Local Currency Microfinance Fund (Locfund)

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The majority of loans to Microfinance Institutions (MFIs) are made in USD or other foreign currencies, despite this sometimes resulting in higher costs to the MFIs and ultimately to the end users due to currency fluctuations. However, there is a chance for this to change in Latin America and the Caribbean, thanks to Locfund, a fund in local currencies targeting microfinance institutions.

BIO has invested 2 million USD in this seven year closed-end fund, split equally between equity and subordinated debt, and has more recently agreed a technical assistance subsidy of 100,000 USD. The technical assistance grant will, in part, fund the development of new financial products and hedging instruments – further incentivising the use of local currency funding. In addition, the grant will contribute to the cost of training MFI staff in asset/liability management and risk control.

Uniquely, Locfund offers local currency denominated debt instruments to small and medium-sized MFIs which tend to be overlooked by other institutional investors. Loan amounts range between the equivalent of 250,000 USD to 1.5 million USD. Locfund also targets credit institutions that are in the process of becoming regulated MFIs, a time when funding in local currencies is particularly important. Receiving loans in local currency enables MFIs to have liabilities in the same currency as their own microfinance loan portfolios thereby helping to mitigate currency risks. Mr. Hugo Yanque, Executive Director of the Microfinance Unit at the Asociación Arariwa in Peru, explains:

“Locfund adds value with a product that strengthens our liability structure and mitigates our exposure to foreign exchange risk.”

Managed by Bolivian Investment Management Limited (BIM Ltd.), the fund is headquartered in La Paz with a satellite office in San José, Costa Rica which can better serve countries in Central America. In 2008, Locfund formalised an impressive 19 local currency loans in 9 countries, bringing its portfolio to an equivalent USD value of 19.2 million.

Through this investment BIO is stimulating development in Latin America and the Caribbean, including Bolivia, Peru and Ecuador – partner countries of the Belgian Development Cooperation. In the 2007 GPR assessment Locfund received the top rating of one, which confirms that it is a very strong investment in terms of development impact. By December 2008, Locfund counted a total of 21 MFI clients, who in turn service a total of 515,730 micro and SME clients; 60 percent of these are in rural areas and 63 percent are women entrepreneurs. BIO’s co-investors in Locfund are: the Inter-American Development Bank -MIF, FMO, Norfund, Corporación Andina de Fomento (CAF), responsAbility SICAV, Gray Ghost Microfinance Fund, Hyos Invest Holding AG, and BIM Microfinance. It is hoped that the continued success of Locfund will spur more DFIs to invest in local currency funds in the future. As a participatory member of the Locfund Advisory Board and Donor Committee, BIO will be able to contribute to strategic decision-making to help the fund build upon the remarkable achievements of 2008.

Sissi Frank, Senior Investment Officer, BIO:

“The success of Locfund since its inception is a clear indication of the need for local currency financing in the region; that Locfund and similar initiatives can, and should, do more in this area.”

In 2013, Locfund together with the investors, published a report on the lessons learned from 5 years of technical assistance to microfinance institutions. You can download the full report here.

Website : www.locfund.com

  • Investment amount (€):

    USD 2,000,000

    Registered offices: Delaware, USA Beneficiary countries: Argentina, Bolivia, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Paraguay, Peru

  • Contract signature :

    2007

  • Nature of intervention :

    Equity and Debt

  • Development impacts :

    • 1 — Access to local currency finance for small and medium MFIs
    • 2 — Job creation, for women in particular
    • 3 — Proving the case for additional local currency funds