How MFIs can improve their access to funding

Today, in developing countries, an estimated two billion people lack formal access to financial services. Financial institutions, including rural banks, financing companies, lending cooperatives, microfinance institutions (MFIs) and microfinance banks (MFBs), have emerged as the main players promoting financial inclusion in unbanked or underserved communities. However, the reach of financial institutions is often limited by limited access to capital from investment funds that they need to grow and reach their clients. There are several best practices that can increase MFIs’ chances to access funding and improve their profitability, competitiveness and social impact.

Oradian interviewed Laura Dreese, a current Board member and former fund manager at Envest Microfinance, a US-based microfinance investment vehicle (MIV) that specialises in lending to Tier 3 and Tier 2 MFIs on five continents around the globe. Laura provides you with advice on how MFIs can improve their access to funding.

In general, what are the main challenges that block MFIs from accessing funds?

Challenges vary by institution, but I will list three common challenges that MFIs can take action to overcome:

  1.  Your portfolio quality and profitability metrics. These metrics reflect how an MFI is managed and can be improved. Many lenders and MIVs are strict about these metrics, so an MFI needs to maintain its ratios within certain parameters to access funding.
  1.  Macro-economic, political, and ease-of-doing-business factors. This includes country and currency stability, general corruption levels, and regulations related to foreign companies investing within the MFI’s home country. While it may seem that there is little an MFI can do to influence this, MFIs can sometimes address these challenges in creative ways. This could be by hedging foreign currency exposure, or by demonstrating strong internal controls against corruption, for example.
  2.  The size of your institution. This is probably the hardest of the three challenges to address if the MFI starts out small. Certain MIVs will not work with small MFIs, no matter how strong they are financially. This is sometimes due to minimum loan amount requirements at the MIV level (requiring a minimum asset level to absorb the transaction) or it could also be due to a perception among MIVs that small MFIs are risky.

What do MIVs and fund managers who review loan applications value the most?

The most important piece of the loan application when a fund manager is completing the desk review is clear financial statements.

Laura Dreese

                           Laura Dreese

As a fund manager, you must be able to explain and justify every single number on an MFI’s financials to the investment committee. If there is anything ambiguous, the fund manager must spend additional time to understand the accounts and is more likely to disapprove funding the MFI.

How can MFIs build trust with the fund managers and lenders?

Lenders are very cautious people because they don’t want to be responsible for recommending a loan that doesn’t perform well or eventually defaults. MFIs must take great care to put lenders at ease.

Be transparent. Lenders know that problems occur at MFIs – fraud could occur at a branch or a new loan product might increase arrears. It is important to proactively and transparently address these issues rather than hoping that a lender won’t notice them.

The only thing that scares a lender more than hearing bad news from an MFI, is the fear that the MFI is not sharing the bad news when it occurs. By being honest about challenges your institution is facing while showing that you are proactively addressing those challenges, you will build trust with your lender.

From your position as Fund Manager within an MIV, how did you help MFIs around the world secure business loans?

In addition to providing funding, we supported our MFI partners in their bids for less strict collateral requirements from lenders. Before lending, certain MIVs require, for example, a portfolio collateral pledge of 120% or even higher, or to hold hard or liquid assets on the balance sheet to be used as collateral. Envest saw how these collateral requirements handicapped the MFI. It means the MFI must carry unproductive assets on its balance sheet that it cannot use towards lending operations. This can make an MFI appear inefficient in the eyes of potential funders if it appears to have excess cash or real estate hanging around its balance sheet.

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