Microfinance

Challenges

Microfinance, which started as a small movement to help the poor households of developing countries by granting them access to finance and savings has grown tremendously over the past few years. It is now set to become a mainstream investment strategy combining social impact and financial return. With foreign capital investments in microfinance passing the USD 10 billion milestone in December 2008 according to CGAP (Consultative Group to Assist the Poor), this asset class is attracting a broad range of socially and financially oriented institutional, private and public investors. In 2009, the CGAP identified 103 microfinance investments vehicles (MIVs) worldwide, with a total of USD 6.6 billion in assets under management.

According to a recent report by CGAP, MIVs total assets grew an average of 31% in 2008 compared to 72% in 2007 and are set to grow an estimated 29% in 2009. MIVs were also one of the few investments that saw positive returns in 2008.

Given the current crisis, MIVs face a paradox situation. On the one hand, they are striving to maintain and increase their profitability in a difficult environment which could see the surge of bad loans and increased risk for microfinance institutions (MFIs) in which they invest. On the other hand, with increasing capital flow in this sector the opportunities for MIVs to invest in 1st tier MFIs defined as being mature, regulated and financially sustainable and which account for only 1-2% of all MFIs is diminishing. Hence the trend is clearly to invest in 2nd tier MFIs, which have not yet reached the institutionalised stage and are near profitability.

Going forward, this means MIVs will have to strengthen their due diligence and analysis of MFIs, as well as their own risk management systems. For MFIs this will imply to develop their governance, risk and compliance processes in order to be able to compete for capital from MIVs.

In addition, the selection of the optimal structure to maximise shareholder value and the implementation of a clear social impact assessment metrics will be crucial with investors demanding not only the optimal investment return but also the social impact of the vehicle.

Number of MIVs

Source: ALFI/CGAP

Luxembourg is one of the leading countries for Microfinance Investment Vehicles domiciliation:

35% of worldwide MIVs assets and 21% of all MIVs are domiciled in Luxembourg, representing a total value of USD 2.3 billion. Supportive regulations and proximity to service providers such as auditors, custodians, etc. facilitate a fast and effective set-up of the investment structure. For MIVs one can choose from a wide variety of structures in Luxembourg such as:

• UCIs Part II funds (under the 2002 Law)
• Specialised Investment Funds (SIFs)
• "Société d’Investissement à Capital Risque" (SICARs)
• Securitisation Vehicles
• Structured Products

MIVs domicilation by AuM (Asset under Management)

Source: ALFI/CGAP

How can PwC help you?

PwC can assist you with the following:

Audit and Legal services

• selection of the optimal legal and tax structure for your MIV;
• set-up of complex structures for NGO/public-private partnerships;
• assessment and due diligence of MFIs across the globe;
• all audit services of your MIV.

Advisory services

• developing the strategic and operating framework of the MIV;
• socio-economic efficiency optimisation of the MIV and MFIs;
• social impact assessment and sustainability reporting of the MIV;
• risk mitigation of the MIV;
• development and optimisation of governance, risk and compliance structures and processes of MFIs;
• staff training on operational, financial and industry aspects of microfinance;
• knowledge management, surveys and research on all microfinance themes.

Tax Services

• choice of an appropriate domicile and tax efficient organisational structure;
• review, consultations and liaison with the local regulatory authorities, where and if appropriate;
• advice and consultation regarding regulatory and fiscal compliance requirements;
• tax due diligences;
• regulatory, tax and accounting advice regarding the repatriation of funds to investors, e.g. management schemes.

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