Four billion people across the globe are at the bottom of the world economic pyramid. These people living in poverty, like everyone, need access to financial services in order to find opportunities to improve their lives and their communities. Microfinance works on the principle that such individuals, with some financial support and assistance, can launch their own income generating activities. This principle of Microfinance involves supplying poor or low-income individuals, frequently women, with financial services such as micro-credits; very small loans, provided by microfinance institutions (MFIs) and often repayable within 6 to 12 months. Capital to support MFI activities is raised from aid and government agencies, NGOs, institutional and retail donors and investors. In the case of investors, the capital may often be channeled through microfinance investment vehicles, (MIVs), which is where the involvement of the Luxembourg investment funds sector is evident.
Luxembourg offers a full range of regulated investment vehicles relevant for microfinance investments.
The most common types of regulated vehicles that may be used for the purposes of microfinance investments are:
> Part II Fund (“UCI”), under the law of 20 December 2002;
> Specialised Investment Fund (“SIF”), under the law of 13 February 2007;
> Risk capital company (“SICAR”), under the law of 15 June 2004;
> Securitization vehicle, in the form of a regulated securitization fund or unregulated securitization company, under the law of 22 March 2004.
The choice of vehicle will depend upon the profile of investors, their requirements, and the type of financial instruments used to invest in Microfinance.
The first microfinance funds invested primarily in senior and subordinated debt instruments; refinancing micro, small and medium enterprises through microfinance institutions. However, new funds are currently diversifying their investment universe by providing funds through equity and quasi-equity participations. This is subject to using the investment proceeds for micro-credit to final beneficiaries, risk sharing loans for the purpose of providing micro-credit to final beneficiaries combined with risk participation between the eligible financial intermediaries and the fund in such micro-credits.
In addition to offering adequate investment structures, Luxembourg has demonstrated its willingness to be a centre of excellence within which to set up microfinance vehicles. One example of this is that since 14th July 2010, a Grand Ducal Regulation allows an exemption of the subscription tax to UCIs and SIFs investing at least 50% of their assets in microfinance investments, or to those which have obtained the Luxflag label.
Recently, the Luxembourg Government has launched a joint venture called LUMINIS Microfinance with MicroRate, the US-based microfinance rating agency, and LuxFLAG to provide important information on MIVs for investors.
Finally, the Luxembourg government has also supported a number of key players encouraging the development of the Microfinance sector within Luxembourg (ADA, E-MFP, Lux-Development, LuxFLAG…).
All these initiatives demonstrate that Luxembourg is a well positioned hub in the field of microfinance. Indeed, around 25 per cent of microfinance investment vehicles (MIV) are domiciled in Luxembourg (1), representing 46 per cent of the World’s MIV assets.
(1) Source: Commission de Surveillance du Secteur Financier