Securitisation: A Funding Alternative for Microfinance Institutions

According to The Banker, approximately 2.5 billion people from low-income countries and many of the 2.7 billion people from middle-income countries have been and still remain widely underserved or even completely disregarded by the conventional financial services industry.1 This is the potential customer base for microfinance. It ranges from the low end of the middle class to the poor and includes households, self-employed people, (owners of) microenterprises, (owners of) small businesses, and dependent workers. Similar to banking customers in high-income countries, the consumer base of microfinance demands not only on a broad range of high-quality retail financial services, but also choices among institutions. Furthermore, since the customers are willing and able to pay for the services, the financial products made available to them need to be readily usable, flexible and competitively priced. Over the past two decades microfinance institutions (MFIs) around the globe have successfully accepted this challenge. Today, typical loan products in microfinance consist of short-term and medium-term loans, longer-term mortgages, leasing (hire purchase), and personal or consumer loans. In addition, MFIs also offer savings accounts and time deposits, contractual products for pensions, (micro-) insurance as well as transaction banking products such as payment transfers, remittances from abroad, etc. Experience also suggests that microfinance is a riskmanageable business. Moreover, provided that the microfinance operation is properly structured and run, and sufficient scale is achieved, there is mounting evidence that banking with low-income and even poor consumers of financial services can generate healthy returns on equity and assets. However, despite the fact that MFIs have been successfully making inroads into their target markets for almost two decades, there is still an enormous gap between potential demand for and actual supply of microloans. Recent research estimates that MFIs already serve approximately 100 million clients, while about 1.5 billion of the working poor are potential clients.2 A further indication of the enormous gap is the extremely low microloan penetration rates, which do not exceed 5% or even 1% of the poor in many developing countries and transition economies.