What is Microfinance?
Microfinance is a type of investment that provides smaller amounts of capital for very small business enterprises, focusing on individuals and companies that are low-income or located in low-income communities. Microfinance funds ensure that low-income households have permanent access to a range of high quality financial services to fund income-producing activities, build assets, stabilize consumption, and protect against risks. Microfinance Funds are not limited to credit but often provide technical assistance to the borrower as well.
“Microfinance offers impoverished people access to basic financial services such as loans, savings, money transfer services and microinsurance. People living in poverty, like everyone else, need a diverse range of financial services to run their businesses, build assets, smooth consumption, and manage risks.” — Consultative Group to Assist the Poor (CGAP)
What are Micro-finance Institutions?
Micro-Finance Institutions (MFIs) deliver small loans to unsalaried borrowers, taking little or no collateral. Their methods include: group lending and liability and pre-loan savings requirements. Future loan sizes can gradually increase when current loans are repaid fully and promptly. Some MFIs provide non-financial products, such as business development, education, health services and other social support services to promote quality of life.
Most MFIs start as nonprofit organizations like NGOs (non-governmental organizations), credit unions and other financial cooperatives or state-owned development and postal savings banks. An increasing number are now organized as for-profit entities because offering savings services require a license from banking authorities. For-profit MFIs may be organized as non-bank financial institutions (NBFIs), commercial banks that specialize in microfinance, or microfinance departments of full-service banks.
What is Community Development Venture Capital?
Community Development Venture Capital Funds provide equity to businesses with very high growth potential that are either launched by low-income individuals or located in low-income communities as well as which hire a substantial portion of their employees from low-income communities. These funds provide equity, or the earlier ‘risk’ capital that they need to launch their businesses.
What is a Fund of Funds?
A ‘Fund of Funds’ (FOF) is a diversification investment strategy: Sustainable Communities Fund (SCF) invests in a portfolio of other micro-finance and community venture funds rather than directly lending or investing in the companies or with individuals directly. This “multi-manager investment” allows SCF to support several micro-finance organizations with the underwriting expertise to directly lend or invest small sums to individuals and companies in low-income communities. A FOF can also be attractive to larger institutional investors looking to support low-income communities while simultaneously balancing risk through greater diversification.