MICROFINANCE PAPER WRAP-UP: Microfinance Investment Vehicles in Sub-Saharan Africa: Constraints and Potentials, by Bertrand Moulin, Published by Centre for European Research in Microfinance (CERMi)

By Bertrand Moulin, published by the Centre for European Research in Microfinance (CERMi), August 2011, 20 pages, available at: http://mpra.ub.uni-muenchen.de/32967/

To explain the drivers of investment decisions in the African microfinance sector, this paper attempt to shed light on the potentials and constraints of interactions between microfinance investment vehicles (MIVs) and the two main African microfinance models—cooperative and commercial—which are widespread respectively in West Africa and East Africa.

The author reviews the following types of MIVs: registered mutual funds, commercial fixed-income investment funds, structured vehicles, blended-value funds, holding companies of microfinance banks and private equity funds. “Registered mutual funds,” such as the Dexia Micro-Credit Fund, invest primarily in Latin America and Eastern Europe. “Commercial fixed-income investment funds,” such as Incofin’s Impulse Microfinance Investment Fund, grant relatively large loans, which reduces their overall costs and increases returns. Such funds tend to invest in areas where microfinance is most developed such as Latin America and the Caribbean, Eastern Europe and Central Asia. “Structured vehicles” use both direct and indirect securitizations. Direct securitization involves the securitization of a portfolio of micro-credits by an MFI such as in the case of “BRAC Micro Credit Securitization Series I Trust” in Bangladesh. Indirect securitization consists of the securitization of debts of several MFIs such as in the case of “BlueOrchard Microfinance Securities I.” The majority of these MIVs consist of collateralized debt obligations.

Among the types of MIVs more active in Africa, the author cites “blended-value funds,” which require lower financial returns and usually pursue social objectives. Private individuals, foundations and NGOs provide 85 percent of the funding for these vehicles, which often tend to invest in smaller MFIs located in under-served areas like Sub-Saharan Africa. Oikocredit, the Dutch cooperative, is an example of this category. However, given the reduced size of the loans granted, these structures generally incur higher operating costs.

“Microfinance Bank Holding Companies,” such as Germany’s ProCredit Holding, receive much of their funding from development finance institutions (DFIs). These MIVs represent the most important investment channel in the microfinance industry in Sub-Saharan Africa, with 31 percent of Africa’s microfinance funding come from them. Finally, “private equity funds” have recently gained more prominence among MIVs. These funds gather private equity and venture capital investments and offer equity investment and convertible debt to growing MFIs.

Assessing whether both MFIs and MIVs can gain from working together, the author argues that given the significant funding needs of MFIs, especially in terms of equity and capacity building, the African microfinance sector does indeed require external private resources. Mr Moulin concludes that MIVs could suitably finance the “highly risky” rural microenterprise segment, which requires more and longer-term funding. He cautions that DFIs should only “play the role of catalysts by initiating investments and taking risks that private investors would not dare taking.”

The author cites evidence that the African microfinance industry seems to offer an unbalanced risk-return profile, which would explain the relatively low investment level of MIVs in that region. Nevertheless, due to recent repayment crises caused by excessive funding and also the “recent infatuation for socially responsible investments,” MIVs are expected to diversify their portfolios in geographical terms for the likely benefit of African MFIs. The author argues that attracting private investors will still require guarantees such as through public-private partnerships, where the public sector acts as a catalyst either by initiating investments in areas with little microfinance operation or through extending technical assistance, which the author states is needed by most African MFIs.

Finally, the author highlights the debate over whether microfinance can be considered an “asset class” as some authors claim that microfinance exhibits low correlation with other asset classes while providing attractive returns. Other research finds that “adding microfinance funds to a portfolio of risky international assets does not seem beneficial, especially for the African [MFIs].”

By Ashim Kar, Research Associate

Sources and Additional Resources:

Moulin, Bertrand (2011), “Microfinance Investment Vehicles in Sub-Saharan Africa: Constraints and Potentials”, Published by the Centre for European Research in Microfinance (CERMi), available at http://mpra.ub.uni-muenchen.de/32967/

MicroCapital.org story, October 17, 2011, “MICROCAPITAL BRIEF: responsAbility Loans Local-Currency Equivalent of $4m to Microfinance Institutions Pearl Microfinance Limited of Uganda, Lift Above Poverty Organiation of Nigeria, Sinapi Aba Trust of Ghana”, https://www.microcapital.org/microcapital-brief-responsability-loans-local-currency-equivalent-of-4m-to-microfinance-institutions-pearl-microfinance-limited-of-uganda-lift-above-poverty-organisation-of-nigeria-sinapi-aba-trus/

MicroCapital.org story, September 2, 2011, “MICROFINANCE BRIEF: Incofin Lends $9m to Microfinance Institutions (MFIs) PRIDE Tanzania; LAPO of Nigeria; Sinapi Aba Trust, FASL of Ghana”, https://www.microcapital.org/microcapital-brief-incofin-lends-9m-to-microfinance-institutions-mfis-pride-tanzania-lapo-of-nigeria-sinapi-aba-trust-fasl-of-ghana/

MicroCapital Universe Profile, Incofin Impulse Microfinance Investment Fund, https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Incofin+Impulse+Microfinance+Investment+Fund

Browse the MicroCapital Universe and add your entry to the wiki at https://www.microcapital.org/microfinanceuniverse/

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