Financing Microfinance: Exploring the Funding Side of Microfinance Institutions

Topic :

As the microfinance industry evolves, an increasing number of specialised formal microfinance institutions (MFIs) are emerging typically through the transformation of non-profit foundations. These newly regulated institutions face different opportunities and constraints to their sources of funds when switching from a funding environment dominated by donors, to a market-based competitive environment that offers a variety of funding sources.

The case studies from Mexico, Bolivia and Peru are useful to explain the various ways in which these formal sector MFIs have developed and deal with their funding issues, for example a tendency towards using financing from other financial institutions is most apparent, especially in the Bolivian and Peruvian cases. The key issues that are discussed include:

  • access to capital markets
  • greater reliance on foreign currency liabilities
  • the search for additional equity

The paper suggests that donors accept the changing landscape of the microfinance industry and their changing role within it. Donor agencies might serve the industry better by shifting the focus away from direct funding and onto removing barriers that currently prevent sustainable microfinance institutions from accessing funding from the public, from financial institutions, and from commercial and social investors.

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