1. THE ROLE AND IMPACT OF
PRIVATE SECTOR CAPITAL IN THE
GLOBAL MICROFINANCE SECTOR
Zina Sanyoura & Elvira Espejo

2. How did we examine the subject?
 Interviews with the main players in the microfinance sector
 More than 70% of the global microfinance asset base covered
 Rationale is to “push the envelope” on the on-going debate
Many questions… some modest suggestions…

3. State of microfinance funding…
 A continued surge in private sector funding
 Still untapped demand of MFIs
 MFIs remain hindered from developing adaptive financial
instruments for their borrowers
Why is there a mismatch?
Is there a role confusion among the players in the sector?
Why did private investors enter the sector in the first place?

4. So much funding, chasing so few MFIs…
Global lending
portfolio lagged Despite economic downturn,
behind aggressive supply of funding growing at
funding growth a decreasing pace
resulting in record
high liquidity
levels.
Risk concentration in
straight hard
currency medium-
Large funding base term funding targeting
chasing a select
universe of mature mature MFIs
well-established
MFIs in LAC / ECA Minimal
funding to
Lack of adequate / down market
conducive players
regulatory
environment

5. Intuitive wisdom tells a tale of a gradual
evolution to the more risky institutions…
Political & Macroeconomic Risk
Environment
Early Stage / Greenfield / Sphere of
Technical Assistance
($/in-kind) & Capacity Building NGO / Non-Profit / Non- Donor Funding / DFI
Regulated MFIs Engagement
as MF
investors gain
comfort with
MF sector… Political & Macroeconomic Risk
Environment
Sphere of
Commercially Sustainable Mature / For-Profit / Commercial /
Operations Regulated MFIs
Private Sector
Investors
Traditional Financial Risk-Return
Relationship Begins to Hold…

6. Questioning the immunity of MF, and the
impediment to private sector capital…
Global economic crisis impeded this
natural evolution GOLDEN
OPPORTUNITY
Is MF is immune / counter-cyclical? for MF investors to
reassess how to
focus on
Mature MFIs continue to source needed
developing the
funding to the detriment of smaller more
products and
fragile institutions
services demanded
by MFIs
Record level liquidity presented the reality
of a mismatch

7. Is it a question of Risk Appetite?
General similarity in risk-return profile of
MIVs
Is MF an Asset
Not enough risk appetite to go down Class in and of
market itself?
Unable to provide capital to early-
stage / greenfield / NGO / or
transforming institutions with short-lived
track record

8. Is it a question of Funding Structure?
MFI Demands Investor Supplies
• Local currency funding • Generally structured in
• Longer tenors hard currency
• Mix of fixed income • Limited ability to extend
and equity exposure Mismatch long term funding
• Capacity building • Mature, established
assistance institutions with track
record
Need for new experimental
vehicles to structure alternative
instruments with capacity
building capabilities

9. Is it a question of Aggressive Fund Raising
coupled with Ambitious Return Expectations?
Most AUM were sourced
A perceived boom in MF
from institutional investors
was a significant driver in
that were promised
aggressive fund raising
ambitious return
efforts
expectations
Limited ability to go
down market in the fear of
compromising overall
portfolio returns

10. Is it a question of Role Confusion?
DFIs intrinsically have a catalytic role to
engage the private sector
Need to define
DFIs were and still are the impetus to bring complementary
the MF sector to the forefront roles…
Slow adaptation to the rapid take-up by
the private sector Is this the time to
admit that the
A converging market approach, yet most sector needs more
MF investors continue to co-invest with DFIs venture capital
type investors?
A risk of role over-lap?

11. Why did the private sector enter in the first
place?
Yet, with a few
MF lucrative
Capital markets exceptions, the
Venture returns…funds
demonstrated strong returns are still not
Philanthropist earmarked from core
appetite for MF commensurate with
Approach investment
exposure the intrinsic risk
portfolios
profiles assumed

12. So what now?
With a few exceptions, the returns are Need to re-assess
still not commensurate with the intrinsic how MF investors
risk profiles assumed engage in the
sector:
Achieving traditional emerging market
return is highly dependent on the expertise  Set new return
of portfolio managers to select “true expectations
winners”  Create innovative
As returns begin and continue to depress, experimental
vehicles
private commercial investors are beginning
 Meet the down
to question whether the risk-adjusted
market MFI demand
returns truly reflect market dynamics