There are around 100 microfinance funds (MFF) around the world, managing around $ 9.9 billion. They invested most of their funds in 2010 in a total of 524 MFIs. As a rule, most MFF investments are thus concentrated on a few large MFIs with stable financial positions. The exceptions are actors strongly focused on development effectiveness, such as Oikocredit and FEFISOL, which promote the development and expansion of small-scale MFIs in developing countries and invest part of the funds directly in production cooperatives.
There are currently no studies on how MFF act and what differences exist in the effect of different fund types. There are, however, very different MFFs, some with clearly divergent strategies. In terms of their social effectiveness, MFFs may differ by:
• The MFF conducts debt-equity studies of the countries and regions in which it operates and refrains from further involvement in the event of an over-supply of loans or threatens to exist.
• In addition to financial support, the MFF offers comprehensive advice on the subject of customer protection and urges the implementation of appropriate principles
• The maturity of loans to MFIs varies between short, medium and long term loans
• The loans can be senior or junior
• The MFF can participate in the equity of the MFIs
• In addition to financial support, the MFF offers comprehensive advice on operational management
• The MFF is a large part of the currency risk
• The MFF offers comprehensive advice on social and environmental impacts
• The MFF conducts studies on the social impact of MFIs in specific regions and publishes their findings
• The MFF is present locally through regional offices
How such characteristics influence the social and environmental impact of microcredit has not yet been empirically investigated. In this section, therefore, it is only from the findings on the effects of microfinance described above that priorities within the listed features can be set.
Application of microfinance funds
Microfinance funds are not promoted with the argument that they reduce poverty. The truth clarifies factually that MFFs help provide financial services to poorer sections of the population and small and medium-sized enterprises in developing and emerging countries. At the same time, attention is drawn to risks associated with microcredit are bound, such as the over-indebtedness of poor households. It shows how the selected MFFs try to eliminate these risks.
Avoid oversupply – The MFFs offered by the distribution bank periodically check whether there is an excess supply of credit in the countries and regions in which the fund is active and whether this relates to the operations of the MFIs it co-finances. If there is a risk of oversupply, precautionary measures will be taken. The Distributor regularly exchanges views with MFF and organizations working on the subject, such as Planet Rating and Oikocredit, in order to better understand this problem and to be able to react responsibly.
Currency risks – The sales bank checks at MFF who assumes the currency risks and makes sure that these risks are only passed on to local micro-credit customers to a very limited extent.
Customer protection principles are observed – The distribution bank ensures that the microfinance organization for which it distributes MFF has signed “Smart Prindples.” If the distribution bank launches its own microfinance funds, it should sign these principles as well Provide advice on the subject of customer protection and push for the implementation of customer protection principles in the sense of the “Smart Principles”. In the long term, it is desirable to have the majority of MFF-funded MFIs certified under the Smart Principles.
Wide offer for MFI
The sales bank prefers to select MFF, which can realize various financing options. They offer MFIs loans with various maturities, including multi-year maturities, senior and subordinated loans and equity investments. Only MFFs are offered to advise MFIs on issues of microfinance and impact measurement.
Measuring the effectiveness of the MFI
MFIs included in MFF portfolios that distribute the distribution bank have data on:
• Share of young, small, medium and established MFIs (Tier 1, 2 or 3 MFIs) in portfolio, Share of cooperatives financed
• Share of rural and urban clientele of MFIs
• Percentage of MFIs operating targeted MFIs in regions with underfunding of financial services providers (start-up or expansion in rural areas)
• Proportion of borrowers below the poverty line of the MFIs and the number of MFIs who use measuring instruments, such as Use the “Progress out of Poverty Index” or the CGAP indicators to document the progress of their clients
• Share of MFIs with predominantly female borrowers
• Share of micro-enterprises financed, micro-enterprises and SMEs, percentage of funded start-ups, number of jobs created
• Percentage of MFIs offering different loan options, savings and insurance products
• Percentage of MFIs who train and advise their clients on business topics
• Share of MFIs advising their clients on social issues such as health care and education, etc.
• Percentage of MFIs providing loans for home-buying or home-building or improving the housing situation (sanitation)
• Percentage of MFIs granting education loans
• Percentage of MFIs that take into account environmental criteria in their lending
• Share of MFIs working with Fair Trade cooperatives