Impact Investing/Social Sector Finance – Microfinance

Microfinance

What is microfinance?

Microfinance is a system of providing access to financial products and services to the world "unbanked," typically poor people and others who have been marginalized from the mainstream banking sector in a country. This marginalization is often for social and cultural reasons, and because the poor are often viewed as not credit-worthy (because they lack assets).

Microfinance includes the provision of financial products and services such as credit (small loans or micro-loans), insurance, remittances, and savings products. It also involves the use, where possible, of mobile technology for financial transactions—known as mobile banking or "m-banking."

Technically "microcredit" refers to the provision of credit (loans) only, while "microfinance" includes a full suite of credit- and savings-based products.

Why does it matter?

It is estimated that more than 2.5 billion people—overwhelmingly women and poor people in the developing world—lack access to basic financial services. Access to finance, in turn, can enable income generation, asset creation, family financial planning and protection against emergencies—all of which are crucial elements to lift a person out of poverty or improve a family's well-being.

Microfinance has gained recognition as an effective means of contributing on a sustainable basis to worldwide poverty reduction. Impoverished entrepreneurs are often unable to follow through on their ideas since it is virtually impossible for them to receive any assistance from their local governments or loans from a bank. The power and promise of microfinance has been highlighted in recent years when, for example, the microfinance pioneer Muhammad Yunus and the Grameen Bank he founded were awarded the 2006 Nobel Peace Prize. The Nobel Committee also saw that fewer people living in poverty leads to a more peaceful world. In addition, in some countries, microfinance institutions (MFIs) are among the largest financial services providers, thereby playing a key role in overall financial sector development and paving the way for a more economically productive future for more people.

How does Orrick get involved?

For more than eight years, Orrick has participated in all areas of the microfinance value chain. We have been consistently at the leading edge of involvement in creating structures to provide MFIs around the world with funds, as well as participating in other aspects of the burgeoning microfinance sector globally. For example, Orrick has developed expertise in peer-to-peer microfinance lending platforms and structured microfinance private equity funds and other investment vehicles. We also participate in due diligence trips, visit MFIs, and attend and present at microfinance conferences around the globe.

Orrick attorneys work often with local counsel on microfinance-related transactions in a variety of developing country jurisdictions. As a result of these experiences and relationships, we have keen insights and appreciation for the fundamentally important role of lawyers – who also understand microfinance—to play in the development of the sector as a whole.

Microfinance Gateway

For more information about microfinance generally, we encourage you to visit the Microfinance Gateway, an information portal and public resource for the global community.

  • Engagements

    Grassroots Capital Partners, Ltd.

    Advised Grassroots Capital Partners, Ltd., in connection with the formation of the Próspero Microfinanzas Fund, L.P. (Prospero), a private equity fund focused on investment in microfinance institutions that serve the less penetrated markets of Central and South America.  The fund includes a related investment vehicle, organized to accommodate the investment parameters of certain investors, that invests with Próspero on a “quasi-parallel” basis.  Development Finance Investors in Próspero and this related vehicle included FMO, Corporación Andina de Fomento (CAF), Danish Microfinance Partners (DMP), Inter-American Development Bank (IDB) and Norfund.

    Accion International

    Advised Accion International in connection with the rescue of a microfinance institution in India that was in precarious financial condition as a result of the crisis that developed in Andra Pradesh in India and has spawned the issuance of microfinance rules that have affected MFIs in India.

    EIB, AFDB and AFD

    Advised the European Investment Bank (EIB), the African Development Bank (AFDB) and the l’Agence Française de Développement (AFD) in connection with an investment in a microfinance institution in Ivory Coast that is a subsidiary of our pro bono client, PlaNet Finance.

    Global Partnerships

    Orrick joined forces with Global Partnerships (GP), a U.S.-based nonprofit organization that provides loans to MFIs in Central and South America, to help GP form a $2 million investment fund to issue debt instruments via private placement to investors. The proceeds of the issuance of these notes were made available for loans to MFIs in Central America. Shortly after completing that fund, Orrick lawyers began work on a second $8.5 million fund for GP, which lent funds to MFIs in additional countries. The Overseas Private Investment Corporation (OPIC) and the Inter-American Development Bank (IADB) were both investors in the second fund, which underscored the confidence that international investors have in GP’s model and activities. Orrick’s work with GP was highlighted in the July 2006 issue of The American Lawyer. globalpartnerships.org