Investors are increasingly able to put their money to work creating social as well as financial returns, thanks in part to the expanding role of investment banks in globalizing the funding of microfinance institutions (MFIs). On March 1 Swiss microfinance specialists BlueOrchard announced the launch of a collateralized loan obligation led by Morgan Stanley called BlueOrchard Loans for Development (Bold) that it describes as a landmark transaction: the securitization of loans to a diverse portfolio of microfinance institutions in 13 countries.
The cash raised in the issue will ultimately be loaned in amounts as small as $50 to micro entrepreneurs in such countries as Azerbaijan, where access to financial services for the poor is severely limited. Investment banks are able to offer secure credit and extensive advertising but their real worth is in providing the mechanisms that convert investors’ euros and dollars into the local currencies that MFIs need to deliver. Jack Lowe, CEO of BlueOrchard, says: “We have already done a securitization in the US but this transaction is groundbreaking in that we have structured it to access mainstream capital markets investors and have included local currency loans.”
| Annibale, Citigroup: hopes to reduce costs |
Bob Annibale, head of microfinance at Citigroup, says that the biggest challenge for global banks working with local MFIs is in helping them to reduce their substantial operating costs. “Delivering huge volumes of $50 loans is an expensive exercise for microfinance institutions, but that’s where innovation has to come in. We’re hoping to use our national networks to reduce the cost of each transaction.” As demand for microfinance rockets while cashflows from non-profit sources remain relatively stable, opportunities for investment banks to work with MFIs will increase rapidly. “It’s not so much a question of demand,” says Lowe, “but of keeping up the quality and the geo-diversification of our loans. We believe the process will become more refined and efficient, and we’ll be bolder about the deal structure and volumes or amounts lent in future transactions. The CLO structure in microfinance is here to stay.”
There’s some debate as to the exact size of the global microfinance market, but it is clear that the rate at which demand for microcredit is increasing means that the Bold bond is likely to be the first of many if it succeeds. Annibale cites the example of Bangladesh, where it is likely that more people borrow from MFIs than use the conventional banking system, as evidence of the likely scale of that demand.
Nobody is claiming that the primary concern behind deals such as Bold is anything other than profitability; in fact the consensus among analysts and bankers is that the MFIs themselves are best able to keep pace with the explosion of demand for bigger loans by moving from being non-profit bodies to being regulated, money-making financial institutions. “Some of the most savvy MFIs are boutiques of innovation,” says Annibale, “and just because they are profitable it does not mean they don’t have a social mission.”
