Small change, big difference

City investors bank on the world’s ‘unbankable’
$108 million was raised in a Morgan Stanley bond – to be turned into microfinance. That’s the truly exceptional thing about the ‘BOLD-2 transaction’. The money, raised in May this year, will be loaned to microfinance institutions in 12 developing countries. They, in turn, will offer it to their low-income clients – giving them access for the first time to small loans, savings accounts, health and crop insurance, remittance services and other financial products.

Morgan Stanley’s transaction is the first such instrument rated as ‘low risk’ by independent assessors – something which really made analysts prick up their ears, and the explanation for conventional investors such as pension funds being so keen to get involved. “It’s a breakthrough,” says Alice Chapple, co-author of a Forum for the Future report on the hot topic of microfinance.

Extending financial products to the ‘unbankable’ has huge potential for boosting business activity in the developing world – as well as helping people afford to feed their families, send their children to school and buy healthcare. Yet Chapple points out that the finance industry is only meeting about 10% of a potential global demand of $300 billion. The only way to gain the mainstream finance sector’s confidence, she says, is to help microfinance outfits get their balance sheets and management skills up to scratch. Both Morgan Stanley and Citigroup, as well as the Department for International Development (DfID), are starting to embrace this, but her tip-off to any investor is: “There’s a huge reservoir of untapped commercial and human development returns out there.”

This July saw the launch of the first capital trading exchange for microfinance (www.mfdaq.com), an online virtual stock exchange that should boost activity within the sector.

Download Forum for the Future's ‘New Horizons: creating value, enabling livelihoods’ at www.forumforthefuture.org.uk/publications

Hannah Bullock

19 September 2007

Hannah Bullock