GLOBAL - Luxembourg fund labelling agency Luxflag has awarded its first labels to three microfinance investment fund - the Dexia Micro-Credit Fund, the European Fund for Southeast Europe (EFSE) and the responsAbility (cor) Global Microfinance Fund.
Luxflag's aim is to reassure investors that the fund directly or indirectly invests in the microfinance sector and is regularly scrutinised by an expert panel. It awards its label to investment funds or similar vehicles that fulfil the criteria to qualify them as eligible microfinance investment vehicles (MIVs).
It will also facilitate fund distribution and fund raising, but neither guarantees performance nor recommends investing.
Labels from the agency, founded in July 2006 by the private and NGO sector as well as the state of Luxembourg, will be granted globally. Microfinance funds applying for the label must demonstrate that they meet appropriate regulatory standards with regard to transparency and investor protection.
They must be subject to supervision by a national regulator, have a microfinance portfolio corresponding to at least 50% of total assets and have at least 25% of their microfinance portfolio invested in microfinance institutions (MFIs) rated by a Luxflag recognised microfinance rating agency.
The Luxflag label is intended for MIVs with a commercial objective and will not be given to donor entities.
The label will be granted for one year - with the first period established as 1 February 2007-31 March 2008 - but can be renewed subject to review.
The first three recipient funds of the label are all domiciled in Luxembourg and managed by internationally renowned institutions. The Dexia Micro-Fund is the oldest microfinance fund in Luxembourg - going back to 1998 - and has Dexia Banque International in Luxembourg (BIL) with RBC-Dexia as a custodian and Dexia Asset Management as asset manager of the fund..
EFSE represents a public private partnership initiative led by KfW in Germany and is among the three largest microfinance investment vehicles in the world, while responsAbility (cor) Global Microfinance Fund is managed by the Credit Suisse Microfinance Fund Management Company Luxembourg and has Credit Suisse Luxembourg SA as a custodian.
Luxflag's chairman Kenneth Hay said: "Awareness of microfinance is on the increase. Microfinance institutions, the frontline of microfinance products, are increasingly turning to the international capital markets in order to raise capital or loans to increase their reach into the poor urban and rural areas. Consequently a growing number of microfinance investment vehicles are being created in order to raise finances, and the Luxflag label has been created in the wake of this."
Chikako Kuno, director for small business at the European Bank for Reconstruction and Development and EFSE investor, said that returns in microfinance were similar to returns of other investments as all loans were provided at normal market rates. She added: "I believe the reluctance to invest in microfinance will eventually disappear, in particular as microfinance's risk pattern is uncorrelated to other asset classes."
Microfinance is defined as the supply of loans, savings, insurance, transfer services and other financial products to poor and low-income clients excluded from the traditional banking system. In general, microfinance institutions in which MIVs invest will have an average loan size of less than €5,000 (or €10,000 within Europe).