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Tapping the Financial Markets for Microfinance

This Grameen Foundation USA paper explores the opportunities and challenges microfinance institutions face in tapping into capital markets to finance their growth. The microfinance industry’s outreach and impact on world poverty continues to develop, and now more than 60 million poor families are benefiting from its services internationally, around US$4 billion in total. However, relative to the demand for these services, estimated to be more than US$300 billion, the potential of microfinance remains unattained. This capital shortfall is far beyond the scope of current donor funding, and can only realistically be met by major capital markets.

This paper explores a host of ways that capital investors can effectively and profitably work in the field of microenterprise, and demonstrates where there has already been initial interest by the financial markets in microfinance. Investment in this area is likely to grow because:

Professionally managed profitable microfinance institutions (MFIs) are emerging from the sector.
Evidence shows that MFIs serving the poorest are most cost-efficient and have the highest portfolio quality.
Evidence suggests that the poverty level of customers does not impact the profitability of the MFIs.

The paper concludes that in the long term, MFIs should be financing themselves exclusively from commercial sources, through the financial markets. Organisations such as the Grameen Foundation USA, and the international donor community need to play a more proactive role in developing financial products that may help MFIs to access commercial markets and improve outreach. Only through these types of initiative, can the gap between demand for, and supply of, financial services to the poor be overcome.