PROPOSAL OF A GLOBAL MICROFINANCE FINANCIAL AUTHORITY MECHANISM
CZECH AGRICULTURAL UNIVERSITY
INSTITUTE OF TROPICS AND SUBTROPICS
SUSTAINABLE RURAL DEVELOPMENT IN TROPICS AND SUBTROPICS
List of abbreviations
FX Foreign Exchange
GMFA Global Microfinance Financing Authority
MFI Microfinance Institution
MII Microfinance Investment Intermediary
MIV Microfinance Investment Vehicle
microfinance, funding, inefficiency, coordination, FX risk, guarantee, credit bureau
It is expected that microfinance services at present affect more than 533 millions of people, including the families of the clients. A ...view middle of the document...
The total estimated investment by different funders is annually $13 billion USD (IAMFI), out of the total microfinance loans outstanding portfolio of over $44 billion USD. This means that almost a third, 29% of the total of microfinance funding is channeled through international financing and continues to grow fast. The assets under management of MIVs rocketed from USD 1,1 billion in 2004 to 6,02 billion USD in 2008. There is a number of limitations in local capital markets. Capital is usually expensive and loans are conditioned by short notice cancellations, increasing risks for MFIs which must build their portfolio on stable and durable funding foundations. Therefore MFIs have to look abroad for capital, balancing the mix of available financing sources. Too little and too few external funding sources can delay growth and inhibit poor clientele’s access to financial services, especially where local funding markets are underdeveloped or where young institutions cannot reach permission of the financial authority to accept deposits. Besides, international funding confers prestige and reduces susceptibility to local political risk. However, this type of funding is tied to severe problems difficult to surmount, such as FX risk, which transforms every unhedged loan into a potential threat for the debtor. Also, heavy investment concentration of the sector is a bareer for growth of small sized institutions. At last, lack of information sharing between the funders means the sector is not measured nor monitored and MFIs can and frequently do deceit funding sources. Given these facts, their reigns a striking absence of a globally acting authority, that would service individual financing initiatives in order to overcome the mentioned barreers, reap advantages of coordinated effort, increasing efficiency of the worldwide funding. As a result, the international market without a single coordinator is fragmented, inefficient and burdened with high transaction costs. This paper proposes creation of a Global Microfinance Financing Authority (GMFA) , formed by representatives of the sector, multilateral institutions and national states, in order to focus on synergy of three spheres of international financing, where aforementioned inefficiencies take place: foreign exchange risk coverage, foreign funding securities and information sharing between funders. These deficient and inefficient areas would be complemented with the following innovations: global foreign exchange risk fund, global guarantee fund and central registry of institutional debtors. The funds subjected to GMFA coordination do not require their own capital, instead they coordinate private resources currently available. Such multitasked endeavour could reap synergies due to its concentration of knowledge, strategic acting on planetary level, elimination of duplicities, lowering the transaction costs, leading to reduction of the cost of capital for the poor.