Funding Landscape: Glossary
Blended Finance – A funding mechanism which uses public or philanthropic funding to mobilize private capital for development or social programs. The OECD defines blended finance as "the strategic use of public or private funds, including concessional tools, to mobilize additional capital flows (public and/or private) to emerging and frontier markets."
Collateralized Loan Obligation (CLO) – A structured credit product that pools commercial loans and divides the credit risk into tranches according to relative risk and return, in order to sell ‘packages’ of cash flows to investors that match their risk appetite. A CLO is a type of Collateralized Debt Obligation (CDO), and the terms are often used interchangeably.
Community Investment – Financial assistance given to economically disadvantaged and financially excluded communities, with an emphasis on social and environmental returns.
Corporate Social Responsibility (CSR) – The obligation of a company, beyond that required by law, to be ethically accountable to all of its stakeholders in its management, operations and products. In its weaker form it involves reducing any negative impact which its activities may have. At the other extreme, it requires companies to actively engage with stakeholders to have a positive impact on society. It has strategic implications for business and policymakers, and touches upon a variety of areas including human rights, gender equality, the supply chain, environment and local and sustainable development.
Credit Risk Rating – The rating of a debt issuing institution (a country, organization or individual) which quantifies the statistical probability that it will be able to meet its debt servicing obligations. Credit risk ratings take into account the likelihood of defaulting over a specified time period (default probability); the size of the obligation in the event of a default (credit exposure) and the fraction of the exposure that can be recovered (recovery rate).
Development Financial Institutions (DFIs) – Also referred to as International Financial Institutions (IFIs), DFIs are the private sector arms of public bilateral and multilateral international finance institutions promoting private sector development to improve economic and social conditions. DFIs account for a large portion of funding for financial inclusion, with a strong focus on providing financing and technical assistance for financial services suppliers. DFIs also contribute to broader market development by supporting new business models, by strengthening the market infrastructure and by leveraging their technical credibility to foster policy reforms conducive to inclusive finance.
Development Impact Bonds - A mechanism that brings together governments, development agencies, civil society and the private sector to finance the achievement of measurable development outcomes. All parties involved agree on a set of outcomes and a way to measure them. Investors fund a service provider (e.g. an association) to deliver on specific outcomes and if they are achieved, an “outcome funder” (usually a government entity or development agency) repays the investor. The mechanism aims to increase the effectiveness and scale of development programs by introducing more results-based programming and attracting private investment.
Global Risk Assessment – A rating that provides a broader assessment of an institute’s operations and prospects than a credit risk rating, which focuses exclusively on creditworthiness. A global risk assessment can take into account management capacity as well as overall strengths and weaknesses. It is the first product created by the specialized microfinance rating field and will typically provide a broad range of diagnostic information on social mission, products, risk management and growth capacity.
Impact Investing – A subset of Socially Responsible Investing, Impact Investing is an investment strategy that aims to generate positive social or environmental impact, alongside a financial return. A broad range of financial actors operates in the impact investing market including Socially Responsible Investing Vehicles (SRIs) and Microfinance Investment Vehicles (MIVs).
The Luxembourg Fund Labeling Agency (LuxFLAG) – Is an independent, non-for-profit, microfinance fund labeling agency, whose aim is to promote the raising of capital for microfinance by awarding a recognizable label to eligible MIVs. A label is obtained by compliance of certain criteria including: have a microfinance portfolio corresponding to at least 50% of the MIV’s total assets; have at least 25% of its microfinance portfolio invested in microfinance institutions rated by a microfinance rating agency; and have a commercial objective. Its objective is to reassure investors that the MIV actually invests, directly or indirectly, in the microfinance sector.
Microfinance Investment Vehicle (MIV) – Specialized financial intermediaries that receive and channel microfinance investments into the industry as their core objective. They can be self-managed or managed by an investment management firm or by trustees. MIVs can be divided into the following groups: regulated mutual funds, private equity funds, holding companies, commercial investment companies, social investment companies and structured finance vehicles.
Microfinance Portfolio of an MIV – Volume of funds that an MIV has directly or indirectly invested in microfinance:
Direct Microfinance Portfolio: Direct investments into MFIs or loans to non-specialized financial intermediaries that are specifically used to fund microloans to end users
Indirect Microfinance Portfolio: Investments in other MIVs or loans to non-specialized financial intermediaries specifically used to fund MFIs
Mini Assessment – Rating assessment of a young microfinance institution that is too young and/or too small for full-scale credit risk ratings or global risk assessments.
Mutual Fund – An open-ended fund managed by an investment company, which raises money through selling shares of the fund to the public. The money is invested in a carefully selected combination of stocks, bonds and other assets (known as the portfolio) which corresponds with a clear set of investment objectives. In turn, shareholders receive an equity position in the fund and an indirect stake in each of the fund’s underlying securities.
Social Rating – A rating of the social performance of a microfinance institution, which investors can use to compare institutions so that they can direct their funds to help achieve specific social, ethical and/or financial goals. Generally speaking, the three main areas which are assessed are: adherence to social mission, depth of outreach to low income or unreached clients, and the suitability of products to client needs.
Socially Responsible Investment (SRI) – An investment strategy that considers the ethical, social, governance and/or environmental return of an investment in the context of financial analysis. SRI encompasses three main strategies: portfolio screening, shareholder advocacy/engagement, and community investing. Investments in microfinance could be considered a socially responsible investment.