The Multilateral Investment Fund (MIF) will provide up toUS$4.5mn in financing to create an emergency liquidity facility that will help Latin American and Caribbean microfinanceinstitutions weather economic crises and natural disasters, the Inter-American Development Bank has announced.
The MIF, an autonomous fund administered by the IADB, plans to partner with other multilateral and private institutions that support microenterprise development to establish Emergency Liquidity Facility SA (ELF).
Microfinance institutions specialise in services such as microcredit for the smallest enterprises, a sector that generates nearly half the jobs in Latin America and the Caribbean.
ELF will supply short-term loans to qualifying microfinance institutions facing liquidity difficulties during emergencies caused by external shocks. This financing will help microlenders meet sudden spikes in credit demand or bridge the temporary arrears in microcredit repayments typically triggered by disasters.
In order to qualify for ELF financing, microfinance institutions will have to comply with strict criteria concerning solvency ratios, management, governance and transparency. The liquidity fund will not bail out insolvent lenders.
ELF will also have a technical support facility with resources to help microfinance institutions strengthen their administration, risk management and contingency planning capabilities, as well as to allow them to resume operations quickly after emergencies caused by factors beyond their control.
The MIF sees ELF as a first step towards addressing the need for a lender of last resort in Latin America’s burgeoning microfinance industry. Unlike large banks, which can normally resort to public sector-sponsored emergency loans to overcome liquidity shortages, microfinance institutions usually suffer severe disruptions in their operations during crises.
“Microfinance institutions now serve nearly 1.5mn small businesses in Latin America and the Caribbean. But even the healthiest MFIs can founder during economic downturns or in the wake of natural disasters,” says MIF project team leader Tomas Miller. “This new liquidity and technical assistance fund will help them weather such crises and ensure continuity of their valuable services when their clients most need them.”
This new project builds on the experience gained by the IADB and the MIF in previous efforts such as a recovery programme for microenterprises hit by Hurricane Mitch in Central America. The MIF is also a founding shareholder of ProFund, the world’s first microfinance equity fund.
Established in 1996, ProFund has become a transforming force in microfinance, making investments in leading microcredit institutions in Bolivia, Colombia, Ecuador, Guatemala, Haiti, Mexico, Nicaragua, Paraguay, Peru and Venezuela. The MIF was also a founder of LACIF, the first debt fund for microfinance in the region, and also makes direct equity and debt investments in new institutions.
The MIF expects to provide up to US$1mn in equity and a subordinated loan to establish ELF. It will also provide a US$3mn long-term balloon loan for ELF and up to US$500,000 in grant resources for technical assistance.
ELF, which will be managed by the Costa Rica-based consulting and fund management firm Omtrix Inc, will have a structure that will allow donors, investors and lenders with different institutional goals and operating policies to participate in the project.