Global Study on Local Wholesale Facilities/ Apexes

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Mar 2009
Washington, United States, March, 17 2009 - Well over $2 billion a year is being channeled to microfinance through Local Wholesale Facilities (often called apex funds). It's perhaps the largest funding mechanism that governments use to finance microfinance institutions. And it's growing. But what do we know about these funds?

Over the past ten to twenty years, apexes—wholesale funds—have become a force to be reckoned with. They represent a substantial means by which public money is directed to microfinance.

And in the context of the global financial crisis apexes may well become an even more important part of microfinance funding, says Alexia Latortue, who leads CGAP’s annual survey of microfinance funding: “As other sources of funding—such as bank lending, and international money from equity funds and foundations—become more scarce and more expensive, microfinance institutions may well find themselves turning to apexes for funding.”

Though prominent in some markets, very little is actually known or written about these funds at a global level. We did a little digging in cooperation with Enterprising Solutions Global Consulting. Here’s what we found.

Apex funds represent a substantial means by which governments fund microfinance. In an assessment of all the funds worldwide that channel money to microfinance  in cooperation with Enterprising Solutions Global Consulting we identified 76 such wholesale facilities. These funds are established in developing countries to pool national government and international donor money and provide loans or grants to microfinance institutions, usually as part of a country’s overall poverty alleviation strategy. Just 47 of the funds reporting disbursed over $2 billion directly to microfinance institutions in 2007. (48 of the 76 funds reviewed reported portfolio disbursements. These 47 funds disbursed $ 1.8 billion in 2006 and $ 2.3 billion in 2007.)

Apex funds exist in all regions of the world. The highest volumes of disbursements through apexes take place in Latin America and South Asia, while Africa is the region with the most (20) funds of this type in place, many created within the last 5 years. 

They are growing in number. Though the first apex—NAFIN—was created in Mexico as long ago as 1934, most wholesale funds were established in the 1990s and 2000s. PKSF, the well known, large Bangladeshi wholesale fund, was launched in 1990. Since then there have been a steady stream of new funds, with eleven having been created in the last 3 years.

Most of the funds are in local currency. This means that the MFIs that borrow from them are less exposed to exchange rate risk than when they get a loan in hard currency.“With the financial crisis, we are seeing a shift from private funding to public funding from Development Finance Institutions and from apexes” says Lead Microfinance Specialist Xavier Reille. “But whereas three quarters of the outstanding loan portfolio of the 16 leading DFIs is provided to MFIs in hard currency, apexes provide the majority of their funding to MFIs in local currency.”

Temporary or Permanent?
They take many different forms, but one trend that CGAP identified across apexes was a tendency toward institutionalization. “In most cases, wholesale funds were originally designed as a temporary funding mechanism intended to address market imperfections,” says Senior Microfinance Specialist Eric Duflos, who led the CGAP inquiry into apexes. “But in many cases, they are effectively becoming permanent entities, and take on a life of their own. While they may play a very positive role in jump-starting small institutions or less mature markets, the problems come when they use highly subsidized loans and compete with commercial sources of funding as the market matures. Those that fail to adapt to the changed environment—the very conditions that they’ve helped to create—are missing an opportunity to help take microfinance in their country to the next stage.”

Duflos says that developing an exit strategy, and understanding how to support the development of a thriving domestic microfinance market should be critical elements in designing an apex. He cites the case of Bosnia, where the Local Initiative Departments (LID) effectively transitioned, and ultimately exited as the microfinance market was re-established after the war. “The international donors had a clear idea from the beginning about what they were there for, and that was to kick-start microfinance and to get to a situation where they could get out and ultimately let the market take over. They always saw LID as a temporary structure, never as a replacement for the domestic microfinance market in Bosnia.”

But if the intention is to help the local market get established, and then for it to take over, achieving that can be a delicate balance, says Duflos: “Much more work is needed to understand the practical implications of what we mean by ‘letting the market take over’.”

In a meeting held in Delhi last year, leading apexes agreed that they should consider creating intermediary instruments such as guarantees, quasi-equity, and equity-for-innovation to provide a bridge between donor and market financing, providing subsidized funding only until MFIs can access funding from commercially priced sources, including savings.

MIVs vs LWFs
Microfinance Investment Vehicles
Local Wholesale Facilities
Wholesale Funding
v
v
Funding Origin
DFIs, individuals, institutional investors
Donors and government
Main Instrument
Debt and equity
Debt
Currency
Hard
Local
Return Expectations
Near commercial
Social
Transparency/Performance
Medium/High
Limited transparency & performance info
Disbursements (2007)
$ 2.67 billion
$ 2.3 billion
NB: MIV disbursements only includes direct loans to MFIs (excludes equity and loans channeled via other funds)

“With the increasing relevance of apexes in the current liquidity crisis, we need to analyze how these funding instruments can play a positive role in the short term without preventing MFIs from accessing long term local commercial financing through deposits and commercial loans and equity,” says Duflos. “We need to ensure that a short term solution will not create longer term obstacles for microfinance, and develop some practical steps and best practices for how to help microfinance transition and grow as markets mature.”

Annexes

Who’s funding apexes?

More than 70% of apexes receive funding from their country governments. International funders (e.g. multilateral, and bilateral agencies) are also very involved. The Top Five International Funders are:

  • KfW
  • The World Bank
  • The Inter-American Development Bank
  • IFAD
  • EU

Why donors fund MFIs through Apexes

Created in developing countries—and either financed by their own government, or by donors from developed countries, or most often a mix of the two—apexes are often seen by donors as a means to jump start the microfinance sector and co-ordinate their funding. 

For example, after the war in Afghanistan when the government decided to actively support microfinance, international donors pooled their money into an apex fund.

Funders that mainly offer loans to government often see it as a way to disburse significant amounts quickly. Funders also see it as a way to focus on smaller MFIs that serve poorer clients.The Breakdown

  • Developing country governments provide funding in nearly three quarters (72%) of the sample surveyed, often in collaboration with international funders.
  • Nearly a quarter of the sample (23%) was funded exclusively by the national government.
  • International donors provide funding of 68% funds surveyed.

 

Source : CGAP
 

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