Intermediating Capital To MFIs: A Survey of Financial Intermediation to Microfinance Institutions

This paper discusses the nature of capital flows to microfinance institutions (MFIs) in the emerging markets. It suggests that expansion of investment in microfinance can best be done through specialized investment funds that target MFIs.

The paper states that:

• Support for the development of an MFI-FI (financial institutions) infrastructure that is able to attract social investment capital will serve two purposes; it will:
  • Raise the volume of capital available to MFIs;
  • Allow social investment to serve as a bridge between the microfinance sector and the more conventional capital markets.

The paper predicts that:

• Conventional capital markets will increasingly open to the microfinance sector as greater scale leads to more standardized investment practices, such as:
  • Asset benchmarking for MFI-FI portfolios, standardized reporting and transparency;
  • Decrease in the level of subsidized donor capital.
• Access to conventional, commercial capital markets will become the norm, helping the sustainability of microfinance and its role in reducing poverty.

The paper then surveys MFI-FIs in detail and offers the following conclusions:

• Although there are some well established MFI-FIs, the scene is still largely dominated by donor institutions;
• Currently, MFI-FIs are limited in size and coverage;
• Information on best practices in MFI-FIs is limited.

The paper concludes that with appropriate resources, MFI-FIs can play a strong role in establishing a more market driven infrastructure for financial intermediation to MFIs, than what exists.