Lessons We Can Learn from Microfinance
On Wednesday, I spoke at an international conference on microfinance. The conference was a veritable United Nations, with representatives from the microfinance community around the world in attendance. We even had those little earpieces for language translation. My role at the conference was to discuss how loans and workouts are done in corporate finance, and whether there are differences in lending to microfinance institutions (covering just the institutional loans this time, not the microloans the institution makes to its individual clients). I was surprised to find many similar issues, despite the sometimes vastly differing circumstances.
Is there anything that we, in the corporate finance world, can learn from microfinance lending?
1. Use intercreditor agreements. Workouts involving microfinance institutions highlight the importance of using intercreditor agreements among lenders. It's very common for a microfinance institution to have received loans from several different creditors, some domestic and some international, but all without any intercreditor arrangements in place. One person I met was from a microfinance institution in Eastern Europe that is running into some financial issues. She's trying to address those issues with ten lenders who each have differing views and approaches. The lack of a common understanding among the lenders as to what to do in this situation creates problems for the lenders themselves, as well as for the borrower institution.
2. Use similar loan documents whenever possible. When several lenders make loans to a single borrower, it becomes all the more vital that the terms of the loans match up. Borrowers and senior secured lenders sometimes insist on this approach in corporate lending, but this hasn't happened much (yet) in microfinance. Microfinance institutions often find themselves with loan documents that contain a wide variety of covenants and terms - each one different from the last. Several institutional borrowers at the conference mentioned that keeping track of (and complying with) eight or ten different sets of reporting requirements takes up time and resources that would be better spent serving the institution's clients. Trends toward standardization of loan documents and the increased use of syndicated loan structures may help with this issue over time.
3. Defined legal structures make a big difference. Microfinance loan workouts can be significantly complicated by absence of the legal structures that we take for granted in the US and Western Europe. Several countries don't have Chapter 11-like procedures for bankruptcy -- or if they do, the process isn't always available to microfinance institutions, especially nonprofits. In many places, it isn't legally possible to obtain a perfected security interest in accounts, which are the primary assets a microfinance institution is likely to have. Even if you do have a security interest, your priority over other creditors isn't assured. Also, the entire process can be affected in unexpected ways by local political events and regulatory changes. Though we are occasionally surprised by bankruptcy court decisions in the US, we benefit from relative certainty as to who has priority and how the legal process will treat our claims.
Borrowers and creditors all over the world, in microfinance and in corporate finance, share many of the same concerns. We have much to learn from each other.
