World Hope's MicroCap Fund

One of World Hope’s signature programs is microfinance, a grassroots economic development approach in which World Hope provides microloans to the ‘entrepreneurial poor.’ These loans are generally between $50 and $200 and they are used for businesses that generate only a few dollars in income every day; but these businesses mean jobs and income for people who are on the edge of absolute poverty and desperation. World Hope has Microfinance Institutions (MFIs) in Sierra Leone, Liberia, Haiti, Indonesia, Philippines, and Cambodia. These programs are currently serving over 30,000 active clients and have a total microloan portfolio of $3,200,000.

For microfinance to be undertaken properly it must be done in an overall context of accountability and business viability; the microentrepeneurs who take loans from MFIs do so with the understanding that they must pay them back and the MFIs must charge enough interest to cover the operating costs associated with providing those loans. With the interest income the MFIs are able to achieve financial self-sufficiency, which enables them to maintain their commitments to their clients in the long term. For example, Hope Micro (Sierra Leone) has almost 12,000 clients, an on-time repayment rate over 98%, and it generates enough income on its loans to cover the operating costs of the program.

In the initial establishment of an MFI there is always some element of subsidy in terms of the provision of technical support and capital for the loan fund. However, with the establishment of the World Hope MicroCapital Fund (MicroCap) World Hope seeks to be intentional about weaning MFIs from the subsidy.

In a nutshell the MicroCap is a global loan fund for MFIs. Its purpose is to instill the idea that capital has a cost and that true self-sufficiency for an MFI implies that the capital used in microlending is imputed into the interest rates charged on microloans. The MicroCap is also envisioned to be a means of getting MFIs familiar with borrowing money that will be used for on-lending to their clients; once the MFIs are fully mature they will be able to borrow from local capital markets or client savers to finance their microlending operations.

World Hope is receiving pro-bono legal support in creating the MicroCap fund from one of the most respected law firms in the United States, Wilmer Cutler Pickering Hale and Dorr LLP. Fundraising for the MicroCap began in 2006 and World Hope has already received a $500,000 matching grant commitment. From this grant, any additional funds raised in 2008 for the MicroCap Fund will be matched dollar for dollar.

World Hope expects to issue its first loans from the MicroCap in the last quarter of 2006. The interest on the loans will be set by the MicroCap’s oversight committee and all disbursements from the fund will require the committee’s approval.

MicroCap loans will have one major concession to the MFIs that will make them highly sought after. While, regular interest payments will be required from the MFIs that receive MicroCap loans, the repayment of the principal will be deferred and, assuming the MFI meets certain performance requirements, ultimately converted to equity in the MFI. The performance requirements are;

• Maintaining the mission of serving the poorest

• Demonstrating a commitment to transparency and internal controls

• Developing a meaningful local governance structure

• Achieving specific quantitative performance benchmarks

• Securing local sources of capital to gradually eliminate the reliance on World Hope and other external donors

Finally, the MicroCap also incorporates a mechanism for extending the concept of self- sufficiency to World Hope itself and for gradually eliminating the dependence of the MFIs on World Hope’s technical support. The idea here is that World Hope will use the interest earned on the MicroCap loans to pay for the technical support that it provides to the MFIs. The fact that the salaries of the World Hope microfinance technical team will be dependent on the flow of interest payments from the MFIs will be incentive for World Hope to take extra care with regard to the due diligence and disbursement of the MicroCap loans. This also communicates to the managers and staff of the MFIs that there is no free lunch for anyone, that we are all in this together and to earn our paychecks we have to make the programs work.

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