Charting the Course: Best Practices and Tools for Voluntary Debt Restructuring in Microfinance
This paper summarizes findings by the International Association of Microfinance Investors ( IAMFI) – Microfinance Lenders Working Group (IMFLWG), which IAMFI spearheaded with financial sponsorship from Morgan Stanley.
IAMFI convened the IMFLWG to develop processes that facilitate orderly workouts of troubled microfinance institution (MFI) debt. The paper aims to lessen future risks, allow MFIs to pursue sustainable growth and enhance the microfinance industry's position as an attractive investment for investors seeking double bottom line returns.
The paper presents research results and offers four industry tools. Recommendations to creditors include:
- Improve loan documentation;
- Use knowledgeable local legal counsel to ensure loan agreement enforceability;
- Encourage MFIs to communicate early and often on problem loan issues;
- Use covenant breaches and waivers to prompt MFIs to take corrective actions;
- Respond to material breaches quickly and proactively;
- Create a voluntary creditor group to govern dealings with the MFI;
- Develop in-house workout expertise or retain an experienced loan restructuring consultant;
- Preserve the MFI as a going concern, provided a voluntary restructuring is viable and sustainable;
- Promote training to improve MFIs' financial skill sets needed for workouts, restructurings and turnarounds.