MFIC’s Transnational Loan Program Enables Access to Financing

This blog post was written by Diego Rios of Microfinance International Corporation following his presentation at After Hours Seminar #56, "Linking Remittances Beyond Consumption with Housing Microfinance."

Today, over 200 million immigrants work abroad and send money home exceeding $300 billion sent worldwide. Given informal methods that are still prevalent particularly in developing countries, the real figure may be closer to $450 billion. In particular, remittance flows to Latin America are illustrated by the large amount of funds transferred by migrants to their home countries, a figure higher than net foreign direct investment and development assistance.

Transnational families receiving remittances have a higher standard of living than families that do not receive remittances. Remittances are collected as cash, and this money is often hidden under the mattress or spent on consumption. These vast funds remain outside of the formal financial system because both remittance senders and recipients lack basic access to the formal financial sector. Financial institutions miss opportunities to capitalize on these funds to have a wider economic impact.

At Microfinance International Corporation (MFIC), we try to leverage the existing infrastructure and money flows to link immigrant customers in the U.S. with financial institutions in their home countries to have a greater economic impact. MFIC’s transnational loan program aims to create a bridge or mechanism for immigrant families to access financing for income-generating or asset-building activities in their country of origin. During the USAID-funded After Hours Seminar, Linking Remittance to Housing Microfinance, I summarized MFIC’s experience in developing financial products and services tied to remittance flows and outlined advantages that financial institutions have in providing such products and services.

What is a transnational loan?

A transnational loan is a unique program developed by MFIC that works to improve the financial inclusion of the poor and increase the developmental impact of migrant remittances.

Transnational loans allow immigrants to apply for and receive loans in their countries of origin while still residing abroad. The funds from the loan can be used to purchase land, a new home, or to renovate an existing home. Recipients can also use the funds to start or expand a business. In the future, transnational loans may potentially be used to finance educational endeavors.

Why are transnational loans important?

Traditionally, immigrant populations in the U.S. have been under-served and ignored by the conventional financial institutions in their home countries and in the U.S. As a result, this important and substantial portion of the population has often lacked access to basic financial services and has only a limited knowledge of the benefits associated with established fiscal behaviors. Transnational loans are important because they help improve the financial integration of both unbanked immigrants in the U.S. and their family members residing abroad. Additionally, the local financial institutions that help facilitate these transactions are strengthened as a result of their participation.

How are the benefits of transnational loans realized?

The recipients of transnational loans are the primary beneficiaries of this service. They see the benefits of participation manifested in:

• Improved access to financial services;
• Increased standards of living;
• Greater social inclusion;
• The ability to purchase and improve personal property; and
• The opportunity to start a new business or expand an existing business.

Financial institutions that work with MFIC to provide transnational loan services benefit in many ways as well. For instance they can:

• Obtain access to a large customer base without having to make a substantial investment of time and resources;
• Gain access to a USAID partial loan guarantee (only available for microfinance institutions);
• Grow their secured loan portfolio; and
• See an increased demand for their financial services.

Additionally, the economy of the country where the transnational loan is dispersed also benefits from this practice. Because the funds of the transnational loan are sent through formal financial channels, the destination country’s debt sustainability rating increases. As a result, the country can then focus more of its resources on asset-building activities.