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Thursday 4 December 2008

Funding a path out of poverty

Elliot Wilson explores how investors can back ventures that lend to the world’s poorest entrepreneurs

Ian Callaghan runs Morgan Stanley’s 12-strong microfinance banking team in London. The US investment bank has launched two ‘collateralised loan obligation’ deals over the past two years in collaboration with BlueOrchard, a Swiss fund management firm specialising in microfinance products. The second of these deals, called BOLD 2, was launched in May 2007, attracting £55 million from institutional investors that was used to extend loans to MFIs in countries including Azerbaijan, Bosnia, Mongolia and Cambodia.

Callaghan says what appealed to global investors was the quality of the MFIs out there and the surprisingly low levels of ‘non-performing’ loans in them. MFIs are attractive at times of economic stress because their borrowers are unlikely to default or skip payments. The Microfinance Information eXchange, or MIX, a US-based information provider, reckons that the average MFI has a loan default rate of no more than 2 per cent. One former European investment banker now working in the industry notes that MFIs across the board have ‘far better performing portfolios than commercial banks’.

According to Martin Holtmann of IFC, very few MFIs run into financial trouble. ‘If you look at the long-term performance of MFIs, you will see that the leading institutions have sailed on very smoothly even in times of economic crisis. They are generally very well run and they provide high returns to investors, both in good times and bad.’

The potential size of the microfinance industry was highlighted in a recent report by McKinsey which estimated that the £8.5 billion in outstanding microfinance loans at the end of 2006 represented just 10 per cent of the potential market, and that as many as half of the world’s three billion poor might be eligible for microfinance loans.

Another reason microfinance is gaining attention in the broader investment community is that many MFIs are becoming commercially viable in their own right. Compartamos, a publicly listed Mexican lender, has opened many investors’ eyes to the potential profits in this sector. MFIs charge unusually high interest rates compared to commercial banks — although not compared to the loan sharks that are the only other source of finance available to their client group.

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