Who Will Buy Our Paper: Microfinance Cracking the Capital Markets

Topic :

This paper begins by stating that microfinance needs capital to achieve its goal of serving the millions of people who lack access to financial services. It sets out the following questions:

  • As microfinance matures, will investments in microfinance gain mainstream acceptance in the financial markets?
  • If so, who will buy these investments?
  • Does it make sense to think that microfinance could become a new asset class on Wall Street?

On February 5 and 6, 2006, ACCION International, Corporación Andina de Fomento (CAF) and Deutsche Bank sponsored a conference in New York together with partner Developing World Markets that brought together fund managers, investment intermediaries and microfinance practitioners to consider these questions. The objectives of this conference were to inform the capital markets of the type of offerings microfinance provides and to identify the challenges that remain. This InSight discusses the main themes of the conference. It describes successful cases of debt and equity financing in microfinance, at both the local and international levels. This report also discusses constraints and opportunities for the microfinance industry as it continues to move towards the capital markets.

The paper concludes by suggesting that not so long ago, the microfinance community was asking, “Will investors buy microfinance commercial paper?” It states that instead, it is now clear that microfinance institutions are successfully accessing the capital markets and the discussion has moved to “Who will buy our commercial paper and how?” Experiences presented at the conference suggest that the main sphere of activity in microfinance occurs in local markets. Investments in local markets may need initial credit enhancements to make local investors familiar with microfinance, but after the microfinance institution establishes a track record, the need for the credit enhancement falls away. International investments have proved to be more difficult, with country-specific regulatory policies and potential exposure to foreign exchange rate risk. However, many innovative examples, particularly in the realm of international debt financing, have contributed to the evolution of the industry. The microfinance industry still has many constraints to overcome before it is to take its place as a true asset class. However, socially responsible investors will smooth the way to mainstream investment, absorbing many of the costs of building the industry.

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