Cross-border Funding of Microfinance

As of December 2009, cross-border funders reported commitments to microfinance[1] of US$21.3 billion, reflecting a 17 percent increase (US$3 billion) over 2008 commitments.[2] Although this rate of increase is lower than the prior year’s 30 percent growth rate, cross-border funding is expected to continue growing.[3] Of cross-border funders, public funders provide a larger share of commitments, though private funders are growing their commitments at a higher rate, with 2009 commitments one-third higher than 2008 commitments. In some markets, cross-border funding represents the lion’s share of microfinance institutions’ (MFIs’) funding base. Yet, where institutions can mobilize deposits and where local capital markets exist, cross-border flows are likely to represent a small part of the picture (see Box 1).

Box 1. What about local funding?

•  In countries where MFIs can offer savings services, client deposits can be a major funding source. Other local funding sources include loans from local commercial banks and private investors, funds raised in the local capital markets, and government loans and grants.

•  Gathering accurate and complete global data on local funding sources is challenging. At the country level, data are available on the funding structures of MFIs through MIX (www.mixmarket.org). For example, the funding structure of Bolivian MFIs in 2009 was made up of 65 percent deposits, while debt represented only 13 percent.

This Focus Note draws on data from CGAP’s annual surveys on cross-border funding (2009, 2010) to provide an overview of the microfinance funding landscape and trends in cross-border funding.

Who is funding microfinance and how?

The US$21.3 billion in commitments to microfinance includes funding from more than 61 funders and 90 microfinance investment intermediaries (MIIs) that reported to the CGAP survey. Funders’ commitments represent all active investments and projects supporting microfinance. As the typical project length is around three to five years, commitments include funds already disbursed as well as funds not yet disbursed. While commitments do not tell us how much funding reaches the microfinance sector within a given year, it is currently the most reliable indicator available for analyzing overall trends in microfinance funding.[4]

A broad range of cross-border funders—public (multilateral and bilateral donors, United Nations [UN] agencies, and development finance institutions [DFIs]) and private (foundations and institutional and individual investors)—contribute to microfinance in different ways. Most public funders use microfinance as a tool to achieve development goals, such as poverty reduction, economic and social development, and financial inclusion. In contrast, for private investors, microfinance presents an opportunity to diversify their investment portfolios, while also doing good. Public funders are largely funded by government budgets, though some also raise money in capital markets. Private funders, in contrast, include individual investors, institutional investors, and foundations. With private interests driving their activities, private funders do not have political pressure, nor are they publicly accountable for the uses of their funds.

Although the number of private funders has expanded over the past 20 years, the bulk of cross-border funding today still comes from public donors and investors (see Figure 1). Public funders’ commitments totaled US$14.6 billion as of December 2009, representing almost 70 percent of total cross-border funding to microfinance.

As of December 2009, private funders had US$6.7 billion committed to microfinance, representing around 30 percent of total commitments to microfinance. Institutional investors, such as commercial banks, pension funds, insurance companies, private equity firms, and other corporate investors, have become a major source of funding. Demand from individual investors—both high-net-worth individuals and retail investors—to invest in microfinance has also significantly increased over the past few years following a general trend toward socially responsible investment (SRI). Sustainable and responsible investments, which combine investors’ financial objectives with their concerns about environmental, social, and governance issues, are gaining popularity in the United States and in Europe. Between 2007 and 2009, the European SRI market increased by an annual compound growth rate of 37 percent, and total assets under management reached EUR 5 trillion by the end of 2009. Eurosif, a pan-European network promoting sustainable and responsible investment, forecasts that microfinance will be of significant interest to European investors in the coming years, with growth coming mostly from institutional investors (Eurosif 2010).

Microfinance also receives funding from private donors, mostly in the form of grants. Commitments from foundations and international nongovermental organizations (NGOs) totaled approximately US$1.1 billion. CGAP has identified over 400 foundations with some activities in microfinance, but only a few reach significant scale. Having increased their commitments to microfinance significantly over the past three years, the Bill & Melinda Gates Foundation is now among the 10 largest cross-border funders.

Intermediaries play a significant role in channeling funding to microfinance

Almost half of total cross-border funding is channeled through MIIs and local wholesale facilities (also called apexes). The other half is provided directly to retail providers, such as MFIs and banks; meso-level actors, such as training centers, rating agencies, and credit bureaus; and government programs and agencies in the policy space.

Growing interest from individual and institutional investors to invest in microfinance has led to the emergence of over 100 intermediaries, including microfinance investment vehicles (MIVs), holding companies (such as ProCredit), and peer-to-peer lending platforms (such as Kiva and Babyloan). These intermediaries combined managed over US$8.1 billion as of December 2009 (CGAP 2010e). Some MIVs are open to retail investors, including Dexia Microcredit Fund, responsAbility, Microfinanzfonds, and Triodos SICAV. Other funds are open only for private placements by qualified investors; they typically receive a majority of funding from development banks and other DFIs. Some MIVs are set up as cooperatives or NGOs, for example, Incofin, Oikocredit, and Consorzio Etimos.

Another type of intermediary is the local apex. While apexes are funded with public money (often including government funding), they can take various institutional forms, such as development banks, NGOs, or donor or government programs; some are housed within private commercial banks. The top 15 apexes in the world had an outstanding portfolio of US$3 billion in 2009.[5]

Majority of money destined to refinance a range of retail providers

Cross-border funders support a diverse range of institutions that provide financial services for poor people, including NGOs, greenfield banks, postal and savings banks, commercial banks, cooperatives, and self-help groups. Many other private firms are also recipients of funding for microfinance, including rating agencies, accounting firms, training centers, telecommunications firms, payment platforms, and others. Cross-border funding also goes to public sector agencies, including government agencies, ministries, state-owned banks, and wholesale entities.

As of December 2009, 88 percent of total commitments for microfinance were intended to finance the loan portfolios of MFIs (see Figure 2). Only 8 percent of funds were used to build the capacity of retail MFIs. A small amount of commitments, 4 percent of the total amount, was used to strengthen the market infrastructure and legal and regulatory environment.

Debt dominates the picture

Cross-border funding for microfinance usually takes the form of debt (whether at market rates or concessional rates). DFIs and MIIs are the main providers of debt funding for financial service providers, which use these funds to finance their loan portfolios. UN agencies and multilateral organizations, such as the World Bank, the Asian Development Bank, and International Fund for Agricultural Development (IFAD), provide loans to governments. Governments then use the funds to on-lend to MFIs and to support capacity-building initiatives at the retail, market infrastructure, and policy levels.

DFIs, and increasingly MIIs, also invest in the equity of financial services providers, which strengthens their capital structure and can help them access additional debt funding. DFIs also use guarantees to help financial service providers access funding from local commercial banks.

Bilateral agencies, foundations, and NGOs predominantly use grants to fund financial service providers so that they can grow and increase the quality and scope of services offered. Grants are also used for capacity building at the market infrastructure level and to strengthen the regulatory environment and build the capacity of policy makers, central banks, and supervisory authorities.

Figure 3 shows the variety of funding instruments used by different types of funders to support microfinance.[6] The US$21.3 billion total committed combines all of these instruments, whether funds have to be repaid or not (loans versus grants), whether they are disbursed or not (e.g., guarantees), and whether they respond to immediate funding needs of MFIs (debt funding) or help build the sector in the long term (e.g., grants for capacity building).

Trends in cross-border funding

Commitments growing; disbursements lower in 2009

Despite fears that funding for financial services for the poor would decline as a result of the 2008–2009 financial crisis and strained national budgets in the developed world, cross-border funding to microfinance has continued to increase, albeit at a slower rate. As noted, total commitments increased by 17 percent from 2008 to 2009, compared to around 30 percent in the previous year. However, at US$3.2 billion, disbursements in 2009 were on average 10 percent lower than in 2008.

DFIs drive growth in commitments

With commitments of more than US$8.8 billion as of December 2009, DFIs accounted for 42 percent of total commitments to microfinance.[7] While other public funders decreased their commitments in 2009 (bilateral agencies by 9 percent and multilateral and UN agencies by 7 percent), DFIs increased their commitments by 28 percent.[8] This growth can also be attributed in part to DFIs’ anticipation of liquidity shortages due to the financial crisis. The International Finance Corporation (IFC) and KfW committed US$150 million each to launch the Microfinance Enhancement Facility, which also attracted funding from other DFIs. This facility provided sustainable MFIs with liquidity when commercial lending was scarce. In general, emergency liquidity facilities were used in Europe and Central Asia (ECA) and Central America, the regions most affected by the crisis.

Private funding is growing faster than public funding

Though from a smaller initial base, private investors increased their commitments by 33 percent to US$5.6 billion as compared to public donors’ 11 percent increase in commitments (see Figure 4). Eleven new MIVs were established in 2009, with a large part of their funding coming from private investors, and MIVs’ asset under management increased by 25 percent from 2008 to 2009. However, the growth in MIVs’ assets under management is much lower than in previous years (86 percent in 2007 and 34 percent in 2008), while MIVs’ cash positions reached a record high of 17 percent of assets due to the lack of suitable investment opportunities (CGAP 2010e).

Private giving has also continued to increase. Foundations and international NGOs increased their commitments by 32 percent. Yet they still represent only 5 percent of total cross-border commitments to microfinance.

Equity investments are on the rise

While debt remains the most used instrument to fund microfinance, funders are increasingly investing in equity. Both DFIs and MIIs, the main providers of equity funding for financial services providers, have increased their equity investments. DFIs increased their direct equity investments in financial services providers by 49 percent in 2009 and in MIIs by 24 percent. The share of equity investments as a funding instrument has increased in most regions except in East Asia and the Pacific. The increase in the value of direct equity investments is due to additional funding (70 percent) and to an increase in the appreciation in value of investors’ equity in financial services providers (30 percent).

Commitments continue to grow in ECA and Latin America and the Caribbean, the regions receiving the largest shares of funding

Regionally, there is significant variation in growth of commitments and differences in who is driving this growth (see Figure 5). ECA and Latin America and the Caribbean (LAC) receive large shares of funding, both from public and from private funders. LAC is the only region where private funding is similar in scale to public funding. Commitments to sub-Saharan Africa (SSA) increased by 22 percent (or US$441 million) from 2008 to 2009. While public funding accounts for 75 percent of commitments to SSA, private funders increased their commitments to SSA significantly by 63 percent (US$230 million), almost equally driven by foundations/NGOs and private investors. Public funders increased their commitments to SSA by 13 percent (US$211 million), driven by DFIs.

High concentration of funding in a few markets

Funders reporting to the CGAP funder survey in 2010 reported microfinance activities in 123 countries. However, commitments are concentrated in a few countries. Ten countries (India, Russia, Peru, Bulgaria, Bangladesh, Mexico, Morocco, China, Pakistan, and Afghanistan) represent close to 50 percent of total cross-border commitments. This has changed only slightly since 2007, with Mexico replacing Egypt among the top 10 receiving countries. On the other hand, the 100 countries at the bottom of the list receive less than 33 percent of total commitments. Countries that saw the largest growth in commitments from 2008 to 2009 are India, Russia, China, Turkey, and Ethiopia. Around 20 countries saw a decrease in commitments from 2008 to 2009. Countries that saw the largest decrease in commitments are Pakistan, Sri Lanka, Afghanistan, Nepal, and Egypt.

Foundations and bilateral agencies lead in funding for capacity building

Commitments for capacity building totaled around US$2.3 billion as of December 2009, 70 percent of which were for the retail level. This reflects a 4 percent increase since 2008. The most common instrument to fund capacity building is grant funding (70 percent of all capacity-building funding). Foundations and bilateral agencies provide over 55 percent of total commitments used for capacity building. Multilateral agencies—such as the World Bank—which provide close to 40 percent of funding for capacity building, fund mostly through loans to governments or through multidonor capacity-building facilities. Many DFIs provide technical assistance along with their investments, but nonetheless, capacity building represents a small part of their funding. Overall, SSA receives the largest share of capacity-building funding with one-third of global commitments (see Figure 6).

The top ten grant funders are the Bill & Melinda Gates Foundation, the U.K. Department for International Development (DFID), the European Commission, the Canadian International Development Agency (CIDA), Gesellschaft für Internationale Zusammenarbeit (GIZ), Millennium Challenge Corporation (MCC), the U.S. Agency for International Development (USAID), Mastercard Foundation, the Swiss Agency for Development and Cooperation (SDC), and the Australian Agency for International Development (AusAID).

Moving Ahead

CGAP’s funding surveys show the magnitude of cross-border funding to microfinance worldwide. Transparency around what is being funded and in what amounts is an important first step to better understanding the drivers behind the growth of microfinance markets. However, it does not tell us enough about the role of cross-border funders in advancing financial inclusion or exactly how funding can add most value. The resources required for building market infrastructure vary greatly from what is required for on-lending. Is enough being spent on capacity building or on regulatory reform? There can be “too much” and “not enough” funding at the same time and even in the same market there may be an abundance of one type of funding—debt—but shortage of another type—equity.

Cross-border funding has been a key driver of growth in the microfinance sector, and it continues to be essential in frontier and remote markets where few private funding sources are available. In more developed financial markets, however, the picture becomes more complicated: Is cross-border funding “crowding in” private, local funding? How can cross-border funding be channeled so that it continues to serve development objectives?

Funders are beginning to analyze their added value more deeply, and they are putting in place checks in their due diligence and project approval processes that require them to look at how their programs impact local funding markets. This is an important step forward in making sure that cross-border funding continues to serve its intended purpose as the market context evolves.

References

CGAP. 2010a. Financial Access 2010. The State of Financial Inclusion Through the Crisis. Washington D.C.: CGAP/The World Bank. http://www.cgap.org/p/site/c/template.rc/1.9.47743/

———. 2010b. “Growth and Vulnerabilities in Microfinance.” Focus Note 61. Washington, D.C.: CGAP. http://www.cgap.org/p/site/c/template.rc/1.9.42393/

———. 2010c. “CGAP 2010 MIV Benchmarks.” Washington, D.C.: CGAP. http://www.cgap.org/gm/document-1.9.47372/CGAP_2010_Benchmarks_Tables.pdf

———. 2010d. “Apexes: An Important Source of Local Funding.” Brief. Washington, D.C.: CGAP, March. http://www.cgap.org/p/site/c/template.rc/1.9.43025/

———. 2010e. “Microfinance Investors Adjust Strategy in Tougher Market Conditions.” Brief. Washington, D.C.: CGAP, October. http://www.cgap.org/p/site/c/template.rc/1.9.47946/

———. 2010f. “Challenging Times: Do MIVs Need a New Investment Strategy?” Web article. Washington, D.C.: CGAP. http://www.cgap.org/p/site/c/template.rc/1.26.13458/

Eurosif. 2010. “European SRI Study.” http://www.eurosif.org/research/eurosif-sri-study

IFAD. 2010. “Rural Poverty Report 2011.” Rome: IFAD. http://www.ifad.org/rpr2011/

Microfinance Information Exchange (MIX). 2009. “2009 MFI Benchmark Tables.” Washington, D.C.: MIX. http://www.themix.org/publications/mix-microfinance-world/2010/10/2009-mfi-benchmarks

———. 2010. “Microfinance Funders Profiles—A Short Guide for Young and Small Institutions Still Looking for a Match.” Washington, D.C.: MIX. http://www.themix.org/publications/microbanking-bulletin/2010/06/microfinance-funders-profiles-short-guide-young-and-small

World Savings Banks Institute. 2006. “Access to finance—what does it mean and how do savings banks foster access?” Brussels: World Savings Banks Institute. http://www.wsbi.org/uploadedFiles/Publications_and_Research_(ESBG_only)/Perspectives%2049.pdf

Annex I: Methodology

Both the CGAP Microfinance Funder Survey and the CGAP MIV Survey were conducted in 2009 and 2010, to improve transparency on microfinance funding and to allow data analyses over time. The surveys collect portfolio data directly from major funders as well as MIIs. Thanks to high participation rates, CGAP estimates that the surveys capture 85–95 percent of total cross-border funding for microfinance.

In 2010, 61 funders and 90 MIIs shared information on their microfinance portfolio.

Data from both surveys were consolidated to present a comprehensive picture of cross-border funding to microfinance. Information on MIIs’ funding sources combined with data from the Funder Survey were used to estimate funding from individual investors and institutional investors, making it possible to compare public and private funding.

If not specified otherwise, all analyses in this report are based on committed amounts.[9] Commitments represent the total amount of all currently active investments and projects, whether the funds have been disbursed or not. As such, total commitments describe the stock of funds set aside for microfinance at a given time (i.e., December 2009 for the data in this report). When analyzing funders’ commitments, one has to take into account that average project lengths and disbursement schedules vary significantly across funders. The average project length is between three and five years, but some funders reschedule projects annually while others have projects that remain active for five years or more. Also, funders do not always disburse everything they committed. Project budgets can change or disbursements are held back if funding conditions are not fulfilled. In our sample, disbursement rates varied from 70 percent to 100 percent, with only six funders reporting a disbursement rate below 90 percent. Finally, commitments are a reliable indicator to analyze overall trends in microfinance funding, but they do not show how much money reaches the sector in a given year.

To understand the actual flow of funding to the microfinance sector, it is necessary to look at annual disbursements. Disbursements are the amounts that funders actually transferred to recipients during a given year. Four large funders in our sample did not report disbursements in 2010; it is thus likely that disbursement figures are underestimated. As not all funders have reliable data on disbursements, trend analyses and breakdowns based on disbursements are limited.

All trend analyses and growth rates given in this report are based on a subset of respondents for which data were available for all years covered by the CGAP surveys. Data reported in other currencies was converted to U.S. dollars at the exchange rate as of 31 December 2010. While exchange rate fluctuations have impacted portfolio data of some individual funders, they do not have a significant impact on overall numbers.

Annex II: Data on cross-border funding

1 For purposes of the CGAP Microfinance Funder Survey and this Focus Note, microfinance is defined as financial services for poor and low-income populations.

2 Data in this Focus Note are based on the 2010 CGAP Microfinance Funder Survey and the 2010 CGAP MIV Survey. These two surveys, which together contain information on 151 institutions and funds representing 85–95 percent of cross-border funding for microfinance, constitute the most comprehensive available dataset on cross-border funding of microfinance. A summary appears in Annex II; further information is available at www.cgap.org/funders.

3 Approximately 70 percent of funders reporting to the CGAP Microfinance Funder Survey expect commitments to stay the same or increase in 2010.

4 Not all funders capture reliable data on annual disbursements. See Annex I for more information on commitments.

5 This is based on research that CGAP conducted in 2010. For prior CGAP research on apexes see CGAP (2010d).

6 The figure shows what funding instruments are used by the primary funder; it does not translate into how funding sources would appear on the balance sheets of recipients. First, funding for infrastructure (credit bureaus, associations) or for enabling environment would not be on the books of MFIs. Second, funding often goes through several channels before it lands on the books of MFIs, depending on the intermediary channels used. A loan to a government, for example, may ultimately result in equity, grants, or debt on the MFI’s books. For individual and institutional investors that fund microfinance mostly via intermediaries, equity investments captured in the survey represent the investments in intermediaries (i.e., MIIs) and not in MFIs.

7 Today, DFIs are the main providers of MFIs’ loan capital, followed by individual and institutional investors. DFIs (as well as private investors) can fund MFIs either directly or through MIIs.

8 Out of the 18 DFIs that reported portfolio information to CGAP, only three did not show any significant positive growth in 2009.

9 Commitments are used to estimate both current and future funding of microfinance (as opposed to including figures for actual investment amounts) due to the relative availability of the data as compared to data on funded amounts. However, it is important to keep in mind the drawbacks of using commitment figures, including the mix of funded and not yet funded amounts; the mix of debt, grants, and equity; and the absence of a minimum or maximum time period for looking backward or forward.

The authors of this Focus Note are Mayada El-Zoghbi, CGAP senior microfinance specialist, Barbara Gähwiler, CGAP microfinance analyst, and Kate Lauer, CGAP consultant. The authors thank Jasmina Glisovic, Alice Nègre, and Xavier Reille for their contributions to this Focus Note.

The suggested citation for this Focus Note is as follows:

El-Zoghbi, Mayada, Barbara Gähwiler, and Kate Lauer. 2011. “Cross-Border Funding of Microfinance.” Focus Note 70. Washington, D.C., April.

No. 70 April 2011

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Table of Contents

Cross-border Funding of Microfinance

Who is funding microfinance and how?

Trends in cross-border funding

Moving Ahead

References

Annex I: Methodology

Annex II: Data on cross-border funding