International Finance Corporation (IFC) and German development bank KfW have announced the Microfinance Initiative for Asia (MIFA) to commit up to $1 billion through debt and equity investments, structured finance and advisory services to support microfinance institutions (MFIs). The initiative is slated to start in India this year. It will involve leveraging existing investment vehicles to provide equity and long-term local currency debt through partial guarantees, and developing new investment vehicles in markets with less access to capital markets.

As many as 5 million micro-enterprises and lower-income households will benefit. The initiative will focus on expansion of MFIs and linking them to local and international financial markets via microfinance investments funds. The initiative will include preparing market assessments and identify existing constraints to the expansion of microfinance, prepare customised development solutions for a region, identifying individual institutions that will receive support, defining the scope for greenfield institutions, assessing existing microfinance investment vehicles operating (or with potential to operate) in Asia. It will also evaluate the potential for establishing regional and national microfinance investment vehicles, and analyse the potential for developing new regional networks.

Since June 2007, IFC and KfW have been implementing the first investments under MIFA. The market research commences in the first quarter of 2008. The technical team comprises of Frankfurt School and Symbiotics Consulting Services. Investment and advisory services will be committed and implemented over a 3-5 year period. MFIs can also tap into risk management products offered by IFC to manage foreign exchange risks through currency swaps, accessing bond markets through credit enhancements among others.

Of the estimated annual requirement of Rs 1,35,000 crore of credit for the under-banked, the microfinance sector in India meets little over 5% of the demand. It is estimated there are over 200 MFIs in the country, of which the top 20 account for 80% of the total MFI portfolio. The microfinance sector touches 40 million people in India.