Capital Markets Initiatives and Social Empowerment

1
Grameen Foundation USA

• Capital Markets Initiatives and Social
  Empowerment
• A Presentation to 7th Annual BYU MicroEnterprise
  Conference
• by Alex Counts, Julie Stahl, Anne Hastings
• and Chris Dunford
• March 12, 2004

2
Benefits of Commercialization

• Investors and lenders demand increased
  efficiency and transparency
• New efficiencies can mean lower costs to
  borrowers
• Increased transparency and professionalism
  leading to lower risk of error and fraud
• Tapping into virtually unlimited sources of
  capital for expansion
• Reduction of time management spends
  fund-raising

3
Risks of Commercialization

• Exclusion of poorest people and areas
• to reduce perceived portfolio risk among MFI
  lenders/owners
• Phasing out of complementary services (BDS,
  credit with education) and social impact
  experimentation
• to reduce costs and increase profits
• Mission Drift Overarching poverty reduction
  objective slowly diluted/lost
• Ownership is increasingly foreign and from
  traditional banking sector

4
Risk Mitigation

• Right mix of incentives for MFI loan officers
• Grameen Bank Five Star System
• 3 stars for financial performance
• 2 for social impact
• Apex organizations choice of MFIs
• Case of SHARE GF-USA
• MFI choices for key management and governance
  posts (case of Fonkoze)
• Donors/Investors attention and valuing of
• Poverty targeting, poverty impact (monitoring
  results), experimentation complementary
  services
• Ensuring that ownership is predominantly local
  and ideally includes clients themselves

5
GF-USAs Partners in India

• 2.1 million invested since December 2000
• Quadruple growth from 80,000 to 330,000 borrowers
  in 3 years

6
Securitization Creating a Secondary Market for
Micro-finance
7
Securitization Structure and Credit Enhancement

• Bank identifies an MFIs portfolio for buyout
• Based on fulfillment of minimum criteria and past
  performance of portfolio
• MFI assigns portfolio to Bank and receives
  payment for value of principal assigned at Par or
  at a Premium
• MFI continues to collect receivables from the
  borrowers thus maintaining its relationships
• MFI provides Bank a credit enhancement in the
  form of a First Loss Deficiency Guarantee (FLDG)
• FLDG is based on the expected losses in the
  portfolio
• Expected loss rates derived from detailed study
  of past portfolio data

8
Securitization Pricing

• Advantage Can differentiate the financial risk
  of an MFI from its operational risk
• Pricing based on
• Past portfolio performance
• Quality of MFIs governance management,
  operating systems MIS
• Credit Enhancement (FLDG) improves rating of
  portfolio thus achieving highly competitive
  pricing
• Typical pricing
• Applicable Securitization Discounting Rate
  8-8.5
• Interest rate on term loans to MFIs from banks
  11-14

9
Example SHARE Securitization

• SHARE sold 4.3 million of its portfolio to ICICI
  Bank in Jan 04
• 42,000 loans from 26 branches as of 10.31.03
• Continues to act as collection agent
• ICICI discounted the FV of principal and interest
  of these receivables at 8.75
• Repayments will all be made by Jan 05
• All future loans originated in these branches
  will be thru Partnership Model
• Boosts SHAREs ROA and ROE

10
Grameen Foundation USA role in SHARE
securitization

• GF-USA supporting SHARE since 2000 total
  investments of approx. 650k
• Grant to SHARE of 325,000 for 8 FLDG (in cash
  collateral account at ICICI)
• Achieved leverage of 12x on donors investment
• Key part of GF-USAs 5 yr Strategic Plan
• Pre-cursor to work of Grameen Capital India

11
ICICI Bank Partnership Model

• ICICI Bank partners with selected MFIs on
  long-term basis
• MFI sets up field organization as a service
  provider for promotion and management of
  borrowers
• ICICI Bank provides credit, savings and other
  services such as insurance directly to the
  borrowers
• MFI plays active role in monitoring and
  collection (incented to maintain low PAR by
  required FLDG)
• ICICI Bank provides working capital assistance to
  MFI to meet cost of promotion during initial
  years
• MFI repays the working capital loan from donor
  funds when available or from service charges

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Partnership ModelExample CASHPOR Pilot
ICICI Bank
1 check
Batched loan applications for approval
Batch repayment
Rural Bank Branch
CFTS Uttar Pradesh
Individual checks

• Group formation
• Loan applications
• 6 service fee

Individual repayments at 12.5 interest
13
Benefits of Securitization and Partnership Model

• Releases funding constraints so MFI can expand
  outreach exponentially
• Frees up MFI management time spent on fundraising
• Enables each party to do what it does best
• MFIs do the social mobilization
• Banks provide financing
• The FLDG structure retains the incentive for the
  MFI to strictly monitor PAR assuring constant
  pipeline of good quality assets for
  banks/investors
• Will permit deepening of the market and entry of
  new investors for micro finance foreign banks,
  mutual funds, retail investors

14
The Vision Commercially Viable Business Models
for Delivering MF to the Poorest

• Partnerships have worked best with MFIs that have
  demonstrated capability in
• Poverty targeting (focus on the poorest)
• Managing information systems
• Maintaining high levels of performance and
  governance standards
• Dedicated action research team (ICICIs SIG)
• Product development
• Impact assessment/due diligence of partner MFIs
• Key volunteers pushing the frontiers
• Partnerships with other service providers
• Capacity building for emerging MFIs
• Systems, Training, Rating

15
Grameen Capital India

• GF-USA, ICICI, and Citigroup launching company
  that will drive mainstreaming of capital markets
  financing for MFIs
• Key businesses
• FLDGs to facilitate securitizations and other
  structured finance transactions for MFIs
• Advisory services to MFIs and banks/investors
• Standardization efforts for financial
  measurement/ reporting and data transfer
• Set up to take integration of MF with capital
  markets to other regions with similar potential

16
Grameen Capital India Year 1
GF-USA and Citigroup
GRAMEEN CAPITAL INDIA 1m initial capital
ICICI Bank Local Partner
495k seed capital
505k seed capital
Credit Enhancements/Guarantees 800k initial
Initial 7.5m leveraged from sale of MFI
commercial paper
Capital Markets
MFIs (SHARE, ASA, CFTS, SKS, etc)
Years 2-5 Additional 10-15 m in credit
guarantees/grants to be raised from development
institutions (AID, Ford, IFC), individuals and
foundations resulting in 100 million in MFI
funding and outreach to 1 million BPL households.

End Borrowers