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Where Does the Money Come From?

The financial crisis – or the conviction that we are all living a crisis – leads to a shortage of funds. Microfinance institutions are certainly feeling the consequences and for the past couple of years, they have begun to innovate the way they fund themselves. Some institutions have become registered banks, which are regulated by the federal government and as a result can offer savings accounts and receive deposits from clients. However, clients of microcredit will have microsavings and for this the main bulk of funding is needed nonetheless in order to operate and grow.

In the case of Mexico, microfinance institutions have traditionally been backed up by numerous governmental entities at both the state and federal level. This does not apply in many countries around the world, but because the microfinance sector has been booming in Mexico, there are public organisations, such as Financiera Rural and FINAFIM, whose main focus is to fund microfinance institutions. FINAFIM is the trust fund of the federal government which only allocates funds to microfinance institutions and other intermediaries. Financiera Rural, instead, as its name suggests, offers a broad range of reports, training and microcredits to entrepreneurs in the rural areas, because their mission is to support the economy of those who work in agriculture, forestry, fishing and other rural activities.

There are at least three more governmental institutions that give financial support to microfinance institutions in Mexico, but the reality is that these funds are getting smaller and fewer, whether because of heightened competition, effects of the global financial crisis or the change in government that is taking place right now. So, microfinance institutions have to find new ways to create greater liquidity and are going through a phase of trial and error.

For example, some microfinance institutions have begun contracting brokers. These brokers will commonly be introduced by someone they know locally and will have an international network of companies that give loans to private enterprises. As a result, these brokers function as a bridge for these local institutions to reach out to international funds. Their function is to liaise with the lenders and manage the application process. For every loan request that is expedited, these brokers will commonly request 1% commission.

The question is, what kind of companies will these brokers find for you? This can be problematic when you are working with the broker for the first time and a relationship of trust does not exist to fully rely on the broker’s choice. As a matter of fact, there are cases when the broker will introduce a microfinance institution to a company and the only tool the institution has to perform due diligence is the internet.

Situations become tricky and sensitive when you find informal sources of complaints about a company and you no longer know whether to trust the broker and go for the big lump of loan or to back off. Other times, you research the company the broker is introducing to you and realise that the company is yet another broker who will liaise with a lender for you. Because every contract signed with a broker or a financial intermediary comes with a different set of requested documents, it is not ideal to go through numerous entities. Also, the type of documents that are requested can be rather private such as bank statements.

In alll, I am not trying to defend the high interest rates many microfinance institutions charge, but the manner in which they get their funding is sometimes rather precarious and risky. So, in microfinance the operational costs are high, not only because of the type of credit and clients they address, but because of the unconventional channels of funds and loans they have to apply to themselves. Perhaps this is just a characteristic of small and medium size enterprises, but one would hope that microfinance institutions who find themselves in these situations will soon be able to create a solid team that solely focuses on identifying funders and lenders, does the due diligence work and manages the request process in order to avoiding searching for money in the dark.

Ayako Iba

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