How Should Microfinance Institutions Best Fund Themselves?

This study examines the funding of regulated microfinance institutions (MFIs) in Latin America, focusing specifically on the relative costs as well as the comparative advantages and disadvantages of the following four major funding sources: deposits, borrowings and stock and bond issues.

The study covers 61 regulated MFIs in nine Latin American countries with large microfinance markets and states that.

• The 61 MFIs had US$ 1,899 million in total liabilities at the end of 2003, including:
  • Deposits of US$ 1.24 billion;
  • Borrowings (from governments, donors, banks, social investors, and others) of US$ 517 million;
  • Bonds outstanding of US$ 33 million.
• The net worth of the 61 MFIs came to $376 million.

The study examines the operating costs associated with deposit mobilization, based on costing studies of 10 Latin American MFIs and finds that:

• Average annual operating costs are relatively high for savings deposits, but much lower for time deposits;
• Most of the deposits that MFIs mobilize are time deposits.

The study:

• Recommends a funding structure for both maturing and mature MFIs in both stable and unstable macroeconomic environments;
• Makes best practice recommendations for using each of the four major funding sources, with detailed recommendations in the area of deposit mobilization.

The study concludes with a series of suggestions for how donors and governments can best support the funding side of MFI operations.