MFI Financing Strategies and the Transition to Private Capital

This paper describes, compares and contrasts microfinance institutions' (MFIs) funding strategies, identifying those that contribute to the transition to private capital and those that do not. The paper:

• Uses secondary and primary data sources, including interviews with microfinance sector experts and MFI executives in Uganda, Peru and the Philippines;
• Considers different types of institutions providing microfinance services;
• Focuses on non-government organizations (NGOs) that have turned into MFIs;
• Discusses private, for-profit financial institutions offering microfinance services;
• Examines:
  • Portfolio funding strategies, comprised of deposits and debt;
  • Equity strategies.

The paper concludes that:

• To make the transition to private capital, MFIs will require structured, professional, funding strategies
• Only some larger, regulated MFIs have such strategies;
• MFI growth is heavily contingent upon access to funding, which is increasingly available from only the private sector;
• In the absence of clear strategy, MFIs tend to drift towards non-commercial sources of funding;
• Lack of information is an important handicap that MFIs face in the area of funding;
• Development agency funds need to be used to lever private capital;
• The poverty alleviation mission of MFIs reduces the universe of investors to typically international social investors, who have little funding.

The paper recommends that:

• Minority shareholders should be able to invest in MFIs on a commercial basis;
• MFIs should sell shares to private sector investors with complementary businesses, who can help grow towards profitability.