Raising MFI Equity Through Microfinance Investment Funds 41 Promoters of microfinance investment funds should target the investment port- folios of individuals. These portfolios are potentially much larger than their alloca- tions to investments producing a clear social return but only a modest financial return. Microfinance development funds will always attract individual investors because these investors can feel good about these investments. They are likely to invest larger amounts if they can make a slightly higher return. Will these individuals find suitable investment funds? Including those investing exclusively in debt instruments, at the time of the surveys, only five commercial microfinance investment funds attract a large number of private individuals. Three are in the Netherlands, mainly geared towards Dutch investors. The other two are in Luxembourg, targeting international investors. All five are growing rapidly. At least four other commercial microfinance investment funds have been set up since then, thereby contributing to widening the range of commercial investment vehi- cles in microfinance available to individual as well as institutional investors. Commercial microfinance investment funds will almost certainly continue to be essentially debt driven with potentially a small portion of their assets in equity investments, which corresponds to the risk profile of the private investors targeted. They are likely to be an important source of debt financing in hard currencies for the most mature MFIs. This will encourage DFIs and other development oriented investors to focus on less mature MFIs and on local currency funding. As the eq- uity portion of these funds will remain small and certainly well diversified, they are likely to co-invest in the equity of MFIs either with quasi-commercial microfi- nance investment funds or directly with DFIs or NGOs, without taking an active role in the governance of these MFIs. This activity will constitute a new form of public-private partnership in the field of equity investment in MFIs, between DFIs (and potentially NGOs) on the one hand and commercial microfinance investment funds on the other. The former will provide expertise in microfinance and the checks and balances required to maintain the development mission of these MFIs. The latter will hopefully provide funding in much needed far larger amounts by giving MFIs access to the wider capital market. 42 Patrick Goodman Annex A Microfinance Investment Fund Legal Name Country of Incorporation Legal status Sponsor Total Fund Assets Microfinance Portfolio Fund Manager Shareholders Financial products actually offered (in percentage of microfinance portfolio) USD Million EUR Million As of Date USD Million EUR Million Category of Microfinance Investment Fund Equity Loans, debt Guaran- tees A CCION Gateway Fund USA LLC ACCION International 6,6 4,8 31. Dez 04 6,6 4,8 ACCION International Microfinance Development Fund ACCION International 100% 0% 0% ACCION Investments in Microfinance (AIM) Cayman Islands Portfolio company ACCION International 12,9 9,5 31. Dez 04 11,7 8,6 ACCION Investment Management Company Quasi- commercial Microfinance Inv Fund Social Inst. Investors and private individuals - Min. $ 250,000 100% 0% 0% Africap Mauritius Private Equity Fund Calmeadow 13,3 9,7 31. Dez 04 5,1 3,7 AfriCap MicroVenture s Ltd, Dakar Quasi- commercial Microfinance Inv Fund Social Inst. Investors 80% 20% 0% ALTERFIN Belgium Société coopérative à responsabilité limitée NA 11,2 8,2 31. Dez 04 3,7 2,7 Alterfin Microfinance Development Fund Social Inst. Investors and private individuals 11% 89% 0% Développement International Desjardins - FONIDI Fund Canada Limited Partnership Développement International Desjardins 4,2 3,1 31. Dez 04 0,5 0,4 Gestion FONIDI Inc. Microfinance Development Fund Four wholly- owned subs of the Desjardins Group 100% 0% 0% Développement International Desjardins - Partnership Fund Canada Part of Déve- loppement International Desjardins Développement International Desjardins 6,6 4,8 31. Dez 04 2,0 1,5 Développe- ment International Desjardins Microfinance Development Fund NA 35% 65% 0% Hivos-Triodos Foundation Netherlands Foundation Hivos Foundation and Triodos Bank 22,6 16,6 31. Dez 04 20,7 15,2 Triodos International Fund Man- agement B.V. Microfinance Development Fund NA 32% 61% 8% Impulse Belgium Investment Company Incofin 12,3 10,0 31. Mai 05 1,2 1,0 Incofin Commercial Microfinance Inv Fund Institutional Investors 0% 100% 0% Raising MFI Equity Through Microfinance Investment Funds 43 Microfinance Investment Fund Legal Name Country of Incorporation Legal status Sponsor Total Fund Assets Microfinance Portfolio Fund Manager Shareholders Financial products actually offered (in percentage of microfinance portfolio) USD Million EUR Million As of Date USD Million EUR Million Category of Microfinance Investment Fund Equity Loans, debt Guaran- tees Incofin Belgium Co-operative Company NA 5,7 4,6 31. Mai 05 3,2 2,6 Incofin Microfinance Development Fund Institutional In- vestors (mainly commercial) and private individuals 42% 58% 0% Investisseur et Partenaire pour le Développement Mauritius Investment Company NA 11,0 8,5 30. Mrz 05 2,2 1,7 I&P Etudes et Conseils Quasi- commercial Microfinance Inv Fund Mainly private individuals + 1 listed company 31% 69% 0% Kolibri Kapital ASA Norway Public Limited Liability Company Korsvei 0,4 0,4 30. Sep 04 0,4 0,3 Kolibri Kapital ASA Microfinance Development Fund Private individuals & Church-relatd inst. Investors 100% 0% 0% La Fayette Participations France Société par actions simplifiée Groupe Horus 0,5 0,4 31. Dez 04 0,5 0,4 Horus Development Finance Quasi- commercial Microfinance Inv Fund Social Inst. Investors 100% 0% 0% MicroVest I, LP Delaware USA Limited Partnership MEDA, CARE & SEED 15,0 11,0 31. Dez 04 9,1 6,7 MicroVest Capital Management LLC Commercial Microfinance Inv Fund Mainly private investors incl. 2 mutual funds 8% 92% 0% Oikocredit Netherlands Co-operative Society NA 332,5 245,3 31. Dez 04 80,8 59,6 Oikocredit Microfinance Development Fund Essentially church- related organisations incl. local parishes 14% 85% 1% Opportunity Transformation Investments Inc. (OTI) USA Investment company Opportunity International 21,9 16,1 31. Dez 04 21,8 16,0 Opportunity International Microfinance Development Fund Opportunity International 91% 9% 0% ProCredit Holding AG Germany Bank Holding Investment Company Initiative of IPC 135,1 99,0 31. Dez 04 108,3 79,4 ProCredit Holding AG Quasi- commercial Microfinance Inv Fund Social and commercial Inst. Investors 74% 26% 0% 44 Patrick Goodman Microfinance Investment Fund Legal Name Country of Incorporation Legal status Sponsor Total Fund Assets Microfinance Portfolio Fund Manager Shareholders Financial products actually offered (in percentage of microfinance portfolio) USD Million EUR Million As of Date USD Million EUR Million Category of Microfinance Investment Fund Equity Loans, debt Guaran- tees PROFUND Panama Investment Fund as an S.A. Calmeadow 13,4 9,8 31. Dez 04 13,4 9,8 Omtrix S.A., Costa Rica Quasi- commercial Microfinance Inv Fund Mainly Social Institutional Investors 97% 3% 0% responsAbility Global Microfinance Fund Luxembourg Fonds Commun de Placement Crédit Suisse 12,6 9,8 29. Apr 05 11,7 9,1 Credit Suisse MF Fund Mgt Cy (responsAbility Social Inv Ser. as Advisor) Commercial Microfinance Inv Fund Social Inst. Investors and private individuals 11% 81% 0% Sarona Global Investment Fund, Inc. USA Nonprofit Corporation MEDA 5,5 4,5 30. Sep 04 2,2 1,7 MEDA Investments, Inc. Microfinance Development Fund MEDA as shareholder and inst. and private ind. as lenders 32% 68% 0% ShoreCap International Cayman Islands For-profit Investment Company Shorebank Corporation, Illinois 28,3 20,7 31. Dez 04 5,5 4,0 ShoreCap Management Ltd Quasi- commercial Microfinance Inv Fund Mainly Social Institutional Investors + Financial Inst. 86% 14% 0% SIDI (Solidarité Internationale pour le Développement et l'Investissement) France S.A. Comité Catholique contre la Faim et pour le Développement 7,2 5,3 31. Dez 04 6,4 4,7 SIDI Microfinance Development Fund Social Inst. Investors and private individuals 55% 43% 2% Triodos Fair Share Fund Netherlands Mutual Fund Triodos Bank 11,2 8,2 31. Dez 04 7,0 5,1 Triodos International Fund Man- agement B.V. Commercial Microfinance Inv Fund Social Inst. Investors and private individu- als in Holland 10% 90% 0% Triodos-Doen Foundation Netherlands Foundation Triodos Bank and Doen Foundation 35,1 25,7 31. Dez 04 30,8 22,6 Triodos International Fund Manage- ment B.V. Microfinance Development Fund Doen Foundation 31% 69% 0% Total for existing Microfinance Investment Funds 725,2 536,0 354,9 261,6 Of which Equity 179,0 131,5 The term Social Institutional Investors refers to Development Agencies, Private Donors and other such institutional investors Raising MFI Equity Through Microfinance Investment Funds 45 Annex B Microfinance Investment Fund Legal Name Country of Incorporation Legal status Sponsor Total Fund Assets Microfinance Portfolio Fund Manager Shareholders Financial products actually offered (in percentage of microfinance portfolio) USD Million EUR Million As of Date USD Million EUR Million Category of Microfinance Investment Fund Equity Loans, debt Guaran- tees Gray Ghost Microfinance Fund LLC USA Limited Liability Company Robert Patillo 50,0 40,5 30. Mai 05 8,5 6,9 Gray Ghost Commercial Microfinance Inv. Fund Private indiv. - - - Oikocredit Nederland Fonds Netherlands Mutual Fund Oikocredit 39,4 29,1 31. Dez 04 27,4 20,2 Oikocredit Microfinance Development Fund Retail investors in the Netherlands 2% 98% 0% Total for existing Microfinance Investment Funds 89,4 69,6 35,9 27,1 46 Patrick Goodman Annex C Microfinance Investment Fund Legal Name Country of Incorporation Legal status Sponsor Total Fund Assets Microfinance Portfolio Fund Manager Shareholders Financial products actually offered (in percentage of microfinance portfolio) USD Million EUR Million As of Date USD Million EUR Million Category of Microfinance Investment Fund Equity Loans, debt Guaran- tees La Fayette Investissement (launched in August 05) Luxembourg Venture Capital Investment Company (SICAR) Horus Development Finance 17,4 14,1 Horus Development Finance Quasi- commercial Microfinance Inv Fund Social Institutional Investors - - - Balkan Financial Sector Equity Fund (launched in December 05) Netherlands Limited Partnership Opportunity/ Oikocredit 30,9 25,0 Development Finance Equity Partners Quasi- commercial Microfinance Inv Fund Social Institutional and Private Investors - - - MicroCred (launched in July 2005) France Investment Company PlaNet Finance 38,9 31,5 PlaNet Finance Quasi- commercial Microfinance Inv Fund Social Institutional and Private Investors - - - Total for new Microfinance Investment Funds 87,2 70,6 Raising MFI Equity Through Microfinance Investment Funds 47 References Alexander, Helen: Sustainable Microfinance Banks – IMI as a PPP in Practice, in Matthäus-Maier and von Pischke (2005) De Sousa-Shields, Marc and Frankiewicz, Cheryl: Financing Microfinance Institutions: the Context for Transitions to Private Capital – (Accelerated Microenterprise Advancement Project – USAID – Dec 2004) Goodman, Patrick: Microfinance Investment Funds: Key Features, ADA, February 2005, originally presented at the KfW Financial Sector Development Symposium, Berlin (November 2004) Ivatury, Gautam and Abrams, Julie: The Market for Microfinance Foreign Investment – Opportunities and Challenges, CGAP, KfW Symposium (Novem- ber 2004) Kaddaras, James and Rhyne, Elisabeth – Characteristics of Equity Investments in Microfinance – Council of Microfinance Equity Funds (April 2004) Köhn, Doris and Jainzik, Michael: Microfinance Investment Funds – An Innovative Form of PPP to Foster the Commercialisation of Microfinance, in Matthäus- Maier and von Pischke (2005) Matthäus-Maier, Ingrid and von Pischke, J.D. (eds.), EU Accession – Financial Sector Opportunities and Challenges for Southeast Europe, Springer (2005) Microrate: The Finance of Microfinance (September 2004) Silva, Alejandro: Investing in microfinance – Profund’s story (2005) Schmidt, Reinhard H. and Moisa, Nina: Public-Private Partnerships for Financial Development in Southeast Europe, in Matthäus-Maier and von Pischke (2005) van Maanen, Gert – Microcredit – Sound Business or Development Instrument (2004) CHAPTER 3: Market Transparency: The Role of Specialised MFI Rating Agencies Sanjay Sinha Managing Director, Micro-Credit Ratings International Limited The Rationale for MFI Rating Two recent studies, one by CGAP in 2003 1 and the other, in 2004 by Patrick Goodman (sponsored by ADA) 2 show the substantial volume of international in- vestment funds available for microfinance. The latter study indicates that there are now over 40 investment funds supporting microfinance institutions (MFIs) and that some 75% of the funds available are allocated to debt financing with virtually all the rest being allocated to equity financing. However, as the CGAP study indi- cates, overall foreign investment is only a small proportion of the global total of microfinance lending – $1 billion out of an estimated global total of $15 billion in microfinance loans at end-June 2003. This substantial amount of microfinance lending has taken place because of a significant shift in the financing of microfinance portfolios from being almost exclusively donor-funded to significantly investor-financed. Finance is now being sourced from domestic sources (apex-level NGOs, development banks and even from commercial banks) as well as from the international investment funds re- ferred to above. Prominent amongst the institutions lending to MFIs in Asia are the Palli Karma Sahayak Foundation (PKSF) of Bangladesh, Permodalan Nasional Madani (PNM) in Indonesia, People’s Credit and Finance Corporation (PCFC) in the Philippines and the Small Industries Development Bank of India (SIDBI). The encouraging experience of these institutions in revolving wholesale funds for mi- crofinance has accelerated interest in microfinance investment. As a result, more 1 CGAP. Foreign Investment in Microfinance: Debt and Equity from Quasi-Commercial Investors. Focus Note No. 25. Washington DC: Consultative Group to Assist the Poor, January 2003. 2 Goodman, Patrick. Microfinance Investment Funds: Objectives, players, potential. Paper presented at the 2004 KfW Financial Sector Development Symposium. Berlin: 11-12 November 2004. 50 Sanjay Sinha domestic apex institutions (as wholesale lenders) as well as domestic commercial banks, such as ICICI Bank in India and Bank Mandiri in Indonesia, have become active in this field. In addition, international funds have also shown increasing interest in investing in microfinance. Investment inevitably generates concerns about the borrower’s cash flows, profitability and sustainability, making the availability of skills for MFI appraisal and risk analysis an increasingly important issue. The response of the domestic apex organisations that wholesale development funds to MFIs has been to at- tempt to develop these skills internally. PKSF (Bangladesh) and RMDC (Nepal) are in this category. Banks – such as Sonali Bank of Bangladesh and SIDBI and ICICI Bank in India – with large portfolios but relatively minuscule exposure to the microfinance sector have been more reluctant to undertake appraisals as purely internal exercises. There are two reasons for this. First, as custodians of commercial rather than development funds, their risk analysis is more sophisticated than is customary in the development sector. Second, a bank with a loan portfolio of a billion dollars or more, invested in a diverse range of activities, may find it difficult to persuade many of its staff to specialise in MFI appraisals when they expect the microfi- nance portfolio to be no larger than $20-30 million in the immediate future. Yet, the potential for microfinance lending in India alone is estimated to be between $6-8 billion if the substantial liquid resources of the banking system could be channelled in this direction. The microfinance funding situation can therefore be characterised as one of in- formation asymmetry. Commercial banks and international investors have funds but not the specific expertise to assess and analyse microfinance operations. MFIs have a high demand for funds but in many cases doubtful records on sys- temic strength, sustainability and profitability. While apex institutions financing MFIs have preferred to develop their own appraisal systems with varying suc- cess, the development and commercial banks – along with many international funds – have preferred to use the services of specialised MFI raters that have en- tered the field since 1997. The Progress of Microfinance Rating Microfinance rating started around 1996-2000 with the advent of three specialised raters – MicroRate in Washington DC, Planet Rating in Paris and Micro-Credit Ratings International Limited (M-CRIL) near New Delhi. 3 MicroRate and M- CRIL grew out of microfinance assessment and appraisal expertise developed by a team assembled by Damian von Stauffenberg in the US and EDA Rural Systems 3 MicroRate was the first actually to be established and to undertake a commercial rating assignment – in 1997. Market Transparency: The Role of Specialised MFI Rating Agencies 51 in India. Planet Rating was set up in 2000 by Planet Finance, a French NGO that promotes the development of microfinance. These three agencies have become the market leaders, accounting for over two- thirds of some 900 ratings of MFIs. As Table 1 shows, these three had undertaken 600 ratings (according to the website of the IDB-CGAP Rating Fund) through end-March 2005, covering all regions of the world with significant microfinance activity. By 2005, M-CRIL emerged as the market leader in numbers of ratings (accounting for over 30% of the total) with a volume of 50-60 a year. Using M-CRIL as an example, in the six and a half years following the launch of its rating service in 1998, M-CRIL assembled a team of 8-10 professionals. It has an active Board of Directors made up of professionals and academics with intimate knowledge and experience in microfinance. These professionals are part of its Rating Committee to provide independent oversight of the ratings process. This vetting mechanism has served to mitigate the risk of prejudice, conflicts of Table 1. Ratings undertaken by agencies recognised by the Rating Fund Microfinance ratings Rating agency Area(s) of operation Total con- ducted % of total Financed by Rat- ing Fund All ratings during 12 mos. to March 05 Specialist raters ACCION Worldwide 56 6.3% 2 9 M-CRIL South/SE & Central Asia 269 30.3% 16 58 Microfinanza Worldwide 50 5.6% 45 25 MicroRate Latin America, Africa, E. Europe 203 22.9% 56 37 Planet Rating Worldwide 130 14.6% 66 28 Sub-total 708 79.7% 185 157 Corporate raters Apoyo & Asociadas Latin America 86 9.7% 1 282 Class & Asociadas Latin America 20 2.3% 100 CRISIL South Asia 18 2.0% 8 400 Equilibrium Latin America 13 1.5% 1 55 Feller Rate Latin America 8 0.9% 310 Fitch Ratings Latin America 20 2.3% 25,000 JCR-VIS South Asia 5 0.6% 113 Pacific Credit Rating Latin America 7 0.8% 80 Standard & Poor’s Latin America 3 0.3% 1 50,000 Sub-total 180 20.3% 11 Total 888 100% 196 Source: CGAP-IDB Rating Fund website www.ratingfund.org. [...]... social investors in the emerging market for microfinance investment funds? The private social investor’s concern is likely to be the safety of the invested funds The microfinance investment funds that have been established to attract private social investors are largely using specialised raters These ratings contribute to and inform investment appraisal and due diligence in selecting MFIs for investment... and investors, including specialised funds, lending institutions and donors Market Transparency: The Role of Specialised MFI Rating Agencies 67 Conclusions Specialised microfinance rating agencies play a role in increasing the flow of funds – mainly loan funds – into financial institutions that work primarily with low income clients These institutions include banks and specialised microfinance institutions... used M-CRIL reports in this way include BURO Tangail in Bangladesh, Spandana, SHARE and SIFFS in India, ARDCI/Vision Bank in the Philippines and Amret in Cambodia The use of the rating process and report for capacity building purposes has gathered momentum Annex 1 shows that a number of MFIs have obtained ratings purely for benchmarking purposes and for promoting internal learning A prime example of... disseminating information about best practices in microfinance This process has made a significant contribution to the deepening of financial markets in ways that serve low income families Specialised rating of MFIs is poised to enhance MFI governance and performance by developing social rating, an entirely new product specifically developed for the microfinance sector that should also be of great interest... extensive mailing Feedback from users indicated that the report was well received, making a significant contribution to learning about good practices in microfinance operations Challenges in Contributing to Financial Market Deepening Specialised microfinance raters have clearly made an important contribution to the deepening of the financial sector in developing countries by • providing investors with... focus on developing a clearer understanding of social performance and defining relevant indicators and methodologies for assessment Rating agencies can respond by providing a separate assessment of an MFI’s social performance which can be viewed side by side with the credit rating, as indicated in Box 1 Is there a need for fiduciary ratings of social investment funds and are such ratings necessary to... four ratings by M-CRIL in 2000 to determine the utility of the rating exercise for the local microfinance industry Benchmarking Performance and Identification of Institutional Weaknesses Others have used rating for benchmarking and to identify shortcomings in MFIs’ capacity to provide services in an effective and cost-efficient manner Essentially, benchmarking compares the performance of the rated MFI... broadly classified as: • initiatives to raise international financing, • facilitation of seed capital finance for emerging MFIs, • demonstration to commercial banks of the utility of the rating service, and • benchmarking of performance and identification of institutional weaknesses MFI Initiatives to Raise International Financing MFIs that want to raise funds from international investors use the opportunity... in a periodic publication, The Finance of Microfinance.) During 2002, M-CRIL expanded and documented its accumulated knowledge on systems and best practices in microfinance, starting in India This was undertaken for a selection of leading MFIs using good practice in various aspects of microfinance operations.6 The practices covered include governance and institutional linkages, operational strategy,... in economic progress Initiatives that deepen financial markets or specific parts of financial markets promote growth by reducing costs and expanding access to financial services 56 Sanjay Sinha • provide a range of financial products for a variety of clients and purposes, and • enable investors to get reasonable returns from the operations of sustainable MFIs by financing their activities increasingly . Mai 05 1,2 1,0 Incofin Commercial Microfinance Inv Fund Institutional Investors 0% 100% 0% Raising MFI Equity Through Microfinance Investment Funds 43 Microfinance Investment Fund. Finance 38 ,9 31 ,5 PlaNet Finance Quasi- commercial Microfinance Inv Fund Social Institutional and Private Investors - - - Total for new Microfinance Investment Funds 87,2 70,6 Raising MFI. billion in microfinance loans at end-June 20 03. This substantial amount of microfinance lending has taken place because of a significant shift in the financing of microfinance portfolios from being