Banking - Funding Micro Finance by fanzhongqing

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									                Funding Microfinance:
An Analysis of Emerging Financial Models


       A Review for the Indian Banks’ Association
                                          Agenda

   Introductions
   Project Overview
   Conclusions
   Recommendations
   Financial Models
      Remittance Securitization
      CDFI Financial Model
      US Mortgage Securitization Model
   Review of Recommendations
                                        Introductions

           International Executive MBA
Georgetown University McDonough School of Business




                    Kent Bonham
                 Celeste Diaz Ferraro
                      John Gray
                      Brian Saal
                  Virginia McMullan
                    Javier Varela
              Dr. Reena Aggarwal, Advisor
                                        Project Overview


   Research began by analyzing the U.S. mortgage market and U.S.
    CDFI system to identify factors relevant to success in capital
    generation for microfinance
   After assessing weaknesses in transferring these models to India,
    the Georgetown team chose to also investigate remittances as a
    capital generation model that has greater short-term opportunity for
    success in India
Conclusions
                                                   Conclusions
                                                        Remittances
   Trend toward increased efficiency, competition and developing
    technology.

   Large market potential.

   Attractive conduit for cross-selling other financial products.

   Securitization of remittance flows is a viable and attractive
    mechanism for generating capital for microfinance.
                                                 Conclusions
                                                         U.S. CDFIs
   Without strong government pressure on banks as well as significant
    incentives for investment, CDFIs would cease to be attractive or, in
    some cases, profitable investment vehicles.

   Even with significant government assistance, CDFIs in the US took
    10 years to reach today’s operating standards.

   CDFI experts indicate that the timeframe for industry maturity is
    approximately 20+ years, even with significant government and
    banking industry support.
                                               Conclusions
                                      U.S. Mortgage Market


   The U.S. secondary mortgage market works due to several factors:
      The extremely large market size provides instant liquidity and
       provides significant for large institutional investors
      Investor community has strong familiarity with this asset class
       and perception of risk has been erased over time
      Perception by financial community of implied government
       guarantee
                                      Recommendations
 Offer remittances through top-tier MFIs.
    “Top-tier” defined by MFIs who have either obtained a credit rating from
      CGAP or have demonstrated investment-worthy accounting practices,
      management competency and operational transparency.
 Cross-sell remittances with other financial products to grow customer base.
 Securitize remittances, building on previous pioneering works of ICICI in
  India.
    Use future remittance cash flows as collateral for microfinance loans.


 Jointly lobby for Fannie/Freddie-style government incentives.
 Jointly lobby for CDFI-style government incentives.
           Remittances

           Expanding Microfinance
        Through New Product Offerings
While Increasing Capital Through Securitization
                                                Remittances
                                         Global Market Trends


 Shift from informal to formal, professional
 Consolidation and partnerships
 Competitive environment
 Greater segmentation
 Proliferation and increasing levels of technology
 Securitization
 Stability of Remittance Flows
                                        Remittances
                Demonstrated Long-Term Stability




IMF Balance of Payments Statistics for Developing Countries
             The Indian Remittance Market
                                                Background


   $126B worldwide, over $25B to South Asia (2004)
   India largest in the world for remittance receipts
   Stability of remittance flows
   Diaspora in U.S., migrant workers in Middle East
   Large number of domestic migrant workers
             The Indian Remittance Market
                                 Background



   MTOs such as Western Union
   Informal channels - hundi
   Current Bank products
   Post Offices
                                              Remittances
                                  Potential for Microfinance


 Leverage existing relationships with MFIs
 Cross-sell additional product offerings
    Package
    Savings
 Potential to reach more customers
 Increase MFI credit ratings
 Domestic remittances
                                                Remittances
                                            Ecuador Case Study



   Banco Solidario alliances with Spanish savings banks
   Remittance services complement other products
      Credit
      Savings accounts - part of remittances can be “blocked off” for
       future purchases or to service existing loans
                                               Remittances
                                                Haiti Case Study


   Microfinance NGO Fonkoze offering a range of services including
    savings, microloans, currency exchange
   Agreement with City National Bank of New Jersey (CNB)
   Remittances through Fonkoze account at CNB – transferred to
    Haitian bank
   Successes – cross-selling other services, increasing volume of
    microloans
                                               Remittances
                      Additional Global MFI Case Studies



   MFIs are providing savings and micro credit based on remittances in
    Bulgaria, Serbia, El Salvador, Ukraine, and Bosnia

   Use remittances to leverage more funds in the commercial markets
    to finance lending operations
                                                    Remittances
                                            Global Securitization


   Ongoing access to funding, new investor base

   Leverage remittance flows to productive purposes through financial
    intermediation of banks

   Include top tier MFIs, geographical diversity
                      Remittance Securitization
                                              Turkey Case Study


   AKBank TAS - structured finance deal of US $400 million by
    securitizing its foreign currency denominated present and future
    remittances. Followed by additional advances

    Recently Ambac financial group provided financial guarantee
    insurance and its AAA rating to $350M in notes backed by AkBank’s
    offshore remittances
                           Remittance Securitization
                                                           Peru Case Study
   Banco de Crédito del Perú (BCP) raised $100 million in January 2001 with its first-
    ever bond backed by securitized electronic transfer payment instructions. ING
    Baring's Latin America was the organizer of the Banco de Crédito transaction
   BCP was first bank to introduce electronic transfers as a new asset class for future-
    flow securitizations.
   The bank receives annually close to $3 billion in electronic transfers
   BCP arranged with its five major correspondent banks – JP Morgan, Citibank, Bank
    of New York, Bank of America and Standard Chartered to flow securitization
    through a special purpose vehicle
   ING structured the deal as a sale of BCP's existing and future rights to the dollar
    payments, so the receivables are no longer owned by BCP but transferred to the
    SPVfor the benefit of the certificate holders.
   MBIA guaranteed the timely payment of interest as well as payment of the principal
    on maturity.
Community Development
 Financial Institutions
                                                   CDFI Profile
   Community Development Financial Institutions are private sector
    financial institutions that solicit capital from public and private
    sources and channel it via their various services into specific
    underserved communities
   Financial resources are provided through:
       Provision of financial services, loans, and investments
       Offering training and technical assistance services
       Promoting development efforts that enable individuals and
        communities to effectively use credit and capital
                                                                                                CDFI Profile
                                                                                            Characteristics
   CDFIs are categorized by services offered and lending portfolio
    focus. Common categories include home loans, consumer credit,
    enterprise funding.
   Loans are far and away the tool most used by CDFIs, with 98% of all
    financial outstanding, or $8.3 billion.1




                                                                                            $217,113
                                                                                                       $272,061
           $300,000

           $250,000

           $200,000
                                                                                                                  2002
                                $59,268




           $150,000
                      $40,030




                                                                                  $40,379
                                                                                                                  2003
                                                                        $36,338
           $100,000
                                                             $4,998
                                                    $4,510




            $50,000

               $-
                      Banks                        Credit             Loan Funds            Venture
                                                   Unions                                   Capital

                                          1CDFI   Data Project, FY 2003 Publication
                          Regulatory Environment
                                       Catalyst for CDFI Growth
   1994 creation of CDFI Fund
      Initial $382 million allocation over 4 year period
      Paid out over $700 million to date
      $55 million slated for FY 2006


   1995 revision of Community Reinvestment Act (CRA)
      Government subjects lenders to evaluation under CRA
      Up to 5% of deposits must be allocated to community
       development initiatives for maximum compliance
      Rating impacts bank’s abilities to accept deposits
      CDFI investments qualify as CRA activity
                                                CDFI Profile
                                             Operational Model

          Banks
                                      CDFI      Borrowers
    Private Investors




                   US Government
                   (Tax Incentives)


   CDFIs act effectively as an intermediary
   The flow of capital is predominantly loans
   This model relies on government incentives for success
                         Regulatory Environment
                           Federal Incentives for Banks

   Bank Enterprise Award (BEA)
      Monetary award given directly to banks to offset investments in
       CDFIs

   New Markets Tax Credit (NMTC)
      Credit given against Federal income taxes initiated in 2000
      Totals 39% of the cost of the investment and is claimed over a
       seven-year credit allowance period
                    CDFI-Investor Relationship
                      Motivation for Bank Investment

   Gain access to intermediary with stronger expertise
      Technical support for customers
      Lower administrative and marketing costs
   Reduce bank portfolio and operational risk
   Enter new markets
      New target audiences
      New geographic markets
      Product or loan type offerings
                   CDFI-Investor Relationship
                 Three Primary Investor Objectives
   Surveyed some of the U.S.’ largest commercial investors in CDFIs
      Banks: Bank of America, Wells Fargo Bank, Citibank
      CDE funds managers: Community Reinvestment Fund, Calvert
       Funds

   Commercial investors tend to have three common goals
      Compliance with Community Reinvestment Act
      Market return on investment
      New market development
                   CDFI-Investor Relationship
                 Three Primary Investor Objectives


   Community Reinvestment Act Compliance
      Banks must invest in all communities where they have presence
       or accept deposits
      Banks are limited by human and capital resources
      CDFIs can reach multiple areas more efficiently, helping banks
       achieve maximum ratings while covering broad geographic areas
                    CDFI-Investor Relationship
                  Three Primary Investor Objectives


   Market Returns on Investment
      Banks must commit 5% of deposits to CRA investments
      Many development activities are unprofitable and often classified
       as charitable or marketing efforts
      CDFIs, particularly New Markets Tax Credit investments, can be
       profit generators and meet or exceed standard commercial
       investment parameters
                    CDFI-Investor Relationship
                  Three Primary Investor Objectives



   New Market Development
      Working through CDFIs provides banks an opportunity to instill
       brand awareness and loyalty among new customers
      Long-term capacity building grows the overall market by creating
       new customers in underserved areas
                      CDFI-Investor Relationship
                                                Investor Strategies
   Market development
       Technical assistance and community education programs
          Homeownership and financial responsibility courses, small business
           outreach, etc.
          Management and technological exposure to CDFI similar to training for
           MFIs
          Typically viewed as charitable or marketing efforts (cost centers)


       Direct investment in local CDFIs (Bank Enterprise Award grants)
          Factors in selecting CDFIs comparable to screening MFIs
                 Management ratings
                 Efficiency and market returns
                 Target audience and customers (loan and funding types)
          BEA award reduces losses on marketing investments but does not
            completely offset expenditures
                   CDFI-Investor Relationship
                                        Investor Strategies

   Financial Return
      NMTC investments provide banks with commercial rates of return
      Minimize risk and reduce administrative expenses
          Banks utilize same assessment tools and processes to
           evaluate CDFIs as commercial investments
          Banks can dictate CDFIs underwriting guidelines
          Banks do shoulder greater risk in NMTC than other tax
           programs
                       CDFI-Investor Relationship
                                Bank of America case study
   Bank of America background
      U.S.’ largest bank and largest CDFI investor
      CDFI investments make up 10% of all Bank of America’s community
       development budget
      Currently have $350mm invested in NMTC with a commitment for another
       $256 million in 4th round (2005)

   Risk assessment and return on investment requirements
      BoA applies similar risk and return evaluation processes to both commercial
        and NMTC investments
      Commercial vs. NMTC repayment rates: 98.1% vs 97.8
      Commercial vs. NMTC ROI: 8-10% vs. 7-8% + 5% tax credit (total 12-13%)
      Additional risk assigned internally to CDFI investments (generally 2-3%
        additional cost of capital), not by demonstrated market performance
                    CDFI-Investor Relationship
                    Evaluation for Future Investment
   Commercial investors still evaluating the long-term profitability of
    CDFIs
   CDFI Data Project launched by government in 2004, initial results in
    2005. Standardized data collection for all CDFIs to enable more
    transparent evaluation of performance.
   Horizon for assessment of commercial return on investment
       Banks have 3-4 years initial data on NMTC investments, will need
        3-4 additional to gauge overall return on investment.
       It will take an additional 8-10 years of data to conclusively
        evaluate CDFIs as reliable investment vehicles.
                     CDFI-Investor Relationship
                                               Lessons Learned
   It’s taken 10 years (1995-2005) of government assistance and
    concerted commercial investment for CDFIs to gain acceptance as
    investment vehicles.

   Without continued strong government pressure on banks as well as
    significant incentives for investment, CDFIs would cease to be
    attractive or, in some cases, profitable investment vehicles.

   CDFI experts indicate that the timeframe for industry maturity is
    approximately 20+ years, even with significant government and
    banking industry support.
Fannie Mae / Freddie Mac and
 the U.S. Mortgage Industry
                       Fannie Mae / Freddie Mac
                                             US Mortgage Market

   Securitization of the US Mortgage Market
      Federal National Mortgage Association (FNMA or Fannie Mae)
       created by US Government in 1938, authorized to purchase
       federally insured mortgages
      Became self-sustaining private company in 1968, operating on
       private capital
      Currently operates under congressional charter, focuses on
       availability of funds for low to middle income families to purchase
       homes
                       Fannie Mae / Freddie Mac
                                             US Mortgage Market


   Purchase mortgages from primary lenders stabilizing the availability
    of mortgage credit
   Pool the mortgages and resell as securities
      Securities earn smaller but constant differential between the yield
        on pooled mortgages and payout to investors
      Capital requirements are lower
                       Fannie Mae / Freddie Mac
                                 US Government Regulations


   Fannie and Freddie benefit from arrangements with the Federal
    Government
      Each has a line of credit with the US Treasury up to $2.25 billion
      The US Federal Reserve has the authority to buy their debt
         Potential to act as a “bail out”
      Exempt from state and local income taxes on profits
      Exempt from SEC securities regulation restrictions
                        Fannie Mae / Freddie Mac
                                                                     Market Model
                                 US Government
                                  (Guarantor)




                   Freddie Mac
Investors                                        Brokers and Banks        Borrowers
                   Fannie Mae




    This model generates large amounts of capital and reduces risk
       Risk is distributed among many investors
    Key elements: government guarantee, established credit systems,
     large market size
Conclusions (Again)
                                                   Conclusions
                                                        Remittances

   Large market potential.

   Attractive conduit for cross-selling other financial products.

   Securitization of remittance flows is a viable and attractive
    mechanism for generating capital for microfinance.
                                                 Conclusions
                                                         U.S. CDFIs
   Without strong government pressure on banks as well as significant
    incentives for investment, CDFIs would cease to be attractive or, in
    some cases, profitable investment vehicles.

   Even with significant government assistance, CDFIs in the US took
    10 years to reach today’s operating standards.

   CDFI experts indicate that the timeframe for industry maturity is
    approximately 20+ years, even with significant government and
    banking industry support.
                                               Conclusions
                                      U.S. Mortgage Market


   The U.S. secondary mortgage market works due to several factors:
      The extremely large market size provides instant liquidity and
       provides significant for large institutional investors
      Investor community has strong familiarity with this asset class
       and perception of risk has been erased over time
      Perception by financial community of implied government
       guarantee
             Recommendations (Again)
 Offer remittances through top-tier MFIs.
 “Top-tier” defined by MFIs who have either obtained a credit rating
  from CGAP or have demonstrated investment-worthy accounting
  practices, management competency and operational transparency.
 Securitize remittances, building on previous pioneering works of
  ICICI in India.
 Cross-sell remittances with other financial products.
 Use future remittance cash flows as collateral for microfinance loans.
 Jointly lobby for Fannie/Freddie-style government incentives.
 Jointly lobby for CDFI-style government incentives.

								
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