See Asset liability management.
Asset liability management (ALM)
The coordinated management of a Fund’s balance sheet risk arising from mismatches in assets and liabilities due to liquidity, change in interest rates, or change in foreign currency exposure.
One of the selected microfinance industry or capital markets standards that are used to evaluate an MIV’s financial performance, risks, social impact and management.
Cash and cash equivalents divided by total assets.
See Collateralized debt obligation.
See Consultative Group to Assist the Poor.
Client Protection Principles (CPP)
As an initiative of The Center for Financial Inclusion at ACCION International and CGAP, the Smart Campaign is a global campaign committed to embedding client protection practices into the institutional culture and operations of the microfinance industry. The Smart Campaign embodies a set of seven core principles – the Client Protection Principles – for the treatment of microfinance clients and which define the minimum standards that clients should expect to receive when doing business with an MFI. (www.smartcampaign.org)
Collateralized debt obligation (CDO)
For microfinance purposes, a type of structured financing that repackages a pool of MFI loans. Characterized by a multi-tranche capital structure and defined rules for repayment.
Capital committed by investors to MIVs based on a contractual agreement.
Consultative Group to Assist the Poor (CGAP)
CGAP is an independent policy and research center housed at The World Bank and dedicated to expanding financial access. (www.cgap.org)
Corporate social responsibility (CSR)
CSR refers to the standard of corporate behavior that an institution subscribes to and seeks to enforce, such as client protection, transparency, and environmental protection. These principles bring the MIV’s self-defined compliance into line with international norms and ethical standards to promote a positive impact.
See Client Protection Principles.
See Corporate social responsibility.
Debt to equity ratio
Total borrowing divided by total shareholder equity (contributed capital plus retained earnings). Also known as the solvency ratio.
When a debtor has not met its legal obligations according to the debt contract, e.g. has not made a scheduled payment or has violated a loan covenant of the debt contract.
Fund expense management that includes the Total expense ratio.
See Environment, social, governance.
Financial strength rating (FSR)
MicroRate’s independent evaluation of MFI creditworthiness, considering country-level risk, the possibility of external support or interference, and overall financial strength. A relative rating scale is used, running from α+ (alpha plus; strongest) to γ (gamma; weakest).
See Financial strength rating.
FSR & Sovereign matrix
A MicroRate proprietary graphical display tool. The FSR & Sovereign matrix represents a cross-sectional analysis of a fund’s portfolio according to institutional and country risks.
TA company that acts as investment advisor, fund manager, or sponsor to, or is otherwise affiliated with, two or more MIVs.
The entity with fiduciary duty of managing an investment fund.
See Investment in other MIVs.
Global MicroScope index
An in-depth analysis of the microfinance business environment in 55 countries, published annually by the Economist Intelligence Unit. (www.eiu.com)
Herfindahl Hirschman Index (HHI)
A statistical measure used to determine portfolio concentration according to (1) single-name entities and (2) countries.
Interest coverage ratio
Earnings before interest and taxes divided by interest expense.
A company that provides investment advice and/or related services to a fund.
Investment in other MIVs
Those MIV assets loaned to or invested in a portfolio of other MIVs, rather than being loaned directly to or invested directly in MFIs. The investee MIVs may contain DMP assets, IMP assets, as well as other assets. Also known as Fund-of-Funds.
The status of the vehicle as defined by the laws of its country of domicile.
The Luxembourg Fund Labeling Agency, an independent, not-for-profit association created in 2006 to promote capital-raising for microfinance by awarding a recognizable label to eligible investment funds. (www.luxflag.lu)
A termination date on which an MIV is contractually scheduled to liquidate itself, through a pre-arranged transaction, to return capital and surplus in full to the owners, in accordance with their pro-rata stake.
See Microfinance Institution.
Microfinance institutions are divided into three categories based on their total assets:
Tier 1 – Above $30 million
Tier 2 – $5 million - $30 million
Tier 3 – Below $5 million
Microcredits are small loans that enable the borrower to generate wealth. True microcredit must satisfy three conditions. It must be wealth-generating. It must be self-liquidating, meaning that the loan is repaid from the additional wealth it helps to generate. And it must be non-collateral-based, meaning that the presence of formal collateral is not a key factor in the lending decision.
Microfinance encompasses a variety of financial services for poor and low-income clients. The goal of microfinance is to provide low-income households with permanent access to a range of high quality services to finance their income-producing activities, build assets, stabilize consumption, and protect against risks. These services include credit, savings, insurance, and money transfers among others. Clients of microfinance are typically those who are unable to afford the more usual financial services that require collateral.
Microfinance institution (MFI)
MFIs are entities for which microcredit makes up at least 50% of the total number of loans in their portfolio. These institutions use lending methodologies developed over the last 30 years to deliver very small productive loans to unsalaried borrowers, taking little or no collateral. The most common methodologies include group lending – where the group members guarantee each others’ loans – and individual lending. Other financial services offered by MFIs include savings, micro-insurance, and remittances.
Microfinance investment vehicles (MIV)
MIVs, also known as microfinance funds, are entities that invest in MFIs. For a fund to qualify as an MIV, it must meet the following criteria: 1) The investment vehicle must be an independent and legal entity for raising and investing funds (i.e. independent of the MFI being funded); 2) Multiple private investors must be present, or the vehicle must be open to such investors; and 3) The investment vehicle must focus on investing in microfinance.
See Microfinance investment vehicle.
MIX, or the Microfinance Information eXchange, is a provider of financial and social performance data for MFIs. (www.themix.org)
See Net asset value.
Non-governmental Organizations (NGOs)
Private organizations exempt from regulation by local financial authorities. They reinvest most or all returns and are often owned by their members (individuals and/or institutions).
Group of similar funds used to benchmark each of the P R S & M categories.
Principles for Investors in Inclusive Finance
A set of six guidelines devised by a segment of the global investing community, resulting from the United Nations-backed Principles for Responsible Investment Initiative (PRI). The purpose of the Principles is to provide a voluntary framework by which investors can incorporate ESG considerations into their investment criteria and decisions. (www.unpri.org)
Performance, Risk, Social, and Management; the four main evaluation and reporting categories used in Luminis reports. (See Methodology.)
Liquid assets to satisfy redemption requests from MIV shareholders.
See Return on assets.
See Return on equity.
Social performance management (SPM)
SPM focuses on the institution’s systems and processes by which it carries out its stated social mission. SPM includes areas like target market definition, process alignment, and results verification. These are the unique elements of the institution’s business model and governance structure that drive its specific social results.
An evaluation of an MFI’s explicit social mission and goals, including its social focus, social commitment, and social performance management systems.
Social results include demographic and geographic outreach achieved by the MIV’s processes. Social results are used to evaluate the extent to which an MIV measures and achieves its social and economic objectives.
Economic, political, business, regulatory, and legal risks that MFI’s face in their country of operation.
See Social performance management.
The name of the institution that sets up the vehicle (MIV, etc.).
See Total expense ratio.
Total Expense ratio (TER)
Total expense ratio measures the total cost of a fund to the investor. It is calculated as period average total assets divided by total operating expense. In this case, total operating expense excludes financial expense, provisioning expense, trading fees, and performance fees.