FMO and KfW respond to Microrate paper on 'crowding out in microfinance'
In a recent paper, MicroRate* concludes that government-owned development finance institutions are limiting their microfinance lending to the strongest microfinance institutions (MFIs). This leaves the increasing number of private lenders to seek out smaller and riskier investments. This role-reversal, MicroRate argues, is a sure sign that development institutions are "crowding" private lenders out of the best MFIs. MicroRate dares IFIs to stick to their knitting, by going where the private sector does not yet dare to tread. To move out of trophy-lending.
FMO and KfW, the Dutch and German development banks, would like to shed more light on the MFI lending market and the role and mandate of IFIs in it. To this end, they have jointly published a short paper, entitled 'Reversing the Coin, What IFI's do to change the face of microfinance'. It makes a strong case for the role of IFIs in the development of microfinance.
In short:
1. The community of microfinance investors is comprised of public agencies, foundations, microfinance investment vehicles, private investors and commercial banks. IFIs account for just 8% of this funding.
2. Only one-tenth of the microfinance market is being served today (CGAP estimates demand at USD 300 billion, and supply at USD 30 billion). No matter how many new private investors show interest in funding this market, deposit mobilization and development of local capital markets are essential steps to fuel this untapped demand.
3. Private investors are increasingly interested in the commercial opportunities that microfinance offers, but still pay relatively little attention to financial sector growth and the integration of MFIs into the financial sector.
4. IFIs enable the development of local capital markets and deposit mobilization in the following ways:
o IFIs support MFIs on their way to obtaining a banking/deposit taking license and to implement necessary internal procedures for sound deposit mobilization.
o IFIs facilitate linkages between MFIs and local banks and local capital markets (creating inclusive financial sectors).
o IFIs have introduced innovative refinancing instruments, which often provide different risk classes for investors, thereby leveraging (crowding in) large amounts of private capital.
o IFIs have a solid history of greenfielding MFIs or growing young and immature MFIs.
o IFIs have the mandate to create an enabling environment for MFIs.
Conclusion: IFIs have played and will continue to play a prominent role in microfinance development. As market enablers and facilitators, IFIs are not limited to funding only. Alongside the growing number of private investors, IFIs offer much needed technical assistance, innovative capital market transactions, local currency financing and greenfielding. IFIs crowd in other investors, and pave the way for sustainable development of inclusive financial sectors.
See: Reversing the Coin, what IFIs do to change the face of microfinance
Last update: 13 June 2007