MICROCAPITAL STORY: Multilateral Investment Fund (MIF), a Fund Administered by the Inter-American Development Bank, to Provide $20m in Financing to the Emergency Liquidity Fund (ELF) to Help Latin American and Caribbean Microfinance Institutions

The Multilateral Investment Fund (MIF), an autonomous fund administered by the Inter-American Development Bank (IDB), will provide up to USD 20 million in financing to the Emergency Liquidity Facility (ELF), a fund located in San Jose, Costa Rica. According to a press release on the IDB website, the funding would be used to help Latin American and Caribbean microfinance institutions ‘weather economic crisis and natural disasters’ and overcome liquidity shortages.

According to the press release, ELF’s short term financing of the Microfinance Institutions (MFIs) would facilitate the normally solvent microlenders to meet sudden crisis and changes in credit demand. The release quoted Ms. Sandra Darville, MIF’s principal investment specialist as saying that MIF’s funding was ‘particularly timely’ as it would provide the ELF additional resources to deal with the potential fallout from the global credit crisis. For more information on IDB’s support for Latin America in face of the global crisis, please refer this MicroCapital story. The release also stated that MFIs, to qualify for ELF’s assistance, had to comply with strict criteria concerning solvency ratios, management, governance and transparency. As per the 2006 Annual Report (p8) of the ELF, MFIs should have at least three years of profitable operations and lending experience in the relevant market with 50% of their loan portfolio in loans to micro and small enterprises and an average ROE of at least 10% over the last three years.

The ELF was established in 2004 in San Jose, Costa Rica to serve as a last-resort lender to Microfinance Institutions (MFIs) affected by natural disasters or man-made crisis such as hurricanes, floods, earthquakes, political unrest, etc. The founding shareholders and partners of the ELF include MIF, Switzerland’s Secretariat for Economic Affairs, the Gray Ghost Microfinance Fund, the Calvert Foundation, ACCION International, the Canadian NGO Calmeadow, the Swiss NGO Argidius and the Costa Rican fund management company Omtrix. In addition to short term financing, ELF also provides its clients technical assistance to strengthen their administration, risk management and contingency planning capabilities, preparing them to resume operations quickly after emergencies. Since 2004, ELF has identified 51 MFIs as eligible for loans and has disbursed(p11) a total of USD 10 million in loans to microfinance institutions in thirteen countries in Latin America and the Caribbean. The list of Institutions that have received financial aid from ELF can be found here(p13). As of December 2006, ELF had a total asset base of USD 4.4 million(p27). ELF does not report to the MIX Market, the microfinance information clearinghouse and no additional information on its current financials is publicly available.

The MIF was created by the IDB in 1993 to promote small and micro-enterprise private sector development in Latin America and the Caribbean through equity investments. The list of projects financed by the MIF can be found here. For more information on MIF’s projects in Latin America, please refer this MicroCapital story. As of December 2004, the MIF had a total of USD 1 billion in assets allocated to Microfinance investments with 19 active MF Investments. No further information on MIF’s financial details is publicly available.

The Inter-American Development Bank, founded in 1959, provides loans, grants, guarantees, policy advice and technical assistance to fund development programs in Latin America and the Caribbean. Over the past year, the bank has provided close to USD 10 billion in loans and grants, and holds over 600 projects in its current portfolio. According to their 2007 Annual Report, the IDB’s total assets sum USD 69.9 billion (p 104). The IDB also approved USD 7.7 billion in total loans for the year (p 79).

The press release briefly explains the need for such emergency funding for MFIs. It states that while large banks can tap government sponsored emergency loans to overcome liquidity shortages, microlenders cannot do so. The ELF website states that the financial asset base of most MFIs is relatively small in terms of the overall system and thus MFIs do not normally qualify for access to public sector sponsored facilities providing emergency liquidity relief. According to this report on Microfinance Gateway, an online resource for the microfinance community, economic crisis or other natural disasters disrupt the normal functioning of small micro-entrepreneurs and this leads to an increase in the withdrawal of deposits by micro-entrepreneurs. This sudden surge in the retraction of deposits decreases the liquidity of MFIs and they often face operational hardships, in most cases the MFIs need external help to withstand the crisis. A study by the Global Development Research Center, a virtual community and environment research organization states that such emergency funding to MFIs would enable them to meet the huge demand from their clients for food, clean water, deposits, etc in case of natural or man-made crisis.