Structured finance and securitization: catalysts for mor inclusive finance via microfinance

Structured finance and securitization: Catalysts for more inclusive finance via microfinance

Microfinance plays a critical role in advancing financial inclusion, providing essential credit access to unbanked populations worldwide. By the end of 2023, the global microfinance sector's total market size is estimated at $195.3 billion in gross loan portfolio, reflecting stable year-over-year trends. South and Southeast Asia accounted for 38.3% of the global gross loan portfolio, followed by Latin America and 2the Caribbean with 33.7%, Europe and Central Asia with 16.9%, Sub-Saharan Africa with 9.3%, and the Middle East and North Africa with 1.9%.1

Microfinance Institutions (MFIs) provide small short-term loans with relatively high interest rates to cover operational costs and associated risks. Despite an enhancement in portfolio quality and a stable risk cost, remaining below 2%2 in 2023, interest rates continue to range from 20% to 60%,3 levels that many may view as counterproductive and harmful to the population.

Traditionally, MFIs have depended on development finance institutions, philanthropic funds, and banks’ loans. However, these sources remain inadequate to meet the growing demand for microfinance services, with an annual borrower growth rate of 8.4%. Additionally, MFIs continue to face significant funding challenges due to limited access to capital markets and the absence of a robust and formalized risk management framework. The industry has gradually recognized the need to attract institutional capital and implement structured finance mechanisms to bridge the funding gap. 

Structured finance/securitization has emerged as a solution to mobilize private capital for microfinance by converting loan portfolios into tradable securities. This structured approach enhances liquidity, diversifies funding sources, and would enable MFIs to expand their lending capacity without increasing debt or diluting ownership while impacting their respective ecosystem. 

Luxembourg has positioned itself as a leading jurisdiction for securitization and structured finance thanks to its regulatory framework and investor-friendly environment. Furthermore, Luxembourg has also become a global leader in sustainable finance, with numerous initiatives supporting green, social, and impact investing. This combination of regulatory stability, financial infrastructure, and commitment to sustainability positions Luxembourg as an ideal center for advancing microfinance securitization and impact investing

Microfinance, structured finance and securitization: A scalable funding mechanism 

The practice of securitization, widely used in mortgage, auto loans, and SME lending markets, is increasingly applied to microfinance portfolios. Its adoption offers significant advantages for both MFIs and institutional investors, creating a structured pathway for sustainable growth.

For MFIs, securitization and structured finance provide a direct channel to institutional and private capital markets, reducing reliance on philanthropic grants or concessional funding. Structured finance enables MFIs to significantly lower their funding costs and consequently generate a significant positive impact on the end-users benefiting from such financing. 

First, securitization enables microfinance institutions to access a wider pool of capital by converting their loan portfolios into tradable securities. These securities can then be sold to institutional investors such as pension funds, insurance companies and hedge funds that could benefit from higher-yield investment opportunities. As more investors compete for these securities, the increased demand can drive down the cost of capital for MFIs. 

The liquidity provided by securitization also helps MFIs lower financing costs. By selling their loan portfolios on the secondary market, MFIs can quickly raise capital, reducing their reliance on more expensive short-term borrowing or overdrafts. This liquidity gives MFIs greater flexibility in managing cash flow, thus reducing the need for costly emergency financing.

Once microfinance loans are pooled and securitized, the associated risks are spread across many loans and tranches. This diversification reduces the perceived risk of individual loans, making the securities more attractive to investors. As the perceived risk decreases, the interest rate required by investors also tends to decrease, ultimately lowering the overall cost of financing for MFIs.

In summary, well-structured securitization programs help lower MFIs’ cost of funding, making microfinance lending more accessible and sustainable for borrowers. 

Luxembourg’s position in microfinance and securitization ecosystems 

Luxembourg remains one of the leading hubs for securitization and structured finance vehicles. In 2023, and for the third consecutive year, Luxembourg was ranked second, behind Ireland, which recorded 1,513 FVCs in 2023 and 1,459 in 2022. In 2024, almost 100 new Luxembourg securitization vehicles were established, while liquidations decreased, leading to a further increase in the total number.4 By the end of December 2024, approximately 1,5385 vehicles existed in Luxembourg. Year after year, Luxembourg continues to establish itself as a preferred financial center from which securitization transactions can be efficiently structured.

The country’s securitization law of 2004 provides a well-defined legal structure for establishing multi-compartment vehicles (MCVs), which facilitate cost-effective and efficient securitization transactions. Luxembourg’s regulatory stability ensures compliance with EU securitization regulations while maintaining flexibility for structuring cross-border financial transactions. The jurisdiction also offers a neutral tax environment, enhancing the attractiveness of securitization transactions for both originators and investors.

Beyond securitization, Luxembourg is a recognized leader in inclusive and sustainable finance. It hosts over 50%6 of the global assets under management in microfinance investment vehicles and has fostered an ecosystem dedicated to financial inclusion. It should also be noted that approximately 60% of microcredits pass through Luxembourg.7 Public-private initiatives, such as those led by the Ministry of Finance and the Ministry of Foreign & European Affairs, support financial inclusion and sustainable development efforts worldwide. Luxembourg is also home to a network of specialized impact investors and development finance institutions that actively allocate capital to microfinance securitizations.

The country’s financial research and innovation ecosystem further strengthens its role in microfinance securitization. Institutions such as the University of Luxembourg contribute to financial technology advancements and structured finance solutions that support inclusive finance. These developments position Luxembourg as a critical node in the intersection of structured finance and impact investing.

A win-win strategy for greater financial inclusion

By attracting a wider range of investors, MFIs can secure better financing terms, making microfinance services more affordable and impactful for unbanked communities, ultimately promoting greater financial inclusion and economic empowerment. For institutional investors, microfinance-backed securities offer an appealing investment opportunity. These structured products provide higher risk-adjusted returns compared to traditional fixed-income assets, such as sovereign and corporate bonds, while also offering exposure to emerging market credit. As investors look to diversify their portfolios, microfinance securitization represents a compelling asset class with low correlation to conventional financial markets. Furthermore, including microfinance assets in structured finance aligns with the "S" in ESG and impact investment mandates, helping investors meet both financial and sustainability goals.

A Luxembourg-based securitization entity has, for years, structured multiple securitization compartments to finance microfinance institutions across Eastern Europe and Central Asia. The entity leverages Luxembourg’s structured finance expertise and legal framework to channel capital efficiently toward financial inclusion projects. By using securitization, it enables microfinance institutions in emerging markets to access institutional capital, driving economic development while maintaining financial sustainability.

In Egypt, a leading microfinance institution completed an EGP 884 million (approximately EUR 18 million) securitized bond issuance in late 2024. The transaction was designed to optimize its funding structure while expanding its lending capacity to underserved microbusinesses. By securitizing its loan portfolio, this institution successfully lowered its financing costs, improving the affordability of its credit offerings. This transaction has not only increased access to credit for micro-entrepreneurs, but also allowed institutional investors to gain exposure to Egypt’s growing microfinance sector while earning competitive returns.

Both cases underscore the transformative potential of securitization and structured finance in microfinance, highlighting its role as a scalable, market-driven solution or financing initiatives aimed at financial inclusion.

Luxembourg is ideally positioned to drive the next phase of microfinance securitization, capitalizing on its expertise. Securitization and structured finance provide a scalable and efficient financing solution for MFIs, enhancing capital efficiency, diversifying funding sources, and strengthening risk management. By aligning the cost of capital with the cost of risk, securitization and structured finance reduce financing costs, enabling MFIs to offer lower interest rates and thus fostering financial inclusion and economic development in emerging and developing countries.

For institutional investors, microfinance-backed securities offer a promising asset class that combines attractive yields, ESG alignment and exposure to high-growth emerging markets. As the demand for sustainable finance and impact investing continues to rise, Luxembourg’s role in connecting global capital markets with financial inclusion initiatives will only grow. The continued expansion of structured microfinance transactions will further solidify Luxembourg’s position as a global leader in innovative financial solutions, driving both social impact and strong, risk-adjusted returns for investors.


Summary 

How can Luxembourg’s favorable position as a leading jurisdiction for securitization and structured finance address the growing demand for microfinance services?

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