Change in the Sources of Funding of the Micro finance institutions

Sources of Funding for Microfinance Institutions (MFIs) have significantly evolved from relying primarily on grants and donor funds to a diverse mix including bank loans, development financial institution support, equity investments, and capital market instruments. Initially, MFIs depended on philanthropic contributions to offer loans to underserved populations. Over time, as the sector matured and demonstrated financial viability, it attracted commercial bank loans, albeit at higher interest rates due to perceived risks. Nowadays, MFIs also secure equity investments from impact investors, form co-lending partnerships with banks and NBFCs, and even access capital markets through bonds. This shift towards a broader, more sophisticated funding base reflects the sector’s growth, its integration into the formal financial system, and the increasing appeal of microfinance to a wide range of investors seeking social as well as financial returns.

Early Years:

• Donor Funds and Grants:

Initially, many MFIs started with funding from international donors, charitable organizations, and government grants. These funds were essential for setting up operations and reaching out to underserved populations.

• Bank Loans:

As MFIs established their creditworthiness, they began to access loans from commercial banks. However, these loans often came with high interest rates due to the perceived high risk of microfinance lending.

Evolution and Growth:

• Development Financial Institutions (DFIs):

DFIs like the World Bank and regional development banks started providing funds to MFIs, recognizing their role in financial inclusion. DFI funding often came with more favorable terms than commercial bank loans.

• Securitization and Bond issues:

Some large MFIs began securitizing their loan portfolios or issuing bonds to raise funds from the capital markets. This was a significant shift, indicating the sector’s growing sophistication.

Recent Trends:

• Equity Investments:

There has been a noticeable increase in equity investments from social venture capital funds, impact investors, and even traditional private equity players. These investments are aimed at scaling operations and enhancing institutional strength.

• Commercial Banks and NBFC Partnerships:

Many MFIs have forged partnerships with commercial banks and Non-Banking Financial Companies (NBFCs) for co-lending opportunities. These partnerships allow MFIs to leverage the banks’ and NBFCs’ larger capital bases and distribution networks.

• Deposits (for MFIs converted into Banks):

Some of the largest MFIs have transitioned into small finance banks, allowing them to accept deposits from the public. This not only diversifies their funding base but also significantly reduces their cost of funds.

• Peer-to-Peer (P2P) Lending Platforms:

Technological advancements have enabled some MFIs to raise funds through P2P lending platforms, broadening their access to individual and institutional lenders.

• International Bonds and Green Financing:

MFIs with a significant track record and international presence have started accessing international bond markets, including issuing green bonds to finance environmentally sustainable projects.

Looking Ahead:

The trend towards diversification of funding sources is expected to continue, with a strong emphasis on sustainability and social impact investment. Additionally, digital finance is opening up new avenues for capital raising, including through cryptocurrencies and blockchain-based platforms. However, with these new opportunities come challenges related to regulatory compliance, currency risk management, and maintaining the social mission of microfinance in the face of commercial pressures.