodos’s debt portfolio in SSA is in local currency, compared to 38 percent of its global portfolio. Some DFIs, such as AfD and IFC, have 100 percent of their SSA debt portfolio effectively in local currency.

This is a positive development insofar as actually helping underserved markets to develop. But one of the big obstacles to reaching critical mass in local currency lending was the absence of an effective hedging mechanism for lenders (and by “effective”, I do not mean a government-subsidized backstop). This too it seems is evolving:

Some MIVs (e.g., Triodos, Regmifa, Fefisol) can or are already taking open foreign exchange positions to support MFIs with local currency capital where market hedges don’t exist. Generally, such exposures are limited to a small portion of the MIV’s assets or have other mitigating protection.

Small is better than nothing. Five years ago, an MIV taking an open FX position in these countries was unheard of. Finally:

Investment managers expect further increase of MFI demand in 2012 and improved growth compared to 2011. They also expect further expansion into underserved markets and more focus on equity investments. MIV managers project increased diversification of their portfolios into other impact investing fields, such as agricultural finance and small and medium enterprise finance, while recognizing that the expansion into these areas will proceed at a slower pace.

Summary page here, full report here.

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