How a loan book is funded: the layers of funding

Every loan has two sides

A loan is an asset of the lender: money owed to it. Before it can be paid out, the lender must have raised that money, either from its owners or from people and institutions it owes. The balance sheet shows both sides, and they always add up.

Assets = liabilities + equity

CGAP's consensus guidelines on financial terms for microfinance define total equity as total assets less total liabilities, and funding liabilities as all liabilities used to finance the lender's financial assets. They name the main kinds: deposits, commercial borrowings that carry a market rate of interest, and concessional borrowings that carry a below-market rate. The cost of these liabilities is covered in the course on unit economics.

The layers of funding

The sources of a lender's funding can be pictured as layers. They differ in who provides them, how long they stay, what they cost and, above all, in the order in which they bear losses.

• Equity: the owners' money and retained profits. It has no fixed repayment date and absorbs losses first. Lesson 2.
• Deposits: money placed with the lender by the public. Only institutions licensed to take deposits may raise it. Lesson 3.
• Borrowing from banks: term loans and credit lines, often with conditions attached. Lesson 4.
• Development finance and bonds: loans and investments from development finance institutions and other investors, and debt sold to investors as bonds or notes. Lesson 5.
• Securitisation and loan sales: selling a pool of loans, or the cash flows from it, to investors. Lesson 6.

When losses come, equity is used up first; lenders and depositors are paid before the owners receive anything. CGAP's guidelines note that equity is generally considered the most expensive form of financing, because investors require a greater return than lenders.

Lenders that do not take deposits

Many lenders outside banking are not licensed to take deposits. CGAP's guide to the regulation and supervision of microfinance says that lending-only lenders pose no risk to depositors, because they have none, and are not subject to depositor runs. Its key point is that, absent extraordinary circumstances, they should not be subjected to prudential regulation and supervision. The risk falls instead on the owners, lenders and donors who fund them, and the guide says they can and should supervise the institutions they invest in. The guide still expects such lenders to follow non-prudential rules, such as those on consumer protection.

The Financial Stability Board, which monitors lending outside the banking system, groups such lenders by what they do. One of its economic functions is loan provision that is typically dependent on short-term funding, with finance companies, leasing and factoring companies and consumer credit companies as typical examples. Its monitoring report for 2025 found that finance companies, together with broker-dealers, securitisation vehicles and real estate investment trusts, continued to have the highest ratios of debt to assets among the types of other financial intermediaries it tracks. As a dated example, the assets in this function reached 6.1 trillion US dollars at the end of 2024 in the jurisdictions it covers.

Will the funding stay as long as the loans?

For example, a lender that funds two-year loans with money it must repay in three months has to find new money every three months. If its lenders decline to roll over, it must stop lending or sell assets. For banks, the Basel Committee's net stable funding ratio measures this. It compares available stable funding, the part of capital and liabilities expected to be reliable over a one-year horizon, with the stable funding the bank's assets require, and the ratio should be at least 100 percent on an ongoing basis.

Net stable funding ratio = available stable funding ÷ required stable funding, at least 100 percent

Available stable funding weights each source by how reliable it is. Regulatory capital and borrowings with a residual maturity of one year or more count in full. Stable retail deposits count at 95 percent and less stable retail deposits at 90 percent. Funding from non-financial companies with less than a year to run counts at 50 percent, and funding from financial institutions and central banks with less than six months to run counts at nothing. The ratio must be applied to internationally active banks, and supervisors may use it for other banks. Its weights can also be applied, as an illustration, to the funding of any lender, as in the example below.

A worked example with illustrative numbers. Two lenders each have a loan book of 1,000 and equity of 200. Lender A borrows the other 800 from banks for three months at a time. Using the weights above, its stable funding is 200, a fifth of its funding. Lender B borrows 300 from banks for three months and 500 under a loan that has three years to run. Its stable funding is 200 plus 500, or 700. If the banks stop lending for a while, A must find 800 within three months, B only 300.

Questions to ask about any lender's funding

The rules on what a lender may raise, and from whom, differ by market and by type of licence; the lending rules comparison shows what applies where.

• How much of the loan book is funded by equity, and how much by each kind of liability?
• When does each source have to be repaid or renewed, compared with when the loans are repaid?
• How many funders are there, and what happens if the largest one stops?
• Which sources does the lender's licence allow, and which are closed to it?