European Microfinance Week 2016

PRESENTATIONS

Myriam NOURI kicked off the session by introducing her panel, representing different investors and an MFI, that would approach the challenges and do’s and don’ts of long term debt from different perspectives. Nouri underlined the benefits of long-term debt through an example of an Oxus affiliate in Afghanistan. Although working in a tough context, the organisation is the best performing in the network. She stressed access to long term debt refinancing (10 year maturity loans in local currency) played a strong role in this success. In contrast, most microfinance investment vehicles (MIVs) and development finance institutions (DFIs) provide funding with an average maturity of 18 to 24 months. This can impede MFIs in terms of planning, developing a balanced growth strategy and developing products and markets. In the context of the session debt financing with a maturity over 3 years was considered as long-term.

She handed over to Kaspar WANSLEBEN of LMDF to provide insights on the tools, prerequisites and constraints of long term debt finance. He explained how long term debt is a challenge for MIVs due to potential asset liability mismatches: providing long-term debt finance to MFIs while their own investors can divest on shorter notice. He stated that long-term debt can benefit MFIs in terms of institutional stability and development as well as providing better opportunities to develop products. In terms of stability, long-term debt can provide security to MFIs to develop long-term strategies. In terms of institutional development, LMDF provides subordinated debt to NGOs looking to transform into MFIs but face constraints in raising senior debt. In such cases, a long term commitment by the funder is needed and a requirement of the regulator. He mentioned that access to finance is not seen as a risk by MFIs. Many find debt markets sufficiently liquid to base their financing strategy on short term finance at lower rates. More conservative MFIs might prefer to attract long term debt.

In terms of developing products which require longer maturities, LMDF identified the agricultural and education sectors as most interesting. In the case of agriculture, such products can go beyond seasonal crop finance, instead allowing for investments in infrastructure improvements. He also mentioned LMDFs Higher Education Finance Fund which allows MFIs to provide long-term student loans. To support MFIs, it is vital that the funder ensures long-term debt is available when the new product is market ready.

Pauline ANGOSO of Proparco added additional insights into tools for long term debt. She first explained how Proparco’s shareholding structure allows it to provide (foreign and local currency) long term financing and engage in long-term partnerships to capacitate clients. Investments are mostly in senior debt or equity. All debt products have maturities over 3 years, with an average of 4-5 years. She demonstrated that funding is not considered a high risk by showing outcomes of the 2016 Banana Skins report. However, risk management, macro-economic risk, and political interference were prioritized by microfinance managers and can be mitigated by the quality of funding. 

Although Proparco can provide long-term maturity borrowing, FX risk management and the cost and availability of FX hedging solutions are a constraining factor in practice. For some currencies, cross-currency swaps through TCX or commercial banks are possible at competitive costs but in many other cases local solutions need to be found by the borrower through commercial or central banks – often with gaps in maturity and resulting re-pricing risks. In cases where MFIs operate in dollarized economies or have income in dollars, Proparco needs to ensure the FX risk is not transferred to borrowers through covenants. Finally, she mentioned guarantees to allow MFIs to raise debt locally.

Priscilla CARPENTER shared experiences of Crédit Coopératif, a French cooperative bank. It is involved in microfinance through an investment company managing two funds CoopEst and CoopMed, providing senior (up to 3 years maturity) and subordinated (up to 7 years) loans in euro, US dollar and local currencies when currency risks are hedged. The bank can bring unique expertise to its investees in terms of developing a tailored approach for the social economy and social entrepreneurs. 

She then explained the shift from direct fund management to the creation of the management company Inpulse. The first offered high flexibility and a patient investment strategy but as microfinance was not a core activity, the bank’s market knowledge was not always broad enough. In contrast, working through a dedicated fund management company ensures the investment committee has the expertise to make sound decisions, for example in terms of maturity and FX risks. However, it has proven difficult to find other investors willing to make long-term commitments above 10 years. 

Rajnish DHALL of Micro Housing Finance Corporation provided a demand side perspective. To provide home financing loans to low-income households requires access to long-term debt for his institution. The market in which they operate benefits from good repayment behaviour and asset creation. His organisation has been able to access long term financing by the regulator in India (the National Housing Bank), commercial banks and other financial institutions, benefiting from the particular situation in India where the regulator incentivises commercial banks to finance organisations such as his. On the other hand, he also saw challenges, in terms of the costs of debt, the availability of long term debt for new concepts, and a lack of depth in the long-term debt market.

DISCUSSION

The discussion first focused on impact. According to Wansleben, MFIs need to become aware that access to long-term debt can make their balance sheet more stable. Furthermore, long-term debt allows MFIs to develop appropriate, long term products for niche markets without exposing their organisation to risk. Angoso wondered whether MFIs look at indirect costs of renewing and refinancing short term credit lines. She also stressed how long-term partnerships between funder and MFI can improve impact. Carpenter added that such relationships also allow for innovative solutions to tackle FX exchange risk, for example by agreeing on a higher interest rate in exchange for debt forgiveness when exchange rates cross agreed thresholds. Wansleben stressed the need to come to tailored solutions to share risks and costs which fit local market realities. 

When asked about risks of shocks in the housing market, Dhall stressed that his organisation lends against earning capacity even though it can be difficult to assess when income is generated through informal activities. As a key message to the audience, Angoso stressed that it is the responsibility of the funder to ensure their client can manage asset and liability risks. Carpenter added that a long term relationship allows the funder to understand the MFI and help them come to innovative solutions which have impact. Wansleben spoke about the need to diversify different funding options for different needs. Dhall closed by stating that long-term debt can help MFIs target new market segments and reach impact.