Potential of microfinance as a mitigant of global systemic risks
Dipl KFM, Tomáš Hes
While the microfinance sector in developing countries suffers from insufficient capital volume employed by microfinance institutions (MFIs) resulting in reduced access to financial markets for hundreds of millions of people, capital markets in developed world are becoming worryingly complex due to boom of structured finance, acting as a negative externality to the global financial ecosystem. The paper studies the interrelatedness between the microfinance sector and capital markets from the point of a potential linkage between them and systemic risks arising from growing complexity of capital markets. Having found low statistical correlation between microfinance and systemic risk indices, the study proposes establishment of a microfinance funding mechanism combined with complexity reduction scheme. The proposed global cap and trade offset system enables trading of complexity quanta for microfinance funding. Being analogue to current emission trading systems, it reduces complexity of structured finance blamed for sparking last financial crisis through regulation of OTC markets and penalizes excessive trade on the one hand, while on the other propels funding to the microfinance sector characterized by simplicity, low systemic risk, high debt traceability and a development potential for underdeveloped regions.