BlueOrchard presentation to SVMN 2009.03.19

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Ann Miles of BlueOrchard Finance, USA presented this material to Silicon Valley Microfinance Network (SVMN) at a Speaker Event on March 19, 2009 at the Omidyar Network office in Redwood City, …

Ann Miles of BlueOrchard Finance, USA presented this material to Silicon Valley Microfinance Network (SVMN) at a Speaker Event on March 19, 2009 at the Omidyar Network office in Redwood City, California.

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  • 1. Financing the Microfinancers How MFIs are Sourcing Capital Ann Miles Mar. 19, 2009
  • 2. Latent Microfinance Demand Total Investment Current supply Potential demand 100% = ~$17B Domestic Investment: ~$13B (vs. Foreign Investment: ~$4B)
    • ___________________________
    • Source: McKinsey’s “Optimizing Capital Supply in Support of Microfinance Industry Growth” presented October 2006. Study drew upon 2004 data.
    • Commercially-oriented capital - has clearly stated financial objectives, but is largely funded by private donors, development agencies, and other such actors in the microfinance industry.
    • Development capital – aims to make capital available to MFIs through sustainable mechanisms to support their development and their growth without necessarily achieving financial return.
  • 3. Significant regulation required Little to no regulation required Level of Financial Integration Equity Capital Markets Debt Capital Markets Deposits Donor or Concessionary Funding
    • Gradual process which is highly dependent on local factors and an MFI’s legal structure
    Private Equity Commercial Loans
  • 4.
    • Commercial Loans- Local Banks
    • Local banks play an important role in financing MFIs.
    • Indian banks have financed MFIs to achieve their priority sector lending targets; generally they secure their loans with a pledge of MFI loan receivables.
    • MFIs are able to access local currency funding.
    • Microfinance networks have helped to promote local bank financing by extending loan guarantees that provide first loss protection for the bank; ACCION and Grameen Foundation USA run successful ‘growth guarantee’ programs for their MFIs.
    • In times of diminishing liquidity, however, local bank facilities can be the first to dry up or to become more expensive (for ex. Bosnia).
  • 5. What are MIVs and how is the MIV market organized today?
      • MIVs provide fixed income and equity investments to MFIs. There are more than 90 MIVS in operation, many created in the last five years. These MIVs are managed by investment managers such as BlueOrchard, BBVA, Calvert Social Investment Foundation, Credit Suisse, Deutsche Bank, Developing World Markets, Microvest and Oikocredit.
      • CGAP, the Consultative Group to Assist the Poorest, classifies MIVs into the following peer groups:
        • Registered Fixed Income Mutual funds: generally subjected to standard compliance regulations (Luxembourg, the Netherlands and the U.S.); open through share subscriptions
        • Commercial Fixed Income Investment funds: generally closed limited partnership funds
        • Structured Finance Vehicles (active and passive): closed special purpose vehicles (ex. CLOs)
        • Blended Value funds: foundations and limited liability companies
        • Holding Companies of MFIs: invest only in MFI partners
        • Private Equity funds: closed limited partnership funds
      • Total assets under management in MIVs increased from $3 billion in 2006 to $5.5 billion in 2007. More than 75% of these assets are invested in microfinance. The remaining 25% are invested in cash, cash equivalents and small and medium enterprise institutions.
    Please see CGAP MIV Benchmarking Report 2008
  • 6. What are MIVs and how is the MIV market organized today?
      • CGAP’s MIV Benchmarking Report 2008 reported on 58 MIVs representing 86% of assets under management as of December 2007.
      • 82% of MIVs are in Western Europe jurisdiction while 12% are in North America.
      • The top 5 MIVs reporting to CGAP accounted for 52% of total MIV assets under management, while two regions- Eastern Europe and Central Asia (ECA) and Latin America and the Carribean (LAC) received 76% of all MIV investments.
      • MIVs were primarily invested in fixed income instruments (77% of MIV portfolio) but equity investments (21% of MIV portfolio) were increasing. The remaining 2% is invested in cash and cash equivalents.
      • Investments are concentrated in large sustainable MFIs. The average top five investment exposures represented 43% of the MIV portfolio.
      • The average net return for fixed income instruments was 6.3% in USD or close to money market rates. The returns for Private Equity funds were 12.5% (gross IRR for 2002/2003 vintage years).
    Please see CGAP MIV Benchmarking Report 2008
  • 7.
    • The Role of Deposits in Financing Microfinance
    • MFI must have appropriate regulatory structure to mobilize savings.
    • Banks, credit unions and rural banks can mobilize savings; NGOs and NBFIs generally cannot.
    • According to the MicroBanking Bulletin, rural banks had the highest deposits to total asset ratio at 68% followed by credit unions, 58%, and banks, 35.6%.
    • In Africa and LAC, the deposit to loan ratio is > 50%, for the large and financially self-sufficient MFIs (number of borrowers > 30,000 and FSS is > 100%). This represents 109 MFIs in the MBB database and almost half of all FSS MFis (231).
    • Liquidity analysis of sight and time deposits is critical.
  • 8.
    • The Development of Debt Capital Markets for Microfinance
    • MFIs have issued bonds in their local markets with partial guarantee support from one of the development banks; there have been private placements, too.
    • Securitization has been done locally in Bangladesh and India.
    • Structured finance transactions (CLOs) have been done on a
    • global basis.
  • 9.
    • Critical Issues in Today’s Environment
    • Availability of capital
    • Commodity and food prices
    • Remittances
    • Foreign exchange exposure
  • 10. BlueOrchard Finance USA, Inc. (212) 944-8748 (main number) www.blueorchard.com