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How Should MFIs Fund Themselves

How Should MFIs Fund Themselves

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Published by: ATS on Feb 07, 2011
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How Should Microfinance InstitutionsBest Fund Themselves?
Felipe Portocarrero MaischÁlvaro Tarazona SoriaGlenn D. Westley
Inter-American Development Bank 
Washington, D.C.
Sustainable Development DepartamentBest Practices Series
Cataloging-in-Publication data provided by theInter-American Development Bank Felipe Herrera Library
 Portocarrero M., Felipe (Portocarrero Maisch).How should microfinance institutions best fund themselves? / Felipe Portocarrero Maisch, AlvaroTarazona Soria, Glenn D. Westley. p.cm. (Sustainable Development Department Best practices series ; MSM-130)Includes bibliographical references.1. Microfinance—Finance. 2. Small business—Finance. 1. Tarazona Soria, Alvaro. II. Westley, GlennD. III. Inter-American Development Bank. Sustainable Development Dept. Micro, Small and MediumEnterprise Division. IV. Title. V. Series.332.742 P33—dc22HG178.3 .P33 2006
Felipe Portocarrero Maisch is a consultant and researcher in the field of microfinance. Álvaro TarazonaSoria is a consultant in microfinance. Glenn D. Westley is senior advisor for microenterprise in the Micro,Small and Medium Enterprise Division of the Sustainable Development Department. The authors wish tothank Socorro Acuña (CMAC Arequipa), Pedro Arriola and Gerardo Mendieta (Banco Los Andes Pro-credit), Eduardo Bazoberry (Prodem), Roberto Guanilo (CMAC Trujillo), Julio Herbas (Bancosol), JaimeQuesada (CRAC Señor de Luren), Andrés Urquidi (FIE), Pedro Talledo (CMAC Piura), Ángela MaríaBecerra (Finamérica), Klaus Geyer and Antonio Martínez (Procredit, Nicaragua), Todd Farrington andDamian von Stauffenberg (MicroRate), Fleming Duarte, Felipe Morris and Bob Vogel. In addition, theauthors recognize the work of Greta Greathouse, GMI, LLC and the GMI staff who prepared the materialon which Annex A is based and also for contribution of material on capital markets. Research was under-taken with the support of the Institute of Peruvian Studies (IEP), which efficiently organized adminstra-tive tasks and provided a stimulating framework for the discussion of results. In particular, we wish torecognize Carolina Trivelli, IEP Director. Finally, we thank Vanessa Banchero for her able provision of research assistance.The views and opinions expressed herein are those of the authors and do not necessarily represent the of-ficial position of the Inter-American Development Bank. Permission is granted to reproduce this paper inwhole or in part for noncommercial purposes only and with proper attribution to the authors, the Sustain-able Development Department and the Inter-American Development Bank. November 2006This publication (Reference No. MSM-130) can be obtained through:MSM PublicationsMicro, Small and Medium Enterprise DivisionSustainable Development DepartmentInter-American Development Bank 1300 New York Avenue, N.W.Washington, D.C. 20577e-mail:mipyme@iadb.org Fax: 202-312-4134Website: www.iadb.org/sds/msm
The microfinance industry is well on its way to maturity. Only a few years ago, the focus was on how togrant and recover loans and reach sustainability. While these continue to be important concerns, todayother issues have also come to the fore, such as the financing of microfinance institutions (MFIs). In their start-up phase, many MFIs depended on borrowings from donors and governments. Currently, however,deposits are their main source of funds, easily surpassing other funding options.In examining this and related phenomena, the current study gathers together a large database on the fund-ing side of Latin American MFIs, providing detailed coverage of 61 regulated MFIs in nine Latin Ameri-can countries with major microfinance markets. Together, these 61 MFIs had US$ 1,899 million in totalliabilities at the end of 2003, including deposits of US$ 1.24 billion (65 percent of total liabilities), bor-rowings (from governments, donors, banks, social investors, and others) of US$ 517 million (27 percentof liabilities) and bonds outstanding of US$ 33 million (1.7 percent of liabilities). In addition, the networth of the 61 MFIs came to $376 million (20 percent of total liabilities, for a leverage ratio of 5:1).After examining these and other important stylized facts associated with the funding of regulated MFIs,the study goes on to examine the relative costs of the four major funding sources: deposits, borrowingsand stock and bond issue. As one important aspect of this analysis, it examines the operating costs associ-ated with deposit mobilization, based on detailed costing studies of 10 Latin American MFIs (six of which are new studies and are undertaken for this analysis). Average annual operating costs are found to be relatively high for savings deposits (11.4 percent of the amount mobilized) but much lower for timedeposits (2.4 percent), which helps explain why most of the deposits mobilized by MFIs consist of timedeposits (74 percent of the total).The study also examines rather comprehensively the other advantages and disadvantages of each of thefour funding sources. It recommends a funding structure for both maturing and mature MFIs in both sta- ble and unstable macroeconomic environments.Finally, the study provides numerous best practice recommendations for using each of the four major funding sources. The recommendations are particularly detailed in the area of deposit mobilization, exam-ining, for example, overall strategy, client segmentation, organization and management, strategies for competing and increasing market share, marketing, and controlling the major market risks (liquidity, termmismatch, interest rate and currency mismatch). The study ends with a series of suggestions for how do-nors and governments can best support the funding side of MFI operations.Álvaro R. RamírezChief Micro, Small and Medium Enterprise Division

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