Revision 1

1. Revision 1

2. Investment Banking Services • This Lecture takes us on a quick tour of the players. Investment bankers deepen the market not only by placing securities but also by helping investors and MFIs understand each other. If they are to reach investors, MFIs need the expertise provided by advisors, as well as the legitimacy that partnering with mainstream players provides.

3. Investment Banking Services • As for the advisors, Investment Dealers Digest puts it bluntly: “As history shows, any time a new asset class emerges, Wall Street stands to profit handsomely from underwriting new securities and selling them to brokerage clients.”

4. Investment Banking Services • The motivation behind the move into microfinance by investment banks is complex, and not purely profit-driven. AsadMahmood of Deutsche Bank, one of the bankers who has been at this longest, insists that microfinance would not receive such corporate commitment if not for the social mission.

5. Investment Banking Services • The scale of the industry is simply too small, he argues, and will remain small compared to other industries for some time. While investment banks expect to make money from the microfinance deals they design, they might make even more putting staff to work in other sectors.

6. Investment Banking Services • On the other hand, one cannot dismiss the commitments to microfinance as mere image-building or conscience-calming. Investment banks are attracted for reasons that include penetrating emerging and frontier markets, the attraction of working at a cutting edge of finance, and

7. Investment Banking Services • On the other hand, one cannot dismiss the commitments to microfinance as mere image-building or conscience-calming. Investment banks are attracted for reasons that include penetrating emerging and frontier markets, the attraction of working at a cutting edge of finance, and tapping into the growing social investment movement. Following the U.S. financial crisis, we can add making countercyclical investments to the list.

8. Investment Banking Services • Perhaps one of the strongest motivations includes building a motivated workforce. Many of the investment banking staff working on microfinance love what they are doing. They go to interesting places, solve challenging problems, and make a difference to people in need.

9. Investment Banking Services • Individuals like Mahmood follow personal passions and act as internal entrepreneurs to build corporate commitment. Insightful top leaders respond because they understand how a microfinance practice could enhance their company’s ability to attract and retain proud, motivated employees.

10. Microfinance Investment Vehicles • The vast majority of international investment in microfinance takes place through microfinance investment vehicles (MIVs): debt and/or equity funds that specialize in microfinance and sometimes other forms of social investing. • At the end of 2007 there were 91 MIVs with $5.4 billion under management. The growth of these MIVs are a significant part of the larger phenomenon of “impact investing,” which encompasses renewable energy, community development, and other investible activities with social or environmental benefits.

11. Microfinance Investment Vehicles • Microfinance investing has developed somewhat independently of other forms of impact investing, but linkages are increasing.

12. Microfinance Investment Vehicles • MIVs have been traditionally structured as debt funds in order to attract investors not prepared for emerging and frontier markets that fall below an investment-grade rating. During the heyday of collateralized debt obligations, debt products were structured in tranches to meet the different risk appetites of investors.

13. Microfinance Investment Vehicles • The structured finance vehicles created by BlueOrchard (BOLD I and BOLD II) and Developing World Markets (Microfinance Securities XXEB) raised $270 million, and are just some of the better known of the transactions carried out in the past few years.

14. Microfinance Investment Vehicles • Prospective investors in microfinance seeking to invest through an MIV might begin by reviewing information on MIVs available through the MIX. They would also want to contact one of two associations: the International Association of Investors in Microfinance (IAMFI) or the Council of Microfinance Equity Funds (CMEF). IAMFI, launched in 2007, addresses institutional investors who put money into MIVs and typically act as limited partners.

15. Microfinance Investment Vehicles • CMEF is composed of MIVs that make equity investments in microfinance, typically acting as general partners. Both associations are devoted to building the practice of microfinance investment.

16. Microfinance Investment Vehicles • CMEF, for example, has pursued projects related to valuation, codes of ethics, compensation standards, industry risks, and MFI governance. Through projects such as these a consensus on best practices for investing in microfinance is gradually built.

17. Microfinance Investment Vehicles • Kiva and MicroPlace • Ratings • Where’s the Data? The Microfinance Information Exchange

18. Revision • UNDERSTANDING CLIENTS, THE MARKET, AND THE OPPORTUNITIES

19. THE BOP MARKET UP CLOSE (AND PERSONAL) • The $5 Trillion Invisible Market • Profiles of the Working Poor

20. WHO SERVES THEBOP MARKET—ANDWHO DOESN’T? • Major Corporations: Shampoo and Cell Phones • Informal Finance Providers: Moneylenders and Merry-Go-Rounds • Formal Providers: Banks, Microfinance Institutions, and Consumer Lenders

21. FOUR CRITICAL CHALLENGES IN THEBOP MARKET • 1. Understanding the clients. • 2. Reducing costs. • 3. Informality and risk management. • 4. Building the industry.