In April, MicroCapital reported that President Obama, in response to the global financial crisis, announced the launch of a Microfinance Growth Fund for the Western Hemisphere to provide lending to small businesses in the region [1]. In response to this announcement, the following organizations have signed an agreement establishing the Microenterprise Growth Facility (MIGROF), a public-private partnership intended to provide USD 250 million in lending to microfinance institutions (MFIs) in Latin America and the Caribbean (LAC): BlueOrchard Finance S.A., a Swiss microfinance investment management company, which has been appointed to exclusively manage the facility; The Inter-American Development Bank (IDB), a development financial institution; the Overseas Private Investment Corporation (OPIC), an independent U.S. government agency which aims to facilitate investment in developing countries; the Inter-American Investment Corporation (IIC), an affiliate of the IDB which supports private sector and capital market development in LAC countries; and the Corporación Andina de Fomento (CAF), a multilateral financial institution which supports sustainable development in LAC countries [2].
To compensate for a possible shortage of funding caused by the global financial crisis, MIGROF will provide MFIs and microfinance investment vehicles (MIVs) with medium and longer-term sources of finance. OPIC agreed to provide an initial loan of USD 125 million, which will then be loaned to MFIs in LAC countries to help them increase their lending capacity. The IDB, through its Multilateral Investment Fund (MIF), is responsible for structuring MIRGOF and will invest USD 10 million in equity. The MIF and the IIC will define its lending strategy while BlueOrchard Finance, the world’s largest fund manager specializing in microfinance, will manage the fund.
Jean-Pierre Klumpp, CEO of BlueOrchard Finance, said “BlueOrchard maintains solid relationships with over 80 MFIs throughout Latin America and the Caribbean based on mutual trust and a track-record of successful cooperation.” BlueOrchard has outstanding loans with 50 MFIs in 12 Latin American countries for a total amount of USD 340 million, accounting for 45 percent of its current loans [3]. For more information on BlueOrchard, refer to the following interview that MicroCapital recently conducted with their CEO, Jean-Pierre Klumpp: https://www.microcapital.org/meet-the-boss-jean-pierre-klumpp-of-blueorchard-finance/
According to a recent report by the MIF, 636 MFIs in the LAC region are providing financing to 9.5 million microcredit clients, with a total loan portfolio of USD 11 billion. The report estimates that these MFIs are currently only reaching at most 15 percent of the market and that 60 million micro entrepreneurs remain shut out of the market [4]. Before the economic downturn, the microfinance industry saw unprecedented growth rates: the market doubled from 1997 to 2000 and increased tenfold by 2006 [5]. However, “as domestic and external debt financing contracts, regional MFIs could confront a financing shortage of up to USD 750 million this year,” according to a White House press release [6].
In a survey conducted earlier this year by the Consultative Group to Assist the Poor (CGAP), “65 percent of MFI respondents reported that their gross loan portfolios were either flat or had decreased over the last six months. Over half of MFIs reported liquidity constraints, with smaller MFIs being more affected.” Liquidity issues and credit risks, combined with food and fuel price hikes, make it much harder for borrowers to repay on time and are impeding the market from expanding to meet the needs of millions of potential borrowers [7].
MIGROF also aims to ameliorate currency risk, another threat constraining microfinance lending, by providing 35 percent of total financing in local currencies. According to a press release issued by OPIC, “further expansion has been constrained by the need for MFIs to receive loans in local currency in order to match the local currency assets on their balance sheets. Lenders, however, were unable to provide local currency loans because they could not hedge the associated foreign exchange risk. In many countries, hedges to address this exposure are either not available, not affordable, or require the provision of significant collateral” [8]. OPIC has prior experience in this arena, having implemented a USD 20 million project whereby currency risk management firms provided currency-hedging products such as currency swaps to MIVs, which in turn provided loans in local currency to MFIs.
By: Stefanie Rubin, Research Assistant
Bibliography:
[1] MICROCAPITAL STORY: US President Barack Obama Announces $100m Microfinance Growth Fund for Latin America and the Caribbean at Fifth Summit of the Americas: https://www.microcapital.org/microcapital-story-us-president-barack-obama-announces-100m-microfinance-growth-fund-for-latin-america-and-the-caribbean-at-fifth-summit-of-the-americas/
[2] IDB News Release. “New lending facility to provide up to $250 million for microfinance in Latin America, Caribbean,” September 2009: http://www.iadb.org/news/detail.cfm?language=English&artid=5696&id=5696&CFID=10462981&CFTOKEN=46088433
[3] BlueOrchard Press Release: https://www.microcapital.org/meet-the-boss-jean-pierre-klumpp-of-blueorchard-finance/
[4] IDB News Release. “IDB urges microfinance industry to reach out to millions of underserved people in Latin America and the Caribbean,” October 2009: http://www.iadb.org/news/detail.cfm?language=English&artid=5697&id=5697&CFID=181972&CFTOKEN=88579013
[5] GC CapitalIdeas.com. “The Microfinance Market Today,” June 2009: http://www.gccapitalideas.com/2009/06/10/the-microfinance-market-today/
[6] The White House. “New $100 Million Microfinance Growth Fund for the Western Hemisphere,” April 2009: http://www.whitehouse.gov/the_press_office/New-100-Million-Microfinance-Growth-Fund-for-the-Western-Hemisphere/
[7] Consultative Group to Assist the Poor. “The Impact of the Financial Crisis on Microfinance Institutions and Their Clients Results from CGAP’s 2009 Opinion Survey,” 2009: http://www.cgap.org/gm/document-1.9.34453/CGAPBrief_SurveyResults.pdf
[8] OPIC Press Release. “OPIC Support Enables Microfinance Investors to Overcome Currency Risk, Expand Lending,” July 2009: http://www.opic.gov/news/press-releases/2009/pr071409
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