Microfinance Management

by
Pradeep Kumar Mishra
Cengage Learning (2019)

Chapter – 16
Funding Issues in Microfinance
Learning Objectives
• To describe the different kinds of funding and financers who have
funded to microfinance sector
• To describe the various instruments of funding like grant, equity and
debt
• To discuss the role of structured funding like securitisation in
microfinance
Types of funding in microfinance
Type of Example Type of funding
funder
Public Corporate/Private foundations Grants
funders (Ford Foundation, Bill and Melinda Gates Debt/Equity
Foundation, Tata Trusts etc)
Multilateral Agencies Grants Debts,
(The World Bank, Asian Development Bank etc) Equity, Guarantee
Bilateral Agencies Grants Debts,
(DFID, SIDA, USAID) Equity, Guarantee
Government Agencies Grants
(SIDBI, NABARD) Debts/Equity
DFIs (Kfw, AECID, FMO etc) Grants Debts,
Equity, Guarantee
Type of funder Example Type of funding
Individual Small investor Deposit, Bond (debt), Equity
investor HNI Debt, Equity
Private Banks Debt, Equity
Institutional Private Equity firm Debt, Equity
Investor Pension funds /Mutual funds Debt, Equity
NGOs (Accion, FINCA etc) Debt, Equity
Microfinane Investment Vehicles Grants, Debts, Equity,
(MIVs) Guarantee
(Oikocredit)
Grant based funding
• Not directly related to profit making purpose
• No consideration
• Welfare oriented
• In microfinance it is used sometimes when it is believed that no
commercial investment would be available until a level of
development is attained
• Channel led to the non profit wing of microfinance organisations
Debt funding
• Bonds
• Tradable debt instruments
• Zero coupon bond: issued at deep discount
• Coupon bearing bond: pays regular interest (coupon)

• Senior term loan: priority over all other loans (after depositors)
• Syndicated loan: same as above but provided by multiple lenders as a
syndicate

• Subordinated debt: low priority (paid before the equity holders)

Equity Funding
• Shareholding of a company
• Helps seeking funds without any permanent obligation to pay dividend
• Dividend payment only on profit, as determined by the management
• However, it dilutes the ownership structure
• Many MFIs have taken equity funding

• In MFIs majority of promoters have minority holding, there is a threat of

hostile takeover

• Once can get a private placement or go for IPO

Appropriate Strategy for funding
• Grant is not appropriate for for-profit MFIs/SFBs
• Grant has also become very scarce
• Equity funding has also become competitive
• What should be the right mix of debt–equity
• Higher the leverage higher the risk
• Modiglian and Miller’s theory says that firm value is independent of the
capital structure
• Other theories say there can be a right mix of deb-equity
Structured Financing
• collateralised debt obligations (CDO),
• collateralised bond obligations (CBO),
• collateralised mortgage obligations (CMO),
• credit default swap (CDS),
• hybrid securities

• Securitisation is also a source of funding

Securitisation Process
• Usefulness of Securitisaiton
• Off-balance sheet asset
• Asset becomes independent of the firm
• Illiquid asset becomes liquid
• Remote chance of bankruptcy
• Different tranches of assets based on risk appetite of investor
Funding Problems in Microfinance
• Dynamic nature of business
• Changing regulatory regime
• SFB/PB, separate category of NBFC-MFI
• CRAR Norms
• This has brought some uncertainty to the funding market
• Variety of ownership structure leading to complexity in funding
Thank You