Credit derivatives in Microfinance

I came across this press release from IFC (thanks to IDB for the pointer) which says:

IFC will invest $45 million in credit-linked notes to be issued by MILAA (Microfinance Institutional Loans for Asia and Africa), a special purpose vehicle set up by Standard Chartered to facilitate microfinance lending. The notes will be linked to a portfolio of loans that the bank has made to microfinance institutions in Sub-Saharan Africa and South Asia. They will also enable the bank to extend additional credit to microfinance institutions that will in turn reach more unbanked people.

So, now we have Credit Default Swap in microfinance as well. For a primer on  Credit Linked Note see RBI’s draft guidelines (pdf).

I am not really sure of this development. With wide scares expected in CDS market, we have some developments in microfinance. It is not as if I am opposed to CDS in general, but we are still so unsure if how this is priced, ghow will they be settled etc. It is unregulated and no one knows how will it fare in case of a crisis.

Further Peter Sands, Standard Chartered Group Chief Executive remarked:

“This transaction will unlock more funding for microfinance. We believe improving access to finance is a key lever in reducing poverty and catalysing broader social and economic development. We hope other investors will be inspired by the IFC’s support of this transaction.”  

So, IFC-Stan C expect others to follow. I am sure they won’t be disappointed and we will see lot more deals in this sector. I just hope they do it carefully as they are dealing with a very sensitive sector- microfinance. And I liked the message on poverty. I would surely want to look at the spread on this deal!

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