Emerging Trends and Challenges
Edited by Suresh Sundaresan
Chapter 2: The Role of International Capital Markets in Microfinance
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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