PAPER WRAP-UP: Capital Markets: A Long-Term Solution to Financial Freedom, Gil Crawford and Lauren Clark

Co-authored by Gil Crawford, CEO of MicroVest, a Washington, DC-based private microfinance investment firm, and Lauren Clark, the Communications Manager for MicroVest, released July 2007 as Volume 10-Number 1 of Microenterprise Development Review, a publication of the Inter-American Development Bank (IDB), 11 pages, available at http://www.microvestfund.com/docs/microenter_dev_%207-16-07.pdf

This paper focuses on the lack of funds available to microfinance institutions (MFIs) and how the global capital markets are becoming a viable solution to the shortage. The issue is approached from both the perspective of the international investor as well as the MFI itself, and innovative financial deals are analyzed.

Crawford and Clark begin by noting that market demand for microfinance services vastly outstrips supply. “Ideally, an institution would tap into local financial markets for debt and equity capital, most significantly, in the form of deposits,” they write. However, they note that capital requirements, infrastructure, and proper governance often prevent MFIs from accessing local deposits. The authors continually stress that, although many MFIs have depended on non-profit sources in the past, donors will never satisfy the market.

To clarify the current prospects for expansion of commercial funding in microfinance, the authors first approach the issue from the investor’s perspective. The benefits of investing in MFIs include perceived low correlation to other markets (whether they are domestic or foreign), higher growth, and compelling risk/return indicators. The authors claim that, despite the previously stated advantages of investing in MFIs, the industry is not yet perceived as an investment-worthy asset class due to the shortage of publicly traded MFIs, high risk, and “the lack of a comprehensive standardized reporting system.” The authors tackle each of these issues in depth and explain the existing opportunities to minimize the risks associated with them.

Gil Crawford presents his approach to MFI analysis according to the “three Cs of due diligence:” Country, Character and Credit. “Country” refers to an investor’s desire for a stable local environment where the government supports and encourages microfinance growth. When evaluating “Character,” an MFI’s total management situation should be reviewed including the examination of rating reports, “reference checks with the MFI’s banker,” in-country meetings with management, assessment of language used in investor communications, and a check for evidence of continual improvement. Thirdly, investment teams from firms like MicroVest visit MFIs and examine operations, employees’ credentials, management information systems (MIS), controls, risk management policies, and any other vital factors that form the “Credit” image of the MFI from the financier’s perspective.

Crawford and Clark then transition to investment instruments, long since introduced in mature markets, which are becoming feasible as facilitators of the supply of microfinance funds. They begin by mentioning syndication, the practice of utilizing several different lenders in various sections of a loan, and mention a 2006 USD 2 million deal benefiting Fundación D-MIRO of Ecuador as a prime example (reported on by MicroCapital here). Moving to multi-tranche international collateralized debt obligations (CDOs), or “investment-grade securities backed by a pool of bonds, loans and other assets” according to Investopedia.com, the authors cite the “BOLD-2006-1” deal as an important precedent (reported by MicroCapital here).

The authors also mention that private equity investment in microfinance is increasing, exemplified by Sequoia Capital’s USD 11.5 million investment in SKS Microfinance in March 2007 (reported on by MicroCapital here), and close the subject of innovative investment instruments by stating the importance of initial public offerings (IPOs) which can serve the dual purpose of providing better access to capital as well as creating an exit strategy for the so-called “angel investor(s)” that many MFIs depend on in their beginning stages.

The article concludes that “commercialization supports the sustainability of MFIs,” better management coupled with intentional use of investment-attractive procedures and language will ease commercialization, and that new options for funding will play a vital role going forward.

Gil Crawford, Chief Executive Officer (CEO) of MicroVest, previously worked for the Latin American Financial Markets Division at the International Finance Corporation (IFC), the Seed Capital Development Fund (SCDF), and was the Assistant Project Director for a USD 7.1 million USAID contract creating risk capital firms in Africa. He received his bank training at Chase Manhattan Bank, worked for the Red Cross and the State Department in Africa, and graduated from the School of Advanced International Studies (SAIS) at Johns Hopkins University and Bates College.

In addition to heading MicroVest’s marketing, public relations, and web operations, Lauren Clark has worked for FINCA International in Washington, DC and Haiti, and conducted independent consultations for several MFIs in Central and West Africa. She earned a BA in Economics and International Relations from Tufts University.

By Anthony Busch, Research Assistant

“Capital Markets: A Long-Term Solution to Financial Freedom”

Investopedia.com: Collateralized Debt Obligation

MicroCapital article, February 15, 2008: “Microfinance Cracking the Capital Markets II”

MicroCapital article, January 12, 2007: “MicroVest Obtains a Microfinance Investor, the Canadian Meritas Jantzi Social Index Fund, and Syndicates a Loan with Calvert Investment and The Dignity Fund, to the Ecuadorian based Microbank, D-Miro”

MicroCapital article, April 2, 2007: “Sequoia Capital Leads USD 11.5mm Investment in SKS Microfinance based in India”