IFC and Standard Chartered Partner to Boost Microfinance

The International Finance Corp, the World Bank's private-sector lender, will partner with Standard Chartered to invest $45 million in credit-linked notes issued by Microfinance Institutional Loans. Standard Chartered is already dabbling in microfinance, but the new initiative with the Washington-based World Bank will enable it to boost its existing programs in sub-Saharan Africa and South Asia.

A credit-linked note is structured as a security with an embedded credit default swap allowing the issuer to transfer a specific credit risk to credit investors.

For example, a bank lends money to a microfinance institution XYZ, and at the time of loan issues credit-linked notes bought by investors. The interest rate on the notes is determined by the credit risk of the microfinance institution XYZ. The funds the bank raises by issuing notes to investors are invested in bonds with low probability of default. At maturity, the investors receive par unless the referenced credit defaults or declares bankruptcy, in which case they receive an amount equal to the recovery rate.The bank in turn gets compensated by the returns on less-risky bond investments funded by issuing credit linked notes.

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