This document proposes a Cash Collateralized Micro-Finance Obligation (Cash CMFO) investment vehicle to increase capital flows to microfinance institutions in South America. A Cash CMFO would securitize microfinance loans into tranches based on social impact and credit risk, allowing institutional investors to choose their preferred risk-return tradeoff while providing transparency and oversight of funds. The proposed Cash CMFO aims to be a sustainable and profitable investment that aligns investor interests with the social goals of microfinancing, expanding access to capital for small businesses and entrepreneurs in Latin America.
1. CMFO - Microfinance Investment Vehicle in South America
Opportunity
Despite Latin America and the Caribbean (LAC) growing at a projected average of 3% per annum in the medium
term, the region still has a significant portion of the population living on less than USD $2per day. And while FDI
inflows into LAC increased by
5% in 2013 there is no true sign
of the wealth disparity reverting
under traditional methods. Mi-
crofinancing sought to change
all that. Introduced to the region
in the 1970s, microfinancing
foundations grant small loans to
individuals seeking capital while
taking on risk seen as unsus-
tainable by traditional financial
institutions. When effectively
funded and implemented, mi-
crofinancing can change the
landscape of an economy while providing an average 95% repayment rate to the lenders. Projects range from
small business loans of USD $50 - $200 to loans for child education and healthcare services. By 2009 the Latin
American region boasted 10.5 million borrowers with a total loan portfolio of USD $12.3 billion and untold so-
cial impact.
However, the amount of capital inflows allocated towards microfinancing is far from what is needed for sustain-
able change. Several studies estimate that 70% of the population in Latin America is still marginalized from fi-
nancial services by commercial banks, with only 17% of those marginalized and applying for microfinancing
capital receiving funding. The continued lack of adequate capital flows to microfinancing foundations stifles the
economic and social growth of the region as 67% of microfinancing recipients are women for whom financial
capital and autonomy would provide local economic growth as well as towards family healthcare and education.
Cash Collateralized Micro-Finance Obligations (Cash-CMFO)
While investment for the sake of charity is an inspiring example, aligning charitable capital flows with investors’
self-interests can provide a win-win scenario of abundant capital and returns to global institutional investors,
regional microfinance foundations, and domestic entrepreneurs. The prevailing misconception is that microfi-
nancing only provides a charita-
ble return with little to no insight
into how the money is used. In
reality, these institutions are
quite profitable. As the risk of
default is already accounted for
by the microfinance institutions it
is diversified across our invest-
ment vehicle. However, there is a
tradeoff between the financial
return of a respective project and
the level of social impact attained
(as measured by the four credit
agencies found in Appendix 1). A
Cash CMFO operates like a stan-
dard collateralized debt obliga-
tion with a few key differences.
Firstly, since the microfinance
loans are backed by the cash pur-
2. Type: Cash Collateralized Micro-Finance Obligations (Cash CMFO)
Size: $10,000,000
Structure: 4 tranches respectively to Social Impact and Credit Risk
Region: Bolivia, Brazil, Colombia, Ecuador and Peru
Investor base: family offices, family foundations and wealthy clients
Expected Returns: 8-13% dependent on tranche
Management fees: 1% of total investment
Time horizon: 2-3 years average loan
chases of debt and equity of microfinance institutions the CMFO is backed by real assets, namely microfinance
loans, as opposed to a synthetic CDO. The second major difference is pertaining to risk. There is a positive
lation between social impact and credit rating. Therefore, we tranche the securitized loans in the Cash CMFO
based on the investor’s impact preference and their risk preferences. Hence, the level of social impact is
ly related to the return of the microfinance loans.
By creating a Cash CMFO, investors are given clarity on the use of their otherwise charitable donations, micro-
finance institutions are provided more capital through a highly liquid capital instrument, and investors are pro-
vided a competitive return that can be reinvested in future Cash CMFOs for the social and economic benefit of all
three parties. Another feature of the Cash CMFO is the cash flow waterfall. In this structure the coupon and the
principal of a social impact tranche will be paid only if all the above tranches (i.e. with higher social impact)
have been paid off. The cash flow waterfall structure gives priority to investors who seek higher social impact
despite the lower rate of returns (Appendix 2).
In short, the Cash CMFO provides the most comprehensive and competitive structuring of MF investment oppor-
tunities in South America while aligning investor interests with charitable needs.
Target investors
Central to sustainable impact investing is the ability of investors to monitor the use of their investments. The
CMFO solves this by providing investors the ability to decide their optimal level of social impact and financial
returns. As a result the CMFO satisfies the financial incentive of the investor while providing clear oversight of
the social impact achieved by their investments. This innovative approach to micro-financing is targeted at
those investors who would donate to microfinance institutions, provided equitable returns and proper over-
sight were incorporated into the investment. This structure can easily be implemented into new microfinance
investment opportunities, regardless
of location. Following successful pi-
loting of the CMFO and the subse-
quent rise in capital flows to micro-
finance institutions it is our hope
that this model could be used in de-
veloping countries, from South
America to South Asia, to provide
micro financing institutions with the
capital inflows needed to create sus-
tainable change.
Microfinance Institutions
The CMFO focuses on the level of social impact and on the rating
of the selected microfinance foundations to incorporate into the
database available to investors. In terms of social rating, only
institutions with 2.5 or more (out of 5) were included. The social
rating framework indicated the microfinance foundation’s out-
reach to the poor, appropriateness of services, and the social
responsibility to the community and to the environment. Default
rating was an important decision in the selection of the institu-
tions as we target secure rates of returns for our investors. The
CMFO will allow investors to invest only in foundations with at
least a B rating, which corresponds to moderate or well-
managed short- and medium-term risk combined with good
performance.
In summary, the Cash CMFO allows for the perfect nexus of fund-
ing for stable microfinance institutions, empowerment of social-
impact projects, and competitive returns to institutional investors. The CMFO is the investment vehicle that will
make a difference in the sustainability of microfinance, bridging the gap between charitable contributions and
innovative financial products. It is a high-impact, sustainable investment vehicle, driven by a fierce belief in
what we can achieve together.
3. Tranch Microfinance Institution Country Date MIR* ROE N° Borrowers ø Loan Portfolio Yld Date Social Rating
Fodemi Ecuador 2013 b+ 10.90% 38,109 $614 23.70% 2013 4
CRECER Bolivia 2011 A 23.40% 109,822 $536 36.30% 2013 4+
ProMujer Peru Peru 2013 a- 24.90% 61,072 $525 55.80% 2013 4
FMM Bucaramanaga Colombia 2013 a 21.70% 301,403 $902 47.70% 2013 4
ProMujer Bolivia Bolivia 2011 a- 12.90% 52,386 $477 36.90% 2013 4
Contactar Colombia 2013 b+ 18.10% 45,441 $781 32.20% 2013 4
WWB Popayan Colombia 2012 a 30.90% 417,479 $827 37.80% 2012 3.5
FINCA Peru 2013 B+ 8.5%** 16,676 $336 54.20% 2012 A-
Movimiento Manuela Ramos Peru 2012 B+ 15.00% 18,641 $361 50.80% 2010 4-
ICC Blusol Brazil 2011 b+ 4.10% 6,913 $1,574 50.50% 2011 3.5
Financiera Crear Arequipa Peru 2011 a- 29.70% 106,401 $1,679 33.40% 2012 3
Fondesurco Peru 2013*** B 5.50% 11,502 $1,724 31.00% 2011 4
Banco da Familia Brazil 2012 b 11.70% 8,928 $1,073 44.20% 2012 3.0
Coopac Norandino Peru 2012 b 14.60% 3,706 $2,091 24.60% 2012 3.5
Banco D-Miro Ecuador 2012 a- 3.70% 39,855 $1,070 29.80% 2012 3.5
Coop. Santa Maria Magdalena Peru 2011 b 14.20% 24,562 $2,344 25.80% 2011 3.0
Funbodem Bolivia 2011 b+ 5.50% 9,853 $1,529 25.20% 2011 2.5
Total/Average a-/b+ 15.43% 1,272,749 $1,085 37.64% 3.6
*Microfinance Institutions Rating **ROA (no ROE available) ***Data for Fondesurco except Rating grade taken from 2011
Social Impact
4.125
Social Impact
3.875
Social Impact
3.5
Social Impact
3.1
http://www.worldbank.org/en/region/lac/overview
http://lab.org.uk/an-overview-of-microfinance-in-latin-america
http://www.iadb.org/en/topics/microfinance/microfinance-by-the-numbers,2450.html
http://www.aboutmicrofinance.com/latin-america-caribbean/regionslatin-america-caribbean
http://www.microrate.com/
http://www.planetrating.com/EN/index.php
http://www.m-cril.com/
http://www.microfinanzarating.com/
Abrams, J. (2012). Global Microfinance Ratings Comparability. Fondo Multilateral de Inversiones (FOMIN).
Marti, A., & Finance Sàrl, E. (2012). Rating Guide: The Microfinance Institutional Rating. The Rating Initiative.
Appendix 1: Microfinance Institutions Rating and Social Rating - Comparability
Microfinance Institutions Rating
Social Rating
Appendix 2: Exemplary Structure CMFO
Microrate Planet Rating Microfinanza M-Cril
a+ A++/A+ AAA/AA a+
a A/A- A a
a- B++/B+ BBB a-
b+ B/B- BB b+
b C++/C+ B b