microfinance, securitization, Special Purpose Vehicle, SPV, microfinance institutions, MFIs
Banking and Finance | Law
Microfinance primarily refers to the making of small loans to low-income individuals and the poor, to enable them to start or expand small businesses. Currently, most microfinance loans are made through nonprofit microfinance institutions (MFIs) that receive donor money. However, donor-funded loans can account for only a small portion of the need. Microfinance analysts estimate, for example, that total market potential is $300 billion, of which only ten percent is currently being captured. Increasingly, the shortfall in funding is being met by commercial banks. But commercial-bank intermediation is expensive, with a global average effective interest rate (on commercial microfinance loans) reported to be as high as thirty-seven percent.
I have separately argued that microfinance lending can benefit through securitization. Securitization envisions the creation of a special-purpose vehicle (“SPV,” sometimes called a special-purpose entity or SPE) that effectively replaces commercial banks as intermediaries of funds from capital market sources (such replacement being called “disintermediation”). Unlike commercial banks, the SPV is not intended to be profit-making. The SPV issues securities to capital market investors and uses the proceeds to acquire rights to payment, which are intangibles, under loans, leases, and other financial assets. These intangible rights, in turn, constitute the source of repayment of the SPV’s securities.
Securitization can be applied to microfinance in two ways. The more straightforward way, which to some extent is already occurring, is to securitize an MFI’s donor-funded microfinance loans in order to regenerate funding for the MFI to make additional loans (“regenerative securitization”). A more innovative way would be to fund new microfinance lending through the capital markets without expensive commercial-bank intermediation (“transformative securitization”).
Steven L. Schwarcz, Helping Microfinance Become Commercially Sustainable, 46 Gonzaga Law Review 495-502 (2011).