Role Reversal: Are Public Development Institutions Crowding Out Private Investment in Microfinance?

This paper studies the funding pattern in microfinance and discusses direct retail lending to MFIs. It finds that:

• The volume of international private lending has exploded: in 2005 alone, outstanding loans to MFIs doubled to nearly US$1 billion;
• International Finance Institutions (IFIs) play an early catalytic role in attracting private funding to microfinance;
• Top MFIs receive disproportionate amount of IFI funding.

The paper recommends:

• Making IFI funding transparent;
• Maximizing commercial participation in innovative capital markets transactions;
• Seeding the next generation of MFIs;
• Helping develop mechanisms to cover foreign exchange risk;
• Promoting further private sector channels for microfinance and finance industry infrastructure.

The paper concludes that microfinance is a dynamic industry where the pace of change seems to be accelerating daily. In this environment, IFIs urgently need to refocus on complementing and attracting the private sector.