by Chinq Yee Chong - Events, Trends/Challenges -

MICROCAPITAL STORY – Highlights From A Hanson Wade Conference On Microfinance Investments And Observations By Key Panelists From MFX Solutions, ACCION, OPIC, Deutsche Bank, Microfinance Transparency And Others

The recent conference on ‘Investments In Microfinance’ which was held in London was attended by a variety of participants in the microfinance sector, including MFIs, investors, bankers, lawyers and researchers. Panelists and speakers at the event discussed topical issues affecting the microfinance sector which included the following: (i) Hedging foreign currency risk in microfinance transactions; (ii) The problem of over-indebtedness; (iii) Client protection issues and (iv) Small and Medium Enterprise (SME) Finance. As shown in the conference agenda, panelists and speakers also discussed the future of microfinance and the impact of the current crisis on sources of funding for the microfinance industry. The conference concluded with a discussion on microfinance securitization and the key legal issues in such transactions. Below is a short summary of some of the points raised at the conference.

(i) Hedging foreign currency risk in microfinance transactions   The importance of securing protection against fluctuations in foreign currencies was highlighted on more than one occasion during the conference. Mr. Brian Cox, Executive Director at MFX Solutions, mentioned that currency risk and mismatches are factors that hinder growth in the microfinance sector. He added that volatility in emerging market currencies, which has become increasingly evident in the current crisis, can be better managed by MFIs. MFX Solutions is a new company that is dedicated to managing global currency risk in the microfinance industry. As mentioned in a previous Microcapital Story, the company aims to make hedging instruments accessible to microfinance lenders in developing markets.  

(ii) The problem of over-indebtedness   Over-indebtedness was mentioned on several occasions during the conference. This issue has also been highlighted in a previous Microcapital Story. A market debate was held at the conference which was entitled ‘Which Is The Greatest Risk Facing The Microfinance Industry: Over-Indebtedness Or High Interest Rates’. Many commentators agreed that over-indebtedness was a pressing problem particularly in the current climate. The importance of pricing transparency was highlighted as an important priority in the microfinance sector, according to materials circulated by Mr. Chuck Waterfield, CEO of MicroFinance Transparency, an organization focused on promoting fair and transparent pricing in the microfinance sector. High interest rates were not identified as a key reason for over-indebtedness.  

(iii) Client protection issues   Ms. Elisabeth Rhyne, Managing Director at the ACCION Centre for Financial Inclusion led a discussion on client protection issues. Ms Rhyne discussed the principles of client protection that are the subject of an ongoing campaign led by the Centre for Financial Inclusion. Among the main objectives of the campaign are to raise awareness and encourage industry dialogue about client protection and to encourage collaboration between MFIs, national associations and other bodies to develop and implement standards for the appropriate treatment by financial institutions of low income clients. The campaign has been endorsed by many MFIs since its introduction at the end of 2008. A list of the current endorsees and specific details of the campaign can be found on the website of the Campaign for Client Protection.  

(iv) SME Finance   The conference included a debate between panelists and the audience about the role of SME finance in the microfinance sector and whether financing for small or medium enterprises departs from the original mission of providing credit for micro-borrowers. Mr. Richard Greenberg, Senior Manager at the US-based Overseas Private Investment Corporation, and Mr. Asad Mahmood, Managing Director of Deutsche Bank’s Global Social Investment Funds, led a lively discussion about SME financing and the challenges facing the sector. Some members of the audience took the view that SME finance requires a different methodology altogether as compared with microfinance. Some regard SME finance as being totally different from microlending or group-lending to borrowers who may not otherwise have access to credit, with different objectives and risks as well as a different customer base. Comments were also made about the fact that SME finance is important in certain contexts where successful micro-borrowers are in a position to graduate from micro-loans to bigger loans to support their growing enterprises. Some members of the audience commented that SME finance is very important as these facilities can support small and sustainable businesses which in turn may help to alleviate unemployment (particularly youth unemployment) in certain areas. 

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