A mechanism that can lower the risk of investing in microfinance in developing countries. This is what the Dutch Development Finance Company has launch today, together with a series of partners, among other the Danish sister of FMO, called IFU (Investeringsfonden for Udviklingslandene). It might seem boring to some, but it will most likely make a very big difference to a lot of poor people in developing countries.
This fund will drastically improve the options for investors in microfinance and thus bring capital to institutions that have until now been out of reach for investors because of country risks.
It is well know that microfinance in itself is not a very risky investment. Unless for the small MFIs, microfinance is low risk because it does not depend on global market, or other volatile financial factors. But investing in microfinance as been risky because of the country risk associated with such investments. Until now. The problem has so far been to find someone with enough capital to diversify the risk enough, and none of the investment banks or financial institutions, who for example hedge Euro and Dollar risk as easy as paying a bill – the rate is around 1% p.a. – have not been willing to enter the market because the returns are so low.
The technical details of the fund have not been published, and the performance will of course be seen only in the future. But the beginning looks very promising.