[PANEL SESSION] Investing in microfinance through funds: results of Tameo's 2021 market survey on private asset impact funds

  • Ramkumar NARAYANAN, Tameo Solutions
  • Genevieve EDENS, WaterEquity
  • Fernando SANCHEZ, BIM


In this session, Ramkumar NARAYANAN presented key takeaways from Tameo’s 2021 report on Private Asset Impact Funds, with a focus on the MIV segment. For this report, Tameo received support from 18 sponsors including SECO, Symbiotics and TCX. The report’s results serve as a unique industry benchmark for fund managers to position their impact products according to current market trends, and for asset owners to understand the financial and impact performance of multi-asset class strategies deployed through funds.

Tameo approached a total of 175 impact funds for the survey. These impact funds cover 62% of the USD 38 billion market for impact investing through private assets in emerging and frontier markets by the private and the public sector through impact funds. The survey covered 92% of the microfinance fund industry within this market. 92 of the 175 impact funds in the sample are positioned in the microfinance sector showing that microfinance funds play a large role in impact investing.

The performance of impact funds in 2021 was expected to be much better than in 2020, which was a flat growth year due to the COVID-19 pandemic. For 2021, impact funds forecasted a 12.3% growth. Microfinance funds specifically forecasted a 10.1% growth.

Microfinance and SME development account for most of the portfolio of the impact funds with a 52% and 24% share in their total portfolios respectively. Geographically speaking, the focus of the impact funds in the microfinance sector is on Eastern Europe and Central Asia (33%) and Latin America and the Caribbean (27%). SME development funds focus on Latin America and the Caribbean (31%), Sub-Saharan Africa (25%) and South Asia (25%). Financial institutions are the main investee type accounting for 85% of the portfolio of impact funds. Data on targets of impact funds with regards to Sustainable Development Goals (SDG) reveal that SDGs 1, 8 and 5 are the most intended targets.

Private debts in local currencies, as opposed to hard currency, accounted for 35% of total private debt investments by impact funds. However, the use of local currencies is increasing with the main local currencies being INR and MXN. This exposes impact funds to currency exchange risks. Narayanan asked Per VAN SWAAY to share his knowledge on mitigating these risks. Van Swaay works for TCX which offers currency derivatives in emerging and frontier markets to support local currency lending to businesses and financial institutions based in those markets.

Van Swaay explained that the case for using hard or local currency depends on the situation. In sectors where clients generate dollars, financing debt in dollars is often the best option. Whereas in sectors which exclusively generate local currency, financing debt in local currency is often the best option. According to the experience by TCX, costs of financing in local currency are quite similar to costs of financing in hard currency over the long-term. In contrast, many borrowers believe that hedge rates are relatively high and opt for lower prices of hard currency loans.

Narayanan then asked Fernando SANCHEZ of the impact fund manager BIM how he approaches dialogue around currency options. Sanchez explained that different factors need to be considered. The first factor is the correlation between the currency generated by a sector and the financing currency. For example, some Latin American sectors are strongly linked to US or European markets and this is an argument for using currencies of those markets. The second factor to consider for currency options is long-term costs. Speculation on currency developments is a short-term strategy, whereas there is a need for a long-term view. The third factor to consider is the knowledge of the financial institution of the local market. Knowledge of the local market helps to reduce credit risk.

Narayanan then asked Sanchez how he sees the future of impact finance markets. Sanchez responded that impact funds can develop markets for financial products through product development. For example, BIM is part of a group with experience in clean energy and can use that to develop specific products for that market which has potential for growth. Genevieve EDENS added that she notices more interest from investors in water and sanitation (WASH), because of the pandemic. However, this has not resulted in a considerable increase in investment in WASH, which remains a small sector as also shown in Tameo’s survey. The main reason for the slow growth despite investor interest is a lack of local regulations and policies for this sector. Another reason for lagging investments in WASH is the lack of knowledge by investors on project finance. It was striking for Edens to see that financial institutions comprise the majority of investees. According to Edens, project finance has potential for growth. One of the steps that the financial sector must take to realise this growth is to adapt metrics for measuring impact of project finance. This will require a systemic approach. For example, the impact of project finance for a new or improved sewerage system is more complex to measure than the impact of many standardized microfinance products.


One of the audience members asked Van Swaay’s point of view on limitations in hedging options. According to Van Swaay, hedging options are not a constraint for financing in local currency and costs of hedging are not as high as perceived by many people. He estimated that the average difference in interest rates between financing in local and hard currency is only marginal. To illustrate, a major benefit of financing in local currency is that financial institutions do not need to keep large reserves to manage risks of currency volatility.

Another audience member asked if policy makers should make it less attractive to speculate with hard currency. Van Swaay could understand that certain individual borrowers decide to take a risk and speculate. However, he warned for large scale speculation and argued that subsidizing local currency options is justified to counter this.