Microfinance Funders Profiles: A Short Guide for Young and Small Institutions Still Looking for a Match

Abstract

Obtaining funding for growth can be an important challenge for many microfinance institutions (MFIs), particularly for small and young MFIs who are starting to navigate the ocean of funding alternatives and have little knowledge of where to go first. Without access to external sources of financing, the growth potential of these MFIs is constrained to their own resources.This paper focuses on those MFIs that presumably have more difficulty getting funding; they can generally be described as younger, smaller, less profitable, and having lower portfolio quality than the typical institution. For simplicity, these MFIs will be defined as those in the lower quartile of each variable under analysis, or in the lower part of the distribution.By concentrating on this group of MFIs, this report seeks to answer questions like: Who lends to young MFIs? What types of lenders fund institutions with higher credit risk? Where are smaller MFIs sourcing their on-lending funds? This paper explores each of these questions individually and offers quantitative evidence on likely matches based on the most recent data available on MFI funding liabilities.General Conclusions:* Funders who are most likely to fund MFIs from the lower quartile are generally local funders, who are closer to the MFIs than any other type of funder and thus have better knowledge about them.* Funders least likely to finance MFIs from the lower quartile are foreign or more mainstream financial players, for whom fixed costs are too high to evaluate small local actors.* This can be explained by the comparative advantage (both in terms of cost and local knowledge about the sector) that local funders have in MFI evaluation, especially for small, new, and not very well-known MFIs.* Small improvements in size, age, or profitability quickly increase the pool of potential funds.The general message for MFIs that are new to the funders’ waters is to target local funders first, and move up the spectrum with the hope of finding a better deal in terms of rate, term, foreign risk exposure, and all other conditions.