Financing Microfinance Institutions: The Context for Transitions to Private Capital

This paper states that the microfinance sector is at crossroads between financing dominated by non-commercial sources and one that is increasingly and necessarily responding to private sector financing needs and interests.

The authors make the following observations:

• Non-commercial capital should not necessarily favor supporting non-profit MFIs over commercial entities;
• Domestic capital is almost always a preferable source for MFIs than international capital over the long run, with some exceptions that include:
  • Post-conflict markets,
  • Countries where capital markets and banking systems are extremely shallow.
• As a means to improve competition among MFIs, public and private MFI funds should invest in the next generation MFIs.

The paper concludes that if the sector is to meet its goal of serving a large portion of the world's poor with permanent financial services, it must continue to prove the viability of its core low income market and must develop significantly deeper access to domestic commercial capital.