Bond Gives Boost To Microfinance

The Financial Times

March 2, 2006

By Paul J Davies in London

Microfinance, the business of making tiny loans to individuals in developing countries, is taking a step forward with the launch of the biggest attempt yet to generate funding through the international capital markets.

BlueOrchard, a Geneva-based specialist company, yesterday launched a $106m (€88m, £61m) bond backed by loans to 22 microfinance institutions (MFIs), which will be available to investors worldwide through a sale being managed by Morgan Stanley, the US investment bank.

The MFIs, which are based in Latin America, eastern Europe and south-east Asia, will use the funding to make loans to individual entrepreneurs in their countries for mainly agricultural or urban business purposes.

Microfinance, a growing industry that has mostly been funded by development banks and multilateral institutions, was put in the spotlight last year by the United Nations when it designated 2005 the Year of Microfinance.

Private banks and wealthy individuals, such as Microsoft founder Bill Gates, have increasingly been developing funds to invest in the area in recent years and efforts to develop the business into a mature asset class with access to international capital markets have been going on for some time.

But so far individual bond sales have amounted to just a few tens of millionsand have mostly been privately placed with experienced microfinance investors.

Jack Lowe, chief executive of BlueOrchard, said access to mainstream capital markets was necessary to maintain the strong growth rates being seen among MFIs.

"The need for long-term money for MFIs is so great that this form of securitisation - more refined, more efficient - is, I think, here to stay," Mr Lowe said. "And the funding gap with what the multilateral institutions can provide will only grow, so the private sector needs to ride to the rescue."

He added that the MFIs to be funded by BlueOrchard's deal were seeing assets growing at about 40 per cent a year, while delinquency rates and the number of bad loans written off were low and had been declining.

"Although the microfinance sector is small today, we believe it will become an established asset class in the future," he said.

The deal will not be rated by the credit rating agencies, but FMO, the Dutch development bank, has committed itself to buying about 30 per cent of the issue in the form of a junior portion of the bond, which will give other investors some protection.