Trends in Microfinance Capital Structure
This paper discusses the evolution of microfinance in Latin America. The sector has evolved from one predominated by non-governmental organizations (NGOs) to a sub-sector of the financial services industry. The move towards professionalization is clear and the author argues that increased competition among microfinance institutions (MFIs) has greatly facilitated this.
The author identifies the following trends in the capital structures of the Latin American MFIs:
- Increasing leverage as indicated by the debt to equity ratios;
- Growing use of deposits to finance lending;
- Continuing use of long term funding;
- Declining use of subsidized sources of funds;
- Using dollar based borrowing;
- Accessing capital markets by issuing bonds.
The paper states that microfinance continues to be a high growth area. However, increased competition has also resulted in some decline in the portfolio qualities of MFIs. Still, on an average, their portfolio is of a higher quality as compared to banks. The paper finds that microfinance is a highly profitable industry with high returns on equity.
