Provide empirical evidence of your proposed solution's success/impact at present. If your project is in the idea phase, please provide evidence that speaks to its potential impact
MFX has proven its model over the last year as the first hedging facility dedicated to serving the microfinance market. After nine months of operation, MFX has a growing portfolio of $30 million in hedged loans to microfinance lenders with an average loan size of around $1.5M. Hedges provided so far cover most geographical regions – Africa, East Asia, Eastern Europe/Caucasus, Central and South America, and Central Asia. Assuming an average loan size of $500 for MFIs benefiting from loans hedged by MFX, MFX has helped deliver funding to 60,000 micro-entrepreneurs in its first year.
MFX operates as a cooperative, so its clients, primarily microfinance funds, are its investors. MFX began operations with ten client/investors. With expanded demand, MFX recently concluded a second round of investment where it is adding 30 new funds. MFX’s client/investor base now represents over $3 billion of assets under management and a majority of non-governmental funds lending to microfinance. The willingness of microfinance funds to invest in MFX, provides concrete evidence of the value of its services, in particular to open up markets that were seen as too risky without hedging. As one of our clients stated in their annual report “the partnership [with MFX] will be particularly significant in sub-Saharan African, a developmentally crucial region targeted by BlueOrchard [the client] as a key growth area now that local currency financing is available.” MFX can help level the playing field for SMEs in high risk markets in the same way it is doing for microfinance.
MFX can also help international SME lenders avoid some of the mistakes of the microfinance industry. The SME intermediary infrastructure is in some ways where microfinance was 10 years ago, before its rapid growth phase. According to the Aspen Network of Development Entrepreneurs (ANDE), non-governmental SME funds currently have roughly $850M in existing loan portfolio, but anticipate growth to over $7 billion in the next four years. In microfinance, with little access to affordable hedging options, the growth phase took place largely in hard currency. This resulted in a build-up of an estimated $4 billion in currency mismatch by the time of the 2008 crisis, which in turn led to major currency losses for MFIs when emerging market currencies fell. By introducing hedging to SME intermediaries at an earlier stage in the industry’s development, MFX can help avoid similar hardship for SME borrowers in the future.
How many firms do you expect to reach?
The MFX model has the potential to scale exponentially. Assuming an average loan size of $500,000, MFX would expect to reach 800-1000 SMEs based on its initial target of having $500M of hedging capacity dedicated to SMEs.
What is the volume of private SME finance you aim to catalyze?
Initially $500M with scale-up from there.
What time frame will be required to reach these targets?
3-4 years for the initial $500M
What would prevent your solution from being a success?
MFX exists to enhance the efficiency and viability of intermediaries. If the growth of SME intermediaries does not take place, then MFX’s model would not see the anticipated ramp-up. On the other hand, by reducing risk for intermediaries, MFX can help accelerate their growth by expanding their potential market and potential for sustainable returns. In that sense, the G-20 challenge itself, to the extent it succeeds in catalyzing new international flows to SMEs, will create the environment for the success of MFX, and vice versa.
Market conditions can also affect the up-take of the product. The larger the spread between U.S. or Euro interest rates (LIBOR/Euribor) and local benchmarks (interbank or T-Bill) the higher the perceived “cost” of hedging. Though this simply represents the market’s perception of the currency’s devaluation risk, if SMEs are unwilling to adjust their rate expectations to changes in local rates, they may not be willing to pay a rate that swaps to an acceptable hard currency rate for the lender. This could mean that in some markets hedging would not immediately open up new lending opportunities.