Wednesday, June 24, 2009

Raising Funds for microfinance in the Face of the Global Financial Crisis

The Center for Financial Inclusion's June newsletter gave some information about research being done on this subject:

Raising Funds for MFIs in the Face of the Global Financial Crisis

How has the global financial crisis affected the way MFIs are capitalizing their balance sheets? The Council for Microfinance Equity Funds (CMEF), is taking a closer look at this question through a study led by Willem Enklaar.

In January, CMEF launched a capitalization study with an online questionnaire asking MFIs about their funding strategies in the face of the credit crunch, foreign exchange movements and other results of the current economic crisis.

To date over 65 MFIs have completed the questionnaire. Merging these responses with interviews from experts in the investment community has produced some interesting initial results.
  • MFIs still need equity but the pot of available funds is getting smaller. The need for fresh equity is not significantly decreasing, as MFIs continue to seek growth and to strenghten their balance sheets. At the same time, the availability of capital has shrunk, as a result of the liquidity crunch.
  • With less investment money to go around, investors are likely to be less willing to pay high prices of MFI equity: valuations are likely to decrease.
  • An increasing number of MFIs are planning to fund part of their balance sheets with subordinated debt because it less expensive and quicker than raising fresh equity.
  • Things may get worse before they get better. Although increased risk of delinquency and higher interest rates are affecting MFIs, they are not presently a primary cause for recapitalization. However, Mr. Enklaar predicts that this will change in the second half of the year because delinquency rates are expected to further deteriorate and interest rate are not expected to come down.
The sustained need for fresh equity highlights the relative resilience of the microfinance sector to the economic downturn. At the same time the study underlines that, as the crisis lasts and profitability ratios come increasingly under pressure, MFIs will face difficulties. Furthermore, with scarce capital and increased risk investors are likely to put their money in first-tier MFIs, leaving small and second-tier MFIs out in the cold.

The study will be available on the CMEF’s website in late summer.

CMEF is the first membership organization to bring together more than 20 of the leading private funds that make equity investments in microfinance. The Center for Financial Inclusion acts as the Secretariat for CMEF and conducts much of its investment related work under the aegis of the Council.