IDB Invest, Locfund Next to Promote Financial Inclusion Through Microfinance Institutions
IDB Invest has closed a $20 million loan with a 6-year tenor to Locfund Next, L.P., a fund that provides local currency financing to small and medium-sized Microfinance Institutions (MFIs) in Latin America and the Caribbean (LAC). Locfund Next contributes to reducing the MFIs’ Foreign Exchange risk exposure, which supports the expansion of their local currency lending capacity to Micro, Small and Medium-Sized Enterprises (MSMEs). About 50% of the final beneficiaries are expected to be women and at least 40% of the final beneficiaries are expected to live in rural areas.
Despite their social and economic importance in LAC, MSMEs have had great difficulty accessing credit, even before the COVID‑19 pandemic. Funding needs for MSMEs are significant, the credit gap for MSMEs in LAC is estimated at approximately US$1 trillion. On average, less than half of the MSMEs in LAC get credit for working capital (short-term) and/or investments (long-term) purposes. In this context, MFIs have become an important finance provider to MSMEs, contributing to closing the existent finance gap for MSMEs in the region.
Moreover, MFIs have traditionally relied heavily on international investors to raise their funding, were most of the debt provided by international lenders is denominated in foreign currency. The mismatch between hard-currency funding and local-currency loan portfolios exposes MFIs to FX risk, which in many cases can be substantial. Although MFIs in LAC have tried to reduce their FX risk exposure, access to local currency financing is still very limited, especially for smaller MFIs.
To address the lack of adequate funding sources for small and medium MFIs, Locfund Next offers an integral solution that responds to the MFIs’ key financing needs: debt instruments in local currency which are aligned with the MFIs’ needs. For this, the Fund Manager, Bolivian Investment Management Ltda. (“BIM”), has developed a currency diversification model that lowers the FX risk of offering loans to MFIs in local currency.
With this financing, IDB Invest supports Locfund Next to increase access to finance for MSEs in LAC, with a strong focus on rural and women-led enterprises, by supporting small and medium-sized MFIs in the region in the expansion of their loan portfolios. Additionally, IDB Invest will provide the Fund and the Fund Manager, BIM, advisory services to develop a Gender and Diversity strategy within the Fund and the MFIs in portfolio.
The deal is expected to contribute with the following United Nations Sustainable Development Goals (SDGs): No Poverty (SDG 1), Gender Equality (SDG 5), Decent Work and Economic Growth (SDG 8), Industry, Innovation, and Infrastructure (SDG 9) and, Reduce Inequalities (SDG 10).
About IDB Invest
IDB Invest, a member of the IDB Group, is a multilateral development bank committed to promoting the economic development of its member countries in Latin America and the Caribbean through the private sector. IDB Invest finances sustainable companies and projects to achieve financial results and maximize economic, social, and environmental development in the region. With a portfolio of $15.3 billion in asset management and 375 clients in 25 countries, IDB Invest provides innovative financial solutions and advisory services that meet the needs of its clients in a variety of industries.
About Locfund Next
Locfund Next, LP is a closed-end fund that finances MFIs in local currency and promotes their access to domestic capital markets. The fund also has a technical support facility that provides non-refundable support in the form of technical assistance to the MFIs in different areas such as digital transformation and corporate governance. The Fund Manager is Bolivian Investment Management Ltd. (“BIM”), a company that has developed significant experience managing investment vehicles throughout LAC.