Lecture 6: Financing microfinance

Question 1

Sources of funding

Answer 1

Donors such as * Foundations,
* Bilateral and multilateral agencies (USAID, WHO, World Bank etc.), and
* Development finance institutions

• Private sector institutional investors, * Commercial banks (both local and international), * Private equity funds, and * Individuals.

Question 2

Objectives of Funding

Answer 2

Debt financing is typically extended to fund portfolio growth or to refinance maturing debt.

• Foreign currency debt: borrowing in foreign currency * Local currency debt: borrowing in the same currency to serve clients.

Equity is often used as a * Foundation to support regulatory requirements, and * Financial cushion that provides greater comfort for lenders to provide debt.

Question 3

Funding Tools

Answer 3

• Equity * Grants * Debt * Senior Term Loans (a loan with a priority repayment status in case of bankruptcy)
• Syndicated Loans (a loan extended by a loan syndicate to a single borrower) * Subordinated Debt (loan that’s paid after all other corporate debts and loans are repaid)
• Bonds * Local Currency Funding * Deposits * Structured Finance * Guarantees * Securitization

Question 4

Types of debt

Answer 4

• Debt is often defined by its level of seniority. * Public depositors are at the top: they bear the least risk and consequently generally earn the lowest return.
• Subordinated lenders are at the bottom: who bear the most risk and typically therefore earn the highest return.
• Debt can be secured or unsecured.
• Secured debt is collateralized by the borrower pledging an asset.
• Conversely, unsecured debt is backed only by the creditworthiness and willingness of the borrower to pay and is not supported by collateral.

Question 5

Bonds

Answer 5

Public bond issuances are available through the capital markets and thus evaluated by the financial markets in terms of yield (return) versus risk.

• Public bonds can be issued on local capital markets or international capital markets. * A local bond issuance will provide funding in the local currency of the country it is issued in.

Question 6

Local Currency Funding

Answer 6

Local currency funding allows an institution to borrow in the same currency it lends. * Matching the currency of assets and liabilities reduces exposure to foreign exchange risk.

• This is a critical issue in financial services for the poor.
• Because the vast majority of funders, except for depositors, are based in developed countries and access funds in U.S. dollars and euros, but providers located in developing countries require local currency.

Question 7

Structured Finance

Answer 7

• Structured finance facilitates access to funding for providers that would not otherwise be creditworthy on their own.
• For example, collateralized debt instruments (CDOs), collateralized bond instrument (CBOs), syndicated loans etc. * Facilitates investment from funders who would not otherwise be willing to take exposure to an institution without added credit protection.

Question 8

Securitization

Answer 8

Securitization is a form of financing that involves the pooling and transfer of financial assets to a special purpose vehicle (SPV).

The most common assets include mortgages, credit card debt, auto and consumer loans, corporate debt, and future revenues

This type of transaction allows financing to be based primarily on the risks of the asset pool rather than solely on the risk of the institution that originated the assets.