Focus on Apexes
March 23, 2010
Over the past ten to twenty years, apexes have become a force to be reckoned with. Well over US$2 billion per year of public money is being disbursed globally to microfinance through apex funds. But while they are prominent in some markets, very little is actually known or written about these funds at a global level. A new CGAP Brief examines apexes, and shows what an important source of local funding they have become for microfinance.
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Who’s funding apexes?
More than 70% of apexes receive funding from their country governments. International funders (e.g., multilateral, and bilateral agencies) are also very involved. The Top Five International Funders are:
• KfW
• The World Bank
• The Inter-American Development Bank
• IFAD
• EU
Why donors fund MFIs through Apexes?
Created in developing countries—and either financed by their own government, or by donors from developed countries, or most often a mix of the two—apexes are often seen by donors as a means to jump start the microfinance sector and co-ordinate their funding. They also provide a way for funders to move significant funding into a large number of smaller MFIs that do not usually access commercial funding. For example, after the war in Afghanistan when the government decided to actively support microfinance, international donors pooled their money into an apex fund.
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Apexes represent a substantial means by which governments fund microfinance. In an assessment of all the funds worldwide that channel money to microfinance in cooperation with Enterprising Solutions Global Consulting, CGAP identified 76 such wholesale facilities. These funds are established in developing countries to pool national government and international donor money and provide loans or grants to microfinance institutions, usually as part of a country’s overall poverty alleviation strategy. Forty-seven of the 76 funds reviewed reported portfolio disbursements. These 47 funds disbursed $1.8 billion in 2006 and $ 2.3 billion in 2007.
Apex funds exist in all regions of the world. The highest volumes of disbursements through apexes take place in Latin America and South Asia, while Africa is the region with the most (20) funds of this type in place, many created within the last five years.
They are growing in number. Most wholesale funds were established in the 1990s and 2000s. PKSF, the well known, large Bangladeshi wholesale fund, was launched in 1990. Since then there have been a steady stream of new funds, with eleven having been created in the last three years.
Most of the funds are in local currency. This means that the MFIs that borrow from them are less exposed to exchange rate risk than when they get a loan in hard currency. “Whereas three-quarters of the outstanding loan portfolio of the 16 leading Development Finance Institutions like IFC and KfW is provided to MFIs in hard currency,” says CGAP Lead Microfinance Specialist Xavier Reille. “Apexes provide the majority of their funding to MFIs in local currency. In volatile markets, this can be significant for the microfinance institutions receiving the money.”
 Temporary or Permanent?
They take many different forms, but one trend that CGAP identified across apexes was a tendency toward institutionalization. “In many cases, apexes were designed as a temporary funding mechanism intended to address market imperfections and improve donor effectiveness,” says Senior Microfinance Specialist Eric Duflos, who led the CGAP inquiry into apexes. Duflos says that understanding how to support the development of a thriving domestic microfinance market should be a critical element in designing an apex. He cites the case of Bosnia, where the Local Initiative Departments (LID) effectively transitioned, and ultimately exited as the microfinance market was re-established after the war.
“The international donors had a clear idea from the beginning about what they were there for, and that was to kick-start microfinance and to get to a situation where they could get out and ultimately let the market take over. They always saw LID as a temporary structure, never as a replacement for the domestic microfinance market in Bosnia. LID is an exception in the world of apexes, because they do not usually develop an exit strategy.”
But if the intention is to help the local market get established, and then for it to take over, achieving that can be a delicate balance, says Duflos: “Much more work is needed to understand the practical implications of what we mean by ‘letting the market take over’, especially in countries where commercial actors aren’t vying to fund microfinance institutions, or where institutions do not have a legal option to raise deposits from the public.”
In a meeting held in Delhi in 2008, leading apexes agreed that they should consider creating intermediary instruments such as guarantees, quasi-equity, and equity-for-innovation to provide a bridge between donor and market financing, providing subsidized funding only until MFIs can access funding from commercially priced sources, including savings.
 “We need to analyze how apexes can play a positive role in the short term without preventing MFIs from accessing long term local commercial financing through deposits and commercial loans and equity,” says Duflos. “We need to develop some practical steps and best practices for how to help microfinance transition and grow as markets mature. CGAP plans to further analyze the conditions that make apexes efficient funding vehicles for funders and host governments.”
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