Reducing Barriers to Microfinance Investments: The Role of Structured Finance

The microfinance industry has experienced dynamic development. Microfinance now reaches close to 100 million clients worldwide and is growing fast.1 It has played and will continue to play a key role in contributing to the UN Millennium Development Goals (MDG). Yet it is estimated that close to half a billion potential microfinance clients, mainly from low income households, still lack access to formal financial services. While the reasons for this gap are multifarious, lack of funding for microfinance institutions (MFIs) has been cited as an important barrier to achieving growth and massive outreach. Many young and small MFIs still rely on grant funding, but the number of financially sustainable MFIs is increasing. More and more MFIs finance their growth by systematic mobilisation of local savings, commercial refinancing loans and retained earnings. Yet equity and long-term funding by development finance institutions (DFIs) and grants for technical assistance still play a key role, even for commercially viable MFIs. However, DFIs are not capable of meeting the huge demand of microfinance providers that results from the growing demand for microcredit. According to a recent analysis by Morgan Stanley, the outstanding global microloan portfolio is estimated to grow from USD 17 billion at present to USD 250 to 300 billion within the next decade. If MFIs are to reach their full potential, new and innovative ways must be sought to upscale sustainable microfinance and to integrate microfinance institutions fully into local and international financial markets.