MICROCAPITAL STORY: World Bank Sees Microfinance as Strong Asset Class in Midst of Financial Crisis According to the New York Times; A Target $600m Fund Managed by BlueOrchard, ResponsAbility, and Cyrano Management Will Be Launched to Support MFIs

The World Bank Group and the German government intend to launch a 600 million USD “Microfinance Enhancement Facility,” according to a report from the New York Times. The fund aims to support microfinance institutions in developing countries facing difficulties as a result of wholesale credit tightening stemming from the recent turmoil in global capital markets.

Created by International Finance Corporation (IFC), a member of the World Bank Group, and German development bank KfW Entwicklungsbank, the facility is expected to provide refinancing at preferential terms to between 150 to 200 microfinance institutions in up to 40 countries. Under the plan, KfW Entwicklungsbank will provide a promotional loan amounting to 130 million USD, while IFC will contribute 150 million USD. The fund would be managed by three companies that specialize in microfinance: BlueOrchard and responsAbility, both based in Switzerland, and Cyrano Management, which operates out of Lima, Peru. World Bank president Mr. Robert B. Zoellick said the bank was soliciting contributions from other countries and agencies to reach the 600 million USD target.

The effort highlights the fact that even small banks in poor countries are getting caught up in turmoil they had arguably no role in creating. The fund will therefore offer MFIs a chance to get public money to replace rapidly diminishing or increasingly expensive private capital, and ensure that low-income borrowers in developing countries continue to have access to financial services. Mr. Zoellick, however, emphasized that the cash being offered was not a recapitalization of microcredit banks after heavy losses. That is, MFIs tended not to speculate in the complex mortgage-linked securities that have caused so much trouble amongst Western banks, as most lack integrated trading operations which aim to make a profit on deposits. Instead, sound commercial lending backed by detailed loan analysis remained their core operational focus throughout the asset bubble. Consequently, credit tightening to MFIs has been largely independent of any significant changes to their operational success, instead reflecting second round effects as multinational giants such as Citigroup, UBS, and Barclays attempt to rapidly shore up their balance sheets.

A recent MicroCapital story discussed evidence that the microfinance industry is relatively resistant to volatility in global financial markets. Nevertheless, with the rising cost of borrowing by MFIs, micro-entrepreneurs have necessarily seen higher interest rates passed on to them. In November, 2008, MicroCapital reported on a news release by Reuters and the World Bank detailing how the global financial crisis may impact microfinance, which raised similar concerns.

In general, such efforts demonstrate the confidence in microfinance as a strong asset class even amidst broader distress. According to a paper wrap-up on MicroCapital in February, 2009, a study by CGAP – an independent resource for microfinance information – indicated increasing interest by private funds towards microfinance institutions, again highlighting the tension between profitability in the microfinance sector and the recent inability to get capital to it. The same study indicated that the average return on assets of 344 MFIs was 2.8 percent, about half of what a profitable pre-crisis bank would have earned, while MFIs’ returns on equity were found to be higher than those in the traditional banking system. Such respectable numbers, especially when combined with the philanthropic aspects MFIs afford, play well with analysts. Finally, another MicroCapital paper wrap-up likewise discussed the prediction by Arthur D. Little, an international management consulting firm, that microfinance is well poised to become a promising asset class for traditional investors.

KfW is one of the largest microfinanciers in the world. On behalf of the German Federal Government, KfW Entwicklungsbank is presently promoting some 100 microfinance projects in around 60 developing countries. As of the end of 2007, its project portfolio adds up to approximately 1.03 billion USD.

IFC, a member of the World Bank Group, aims to foster sustainable economic growth in developing countries by supporting private sector development, mobilizing private capital, and providing advisory and risk mitigation services to businesses and governments. According to the organization’s 2008 Annual Report (p.12), IFC made investments of 16.2 billion USD in fiscal year 2008, a 34 percent increase over the previous accounting period.

BlueOrchard is a leading commercial microfinance investment manager. The organization is made up of two companies: BlueOrchard Finance S.A., which since 2001 has provided credit to microfinance institutions, and BlueOrchard Investments, which since 2007 has invested in the equity of MFIs and network funds. The company is headquartered in Geneva, Switzerland, and has offices in Lima, Peru, and in New York, USA. At present, BlueOrchard works with over 160 partner microfinance institutions in more than 40 countries world-wide. According to the company report, as of the first quarter of 2008, BlueOrchard Finance S.A. was managing over 750 million USD worth of assets, while BlueOrchard Investments had already raised 35 million USD to invest in equity.

ResponsAbility is a Switzerland-based asset management firm that connects social investors with microfinance institutions. In June 2008, MicroCapital reported that responsAbility lended 600,000 USD to COMIXMUL, a Honduras-based cooperative that promotes microenterprise development by providing microlending and business training programs, and to Frontera de San Ignacio, a Peruvian cooperative of coffee plantations. According to another report from MicroCapital in May 2008, responsAbility Mikrofinanz-Fonds made investments totaling 2.7 million USD in four microfinance institutions including MicroInvest, AgroInvest, Prestanic, and Fondesurco.

By Yanni Hao

Additional Resources:

BlueOrchard: “Home” “BlueOrchard Factsheet”

Cyrano Management: “Home”

International Finance Corporation: “Home”

New York Times: “Home” “Microbanks Are Getting a Cash Infusion”

KfW Entwicklungsbank: “Home”

MicroCapital Story: February 3^rd, 2009 “MICROFINANCE PAPER WRAP-UP: Microfinance: Ready For its Big Leap? By John Engen”

MicroCapital Story: January 26th, 2009 “PAPER WRAP-UP: Fitch Ratings Report: Microfinance – Testing its Resilience to the Global Financial Crisis by Sandra Hamilton”

MicroCapital Story: January 26th, 2009 “MICROFINANCE PAPER WRAP-UP: Microfinance Still Hums, Despite Global Financial Crisis, by Jeremy Caplan”

MicroCapital Story: January 26th, 2009 “NEWS WIRE: Fitch Sees Microfinance Tested By Crisis”

MicroCapital Story: January 15th, 2009 “NEWS WIRE: Recession squeezes even philanthropies of Gates, Allen”