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Howard J. Finkelstein: Microfinance

Find more information on microfinance, its basic structure, and how the entire process works for millions around the world.
Microfinance Advancement Program (MAP)
Microfinance as an Investment
The microfinance sector has experienced tremendous growth over the last decade, in the process raising the living standards of millions of people living in poverty. As of 2008, there were more than 100,000,000 borrowers from microfinance institutions worldwide. This dramatic growth has, by and large, been achieved by microfinance institutions (MFIs) that have operated on a sound financial basis. It is estimated that the world-wide default rate on microloans is less than 2%.

Both for-profit and not-for-profit MFIs have been the beneficiaries of grants and subsidized funding from Western not-for-profits, foundations, governments and government-sponsored entities. However, the microfinance sector has long realized that there would be a ceiling on the amount of funding that would be available from those sources and that in order to reach even a majority of potential microfinance borrowers commercial financing would be necessary. Over the last ten years, a steadily increasing portion of the growth of the microfinance sector has been funded by microfinance investment vehicles (MIVs), which include debt, equity and hybrid funds, securitization vehicles and other pooled investment vehicles, as well as syndicated investments in debt and/or equity of individual MFIs. There are approximately 100 MIVs in the world today, though many are small and some are essentially static.

The growth in MIVs has been funded primarily from sources outside of the US. Most MIVs are based in Europe and have been funded from a wide variety of capital sources in Europe, including significant investments from European pension funds and institutional investors. In contrast, those MIVs which are US-based or which have raised funds from the US have relied primarily on the investments of foundations, not-for-profits, socially responsible investors and family offices, with a minimal number of pension funds, endowments and institutional investors participating. To my knowledge, only two US pension funds and one US endowment have invested relatively significant amounts in the microfinance sector.

The Paradox
Since 2000, again to the best of my knowledge, NO Western commercial investor has taken a loss on a microfinance investment. The CDOs originated from 2004-2007, raising approximately $500 million, have made all scheduled payments and the MFIs whose loans have been securitized in those CDOs seem to be fully prepared to make all required interest and principal payments. MIVs that have invested in equity of MFIs have increased their net asset value, some quite dramatically.

On the other hand, US pension funds, endowments and other institutional investors have invested significant amounts of money in asset classes that have performed, to put it mildly, miserably. These investors have lost significant amounts of money by investing in industries that were rife with exaggerated expectations and fraud. Why have they not taken the path of their European counterparts and invested at least some of their funds in a sector that has demonstrated a sound long-term growth record?

I work on a daily basis with MIVs based in both Europe and the US that are spending an inordinate amount of time trying to raise funds for commercial investment in the microfinance sector. Some get by and raise the minimal amount of funds required for an offering; others flounder and are forced to wait months, even years until they get funded; while others are simply forced to ditch their efforts. They work on ‘leads’, try to market as best they can, but are never as successful as they should be given the financial strength of their proposed investment program. The paradox is that instead of the MIVs chasing capital, the capital should be chasing the MIVs.
I propose that the microfinance sector, which has done so well so often in engineering collaborative efforts, engage in a collaborative effort to address this paradox. The program I propose (MAP), would consist of three parts which can be summarized as follows:
On a systematic basis, MAP will meet with and interview managers of pension funds, endowments and other institutional investors to determine the reasons they have not invested in the microfinance sector and which elements of MIVs they find attractive and which unattractive. The MAP interviews will be conducted by people who have at least a grassroots familiarity with the investment process at these institutions. They will be exploratory and inquiring; they will not be marketing forums.

In addition, MAP will conduct interviews with European institutions to determine what can and what cannot be imported from Europe to the US.

Those conducting the MAP interviews will compile their results into a report which will be utilized for fine-tuning the directions of Parts II and III of the MAP.
MAP will develop a strategy to, simply put, create a “buzz” for investment in the microfinance sector. This will include the placement of speakers at industry events attended by the target audience, placement of articles in industry publications read by the target audience, arranging meetings with MFI founders and executives, including representatives of pension funds, endowments and other institutional investors in microfinance sector events and task forces and other efforts to create a perception that microfinance should be viewed as a mainstream investment opportunity.

This effort has to be undertaken systematically and with a great deal of care. It will include mobilizing all of the resources available in the sector to present research data and prospective projects as transparently as possible.
The knowledge gained from Parts I and II of MAP will be utilized in a collaborative effort to attempt to design MIV investment products that meet the investment needs of pension funds, endowments and other institutional investors. Like Parts I and II, it will require responsiveness, creativity, innovation and outside-the-box thinking.
Those involved in the microfinance sector are creative, innovative, capable, passionate and collaborative. If we do not work together in this effort, we will be doomed to keep following the scatter-shot approach that has existed over the last ten years. The systematic approach outlined here will make us better able to get US dollars to fund loans to the next 100,000,000 borrowers, to assist MFIs in improving the lives of those at the base of the pyramid.

If you are interested in joining me in this effort, please let me know by emailing me at
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