Standard Chartered and the International Finance Corporation have joined forces to launch the first-ever issuance of credit-linked notes backed by loans to microfinance institutions (MFIs) in sub-Saharan Africa and South Asia.
Peter Sands, Standard Chartered: unlocking funding for microfinance
As the private sector arm of the World Bank, the IFC is investing $45 million in the notes – a basic credit derivative with an embedded default swap, allowing the issuer to transfer credit risk to investors. The notes will be issued by Microfinance Institutional Loans for Asia and Africa, or MILAA, a special-purpose vehicle set up by Standard Chartered to facilitate microfinance lending.
Vibhuti Sharma, global head of development organizations at the London-headquartered lender, says it only offers microfinance loans in markets where it is either strategically strong – notably in Africa and Asia, two markets that provide most of its earnings – or where it can offer loans in the local currency. "These are the poorest of the poor in these markets, and we are working to ensure they are not exposed to forex risk or asset liability risk," says Sharma.
He admits that these turbulent global times aren’t the easiest in which to offer investors new credit structures backed by loans in high-risk markets. "The markets are challenging at this time, but we are confident that this transaction will be successful. It’s particularly important to be executing a transaction like this at a time when so many people’s attention has shifted away from financial inclusion and the needs of the poor towards the fate of western financial markets," he says.
For legal reasons, Standard Chartered is restricted in revealing either the structure or its total capital commitment to the deal, which should be completed this month. Group chief executive Peter Sands hopes the transaction will "unlock more funding for microfinance", while Lars Thunell, chief executive at the IFC, says his institution wants to build an area of business for investors "looking for more microfinance opportunities in emerging markets".
Microfinance is steadily becoming an accepted asset class in its own right, with insurance firms, wealth managers and pension funds increasingly seeking exposure to the sector in their portfolios. Morgan Stanley has launched two collateralized loan obligation deals over the past two years with Swiss fund management firm BlueOrchard, which specializes in microfinance-related products. Citi and Deutsche Bank have also become big investors in the sector, while the IFC is among the top three global investors in MFIs, with $790 million committed to 90 institutions in 57 countries.
A recent report by McKinsey estimated that the $8.5 billion in microfinance loans outstanding at the end of 2006 represented just 10% of the potential market. Defaults on microfinance loans are surprisingly low (less than 2% worldwide, according to US information provider The Microfinance Information eXchange) particularly in view of the high rates of interest charged (Compartamos of Mexico, one of the world’s few listed MFIs, charges 80% interest over the full term of the loan), providing added impetus to investors.
Standard Chartered’s move is in line with its own presence in the sector. In 2006, the UK lender established a $500 million facility focused on investment in the MFI industry, $190 million of which is fully invested. Sharma says the bank aims to grow the number of MFIs it works with to 55 to 60 by end-2008, from 45 at present, and is committed to investing the full $500 million before a self-imposed deadline of 2011.