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Building Inclusive Financial Sectors for Development
of larger banks, it is also relevant for smaller institutions because they tend to lend at fixed rates and borrow at floating rates. Furthermore, the risk becomes more critical when MFIs make longer term loans at fixed rates since they cannot renew loan contracts in just a few months at a higher rate. Special attention should be paid to this risk in countries where interest rates are being deregulated and where microfinance providers offer longer-term fixed rate loans for housing or other finance needs.
Constraints on financial market confidence Beyond the general concerns regarding the track record of MFIs, banks and other financial institutions have been slow to show confidence in specialized financial institutions. These institutions operate very differently from more traditional financial institutions. Commercial lenders, for example, are reluctant to allow unregulated MFIs to leverage their equity beyond low limits; they will lend them a smaller amount relative to equity than they would lend to a regulated institution, which is a sign of lower confidence. While only rarely a requirement, it is often the policy of lenders to lend only to regulated institutions, thus leaving out many solid and successful MFIs. The risk profile of regulated institutions is simply more appealing to potential lenders. In some cases, this perception of the riskiness of unregulated MFIs reflects an unwillingness to engage with a different type of organization or to adjust the existing loan evaluation methodology; in other cases, the perception of risk is warranted. Ownership. The status of many MFIs as non-profit institutions makes it difficult for them to secure loans. NGOs that are not legally established as corporations have no clear ownership and no capital base that is formally the property of the owners that can be leveraged to raise debt. When there are private owners, the bank knows whom it can hold responsible for the loan. Without this assurance, it is more difficult to borrow from a bank. When non-profit institutions learn the challenges and difficulties they face in accessing the financial markets, they are frequently motivated to transform into corporations. As expressed in MicroRate’s The Finance of Microfinance: “Why would any sane MFI exchange a comfortable existence, free from governmental supervision and taxation, for the burdens of being a regulated financial intermediary? The answer is simple: MFIs are growing so fast that they have developed a voracious appetite for funding” (Von Stauffenberg, 2004, p. 5). There is, however, no consensus on what types of ownership structure are best or most effective under what types of circumstances. Most non-profit structures would be considered unappealing to market lenders. Yet, the case of the Fundación WWB Colombia in Cali demonstrates that a non-profit institution with strong financial performance can access capital markets. The organization successfully floated a bond issue in Colombia without any guarantee, based instead on its strong reputation and investment grade rating. While some contend legal status and ownership structure are defining factors, others contend that reputation and performance are more important. A commercial bank, like bond buyers, looks at the management team, credit risk and the track record of a potential borrower, as well as the ownership structure and the range of products and markets over which it is spreading its risk. Risk assessment. In contrast to bank loans, borrowing on credit markets requires independent risk assessments to help guide bond purchasers. Risk assessments of MFIs, when they are made, are