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Microfinance: the Challenge of Accessing Global Capital Markets

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  1. Executive summary
  2. Introduction
  3. Accessing the global capital markets
    1. Financing environment
    2. Bond market
    3. Securitization
    4. Equity and quasi equity
  4. Overcoming the limitations of the current financing model
    1. Addressing investor's main concerns
    2. Misunderstood and/or inadequate risk return profile
    3. Lack of expertise and/or experience
    4. Operational issues
    5. Rationale behind social returns
    6. The attractiveness of the risk return profile
    7. Attracting equity investors
    8. Social return: A new dimension to investment
  5. Conclusion
  6. References

The main theme of this project is the facilitation and development of microfinance, which is the ?provision of loans, savings, insurance, payments, and other basic financial services to low-income populations? .
The project is dedicated to identifying and evaluating existing options for microfinance institutions (MFIs) who wish to access the funds necessary to take advantage of the huge potential market for microfinance. This topic is particularly important as the current lack of funds remains the major growth constraint for the microfinance industry.
Global capital markets would enable MFIs to raise capital for lower rates and longer terms than local financing. Ways for MFIs to access global capital markets are therefore explored in details. The following three sources of commercial financing are then outlined and evaluated in the context of MFIs: bonds, securitization and (quasi-)equity.
However, although microfinance can be profitable, investors remain reluctant to invest in MFIs. We identify the main concerns preventing substantial investment in this area as: concerns over the inadequate risk-return profile, a lack of expertise or experience in the area, operational problems such as pricing, liquidity and legal issues and the perception of microfinance primarily as a form of charity. We then propose ways to deal with these concerns and promote investment in microfinance.
We demonstrate not only how microfinance can offer a relatively low level of systematic risk through its low volatility and weak correlation with political and economic events, but also how it offers a good opportunity for diversification. After showing certain comparability between investments in venture capital and microfinance, we suggest targeting venture capital investors as a priority in gaining access to equity capital.
Having explored and concentrated on the financial aspects of microfinance, we then remind the reader of huge benefits it represents in terms of poverty reduction in under-developed countries.
We conclude by mentioning some further challenges faced by microfinance, such as risk hedging, especially in the context of exchange rate risk, and achieving the three factors that determine a country's ability to manage microfinance efficiently: political stability, economic security and cultural readiness.

[...] The risk-return profile in venture capital is probably different to that of microfinance equity. However, while a venture capital can expect only two investments out of ten to be significantly successful, a microfinance investor could reasonably expect ten positive returns. And the average total return of venture capital is therefore very comparable, as illustrated below. Fig Venture Capital vs. Microfinance Return Profile Investors may then argue that exiting an investment in microfinance is difficult. But once more, there is no reason to think it would be more difficult than in venture capital operations. [...]

[...] Although it should not be one of the main arguments for a commercial investor to enter the microfinance field, we should bear in mind the huge benefits poor people draw from it. By providing financial facilities to low-income people around the world, microfinance acts as a very effective tool to reduce poverty. Investors acknowledging this fact could ?push the frontiers of international finance?[19] and, at the same time, provide thousands of people with opportunities for better lives in terms of business development, education, health, housing, nutrition and so on. [...]

[...] As such, they should play an important role in helping the largest MFIs to access sufficient capital to promote development in the poorest regions of the world Bond Market Global capital markets allow MFIs operating in poorly developed financial systems to access long-term debt instruments used by typical corporations, bonds being a classic example. As liquidity could be an important part of investor's required risk premium[10], such a bond issue should be supported by major banks worldwide. Credit rating from an international agency such as S&P or Moody's could also enhance the bond's liquidity. [...]

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