Capital Markets: Use in Microfinance

This paper discusses options for efficient use of capital markets to finance MFIs.

The paper states that MFIs must review their approach to financing if they are to sustain growth of the microfinance industry. MFIs currently depend to a significant extent on loans from traditional lenders. The paper recommends a shift to capital markets, which will enable them to reach out to a larger investor class and improve their access to debt capital. It discusses three ways in which this can be achieved. They are:

• Securitization, or conversion of existing assets or future cash flows into marketable securities;
• Collateral Debt Obligations (CDOs), a structured finance instrument where the pool of assets to be securitized is smaller than that of a traditional securitization product;
• Foreign market debt, provided foreign exchange risk is managed effectively.

The paper identifies advantages and risks associated with each option. It introduces the concept of a global local currency fund to manage foreign exchange risks and tap global capital markets.