Role Reversal

By February 2, 2007 No Comments

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Role Reversal: Are Public Development Institutions Crowding Out Private Investment in Microfinance?

The rapid emergence of a large number of foreign private lenders is one of the most encouraging aspects of microfinance. If all of those among the poor who can use credit productively are to be reached, then vast amounts of private funding will be needed in the future. Development institutions (International Financial Institutions -IFIs) large as they are, cannot come close to meeting the future funding needs of MFIs. Only private capital can provide that kind of money. Yet IFIs are concentrating their loans in the strongest MFIs, leaving private lenders to look for opportunities among smaller, riskier borrowers. Development institutions are crowding private lenders out of the best MFIs. By forcing private lenders out of the most lucrative segment of microfinance, IFIs are hampering the development of the very institutions on which the sector will depend in the long run. This has led to a surprising reversal of roles between government-owned development institutions (which traditionally reach the sectors deemed too risky by private investors) and private lenders.

This paper focuses on direct retail lending to microfinance institutions. Equity and guarantees are not addressed, nor are lending via apexes or debt or equity investments in microfinance investment vehicles. Furthermore, this paper investigates the shift in roles and makes recommendations on the role IFIs should play.

Written by: Julie Abrams, Damian von Stauffendberg. Feb 2007.