Latin American Challenge Investment Fund II The project proposes to build on LA-CIFs excellent 7-year track record in Latin American microfinance by creating a multi-currency capital structure to provide local currency resources to MFIs and also to attract local investors. The project falls directly under IFCs priority to boost both investment volume and development impact, which is through promoting collective investment vehicles. IFCs participation in this project will lead to a pioneer bond issue through a strategic partner which will issue PEN and MXN denominated bonds to Mexican and Peruvian private investors. The project will be executed in close collaboration with IFCs Treasury Department.

The primary goal is to demonstrate that well managed Latin American MFIs can access private sources of capital and attract sophisticated investors. LA-CIF IIs objectives are to: 

- structure and mobilize additional local currency financial resources for MFIs; 
- attract large local pension funds and banks to the microfinance sector; 
- generate adequate returns for investors;
- diversify risk sharing among a larger number of investors and investees; and 
- manage a regional portfolio of up to 23-25 MFIs. - Significant Direct Contribution to Poverty Reduction: 

The project will extend finance through MFIs to previously underserved groups: micro and small businesses that lack adequate sources of funding. IFCs new investment will increase the availability of financial services to this large underserved group. Supporting productive small businesses will in turn stimulate growth, employment generation and poverty reduction.

- Scaling Up Microfinance: 

By supporting an institution sponsored by LA-CIF II, this project will help scale up 23-25 microfinance institutions operating in Latin America by providing them with commercial funding in order to expand operations. This model should attract other private and commercial investors to do the same, thereby promoting investments in the microfinance sector. The project will also help address the mismatch of assets and liabilities on the books of MFIs (foreign exchange risk).

- Demonstration Effect:

The integration of local private investors (private banks and pension funds) into microfinance will be one of the first of its kind. This will show the way for other sophisticated institutional investors to enter the sector and deepen local financial markets. In addition, the transaction is also expected to facilitate a flagship bond issue that will be offering a PEN bond instrument to local Mexican and Peruvian investors for the first time. This could lead to replication in other countries and regions.

- Facilitate the Access of MFIs to Local Currency/Commercial Funding:  

The current demand of credit by underserved micro enterprises in emerging markets far exceeds the funding provided by donors and commercial lenders.  In order to satisfy the demand and unleash the productive capacity of these micro enterprises, MFIs need to tap into commercial funding sources to support their expansion.  The Fund enables MFIs to access capital from financial markets in local currency, which strengthens their balance sheets.  The demonstration effect and the experience to be gained by commercial and institutional investors in the MFI sector is expected to result in sustainable, commercial funding relationships.