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Emerging Trends and Challenges

Edited by Suresh Sundaresan

This book takes a solid step toward a systematic analysis of the implications of microfinance for the role and regulation of capital markets. The authors address integration of capital markets with microfinance, technological innovations such as the use of mobile phone technology, the consequences of women’s access to micro-loan borrowings, and the regulatory challenges and opportunities emerging as the landscape of microfinance dramatically evolves.
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Chapter 2: The Role of International Capital Markets in Microfinance

Brad Swanson


2. The role of international capital markets in microfinance Brad Swanson INTRODUCTION In 2004, international capital markets awoke to the attractiveness of investing in microfinance. Since then, debt and equity security issues for microfinance have raised an estimated US$1 billion from private sector financial institutions seeking commercial returns.1 The deals have taken forms that are familiar in developed markets such as initial public offerings, bond issues, collateralized debt obligations (CDOs), and securitizations of the underlying micro-loans. In addition, private sector debt and equity microfinance funds have sprung up—for investors who prefer to give discretion to professional managers—and are now thought to control more than $2 billion, of which more than $300 million is “mainstream” commercial investment.2 Overall, cross-border investment in microfinance surged to $1.4 billion in 2006, triple the rate only two years previously.3 While traditional suppliers of microfinance capital—non-profit organizations, governmental development agencies, and individuals—are contributing to this surge,4 the novelty since 2004 is the participation by private sector institutional investors seeking full market returns. These mainstream commercial investors, most located in Western Europe and the USA,5 are driving the opening of capital markets to microfinance. How and why commercial mainstream investors have come into microfinance and the likely evolution of capital markets funding for microfinance is the topic of this chapter.6 THE NEED FOR CAPITAL MARKETS FUNDING IN MICROFINANCE When properly conducted, microfinance is a profitable, low-risk, and...

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