Assessing risk in microfinance – could it possibly be worse than normal finance, these days?

Very interesting story in the Financial Times, just spotted. At a time when microfinance is growing rapidly (and doing wonders), it is apparently constrained by a lack of transparent assessability of risk.

…some experts say there are obstacles preventing the microfinance sector from reaching its full potential, including the absence of a global framework that mainstream investors can use to assess properly the risks associated with the sector.

Activity in the microfinance sector has been growing in the last few years and has involved increasingly complex deals. Last month, for instance, the first publicly rated microfinance collateralised debt obligation – which pools together packages of bonds – raised more than $100m. The deal was rated by S&P and completed by BlueOrchard, which specialises in the management of microfinance investment funds, and Morgan Stanley.

S&P expects to rate an additional two to three microfinance CDO transactions and around 25 MFIs in the coming months, with CDO issuance levels potentially reaching $500m by the end of 2007. As the existing microfinance institutions become adept at handling new inflows of funding, and more MFIs enter the market, securitisation volumes could reach between $1bn and $3bn annually over the next decade, the agency says.

You know, those number might need re-doing. I don’t know how potentially risky debt from developing countries will fare in a market that can’t sell CDOs from the US.

The amount of U.S. high-grade, structured finance CDOs that are being offered to investors has plunged to $3 billion, from $20 billion a month ago, JPMorgan said in a report dated yesterday.

(I got that story via Calculated Risk) Yes, I expect BlueOrchard to be less risk and yield-happy than Bear Sterns or the ordinary hedge fund world, but we’re talking about basically the same thing. The way things are heading, I think microfinance is better off without. Anyone investing in CDOs – or investing in debt at all – is probably getting quite jumpy just now.

Also, via the Big Picture, a story from the Bloomberg markets magazine about the over-exposure of pension funds to CDOs. I’ve intimated before that I consider any exposure by pension funds to risky debt to be too much, but they’re being sold the riskiest of the risky debt – are they just plain stupid? More likely they realise that they’re dealing not only with Other People’s Money, but other people 40 years from now. Not likely to promote proper risk assessment. Which is kind of where we came in…


1 comment so far

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