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“Banco Lempira de Honduras”

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									“Banco Lempira de Honduras”

En Fuego Rachael Hoover Joseph McCollum Shane Warner

April 30, 2002 International Business Dr. Juan Castro

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Executive Summary Banco Lempira is a micro finance company that is requesting a loan from Citibank to accomplish securitization. The lending officer, Susan Murphy, is concerned as to the benefit of this proposed transaction. The transaction was proposed by Banco Lempira. Although a relatively new bank, formed in 1992, within five years of it’s beginning, Banco Lempira claimed thirty percent of the bank customers in Honduras (85,000 borrowing customers). Honduras is a poor country, it is also a very small country, about the size of Tennessee. It can be found in Central America. Almost fifty percent of the Honduras population is under the age of twenty-five, thirty percent are illiterate, and life expectancy rarely exceeds fifty-five in more remote areas. The country was founded in 1821, and since that time it has suffered many coups and uprisings. Honduras mainly produces agricultural items such as bananas, coffee and vegetables. Honduras was hit hard by the global banking crisis of the nineteen eighties, their bank loans hit a low point of six percent face value in 1987. Banco Lempira actually began as a non-profit organization that encouraged micro enterprise development. It began in 1986 under the name-“Fundacion para la Promocion y Desarrollo de la Microempresa(PRODEM). One of the pivotal ideas of the plan was group lending. Customers desiring a loan had to prose the request in groups of three or more and sign jointly. This strategy was very effective in the Latin American culture because the people are very community oriented. They were prompt and complete in their payments so not to lose face with the other members of their loan contract. To solve this dilemma, the ABA was formed. ABA is a special finance company that would be established by Accion and two other investors. They would give access to equity and also a line of credit from a major lender, such as Citibank. Although it seemed that Banco Lempira did not have much to offer, they had an amazing history of loan repayment to work in their favor. Crown Capital and Twin Capital were chosen to be the equity investors. They also would provide managerial services. Even with all this information, Susan still has questions and doubts in her mind.

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“Banco Lempira de Honduras” In recent years, securitization of bank assets has become a far-reaching trend. Mortgages, car loans, and consumer receivables

worldwide have been impacted by securitization. This case draws attention to the dilemma that Susan Murphy, Citibank lending officer, now faces. She has received an application for the Why is this a

securitization of many small loans in Honduras. dilemma?

Honduras is one of the poorest modern countries. Although a

The transaction was proposed by Banco Lempira.

relatively new bank, formed in 1992, within five years of it’s beginning, Banco Lempira claimed thirty percent of the bank customers in Honduras (85,000 borrowing customers). Banco Their

Lempira’s success cannot be attributed to large loans. average loan is only $828. profitable.

Despite the small loans, they are very

They boast an average return on assets of 2.7%,

average return on equity of 33%, and loans that did were not recovered accounted to only 2.1% of total loans. To give this data

perspective, U.S. banks only have an average return on asset of 1.2%, return on equity of 14.7% and non-performing loans were 2.5% Honduras I mentioned that Honduras is a poor country, it is also a very small country, about the size of Tennessee. Central America. It can be found in

Almost fifty percent of the Honduras population

is under the age of twenty-five, thirty percent are illiterate, and life expectancy rarely exceeds fifty-five in more remote areas.

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The country was founded in 1821, and since that time it has suffered many coups and uprisings. Honduras mainly produces agricultural items such as bananas, coffee and vegetables. Honduras was hit hard by the global banking

crisis of the nineteen eighties, their bank loans hit a low point of six percent face value in 1987. With influences of socialism and import protection, Honduras has suffered high inflation and drastically varying price indexes. Because of these, and many other problems, the government has moved towards free markets and global trade. Through the aid of various

political parties and other countries, Honduras has been able to conquer their debt problem by the nineteen nineties. Banco Lempira Banco Lempira actually began as a non-profit organization that encouraged micro enterprise development. It began in 1986 under

the name-“Fundacion para la Promocion y Desarrollo de la Microempresa(PRODEM). Accion Internacional is a U.S. based non-

profit firm that aided and guided PRODEM in its beginning stages, well-known businessmen in the Honduras community provided leadership for the project. Internacional One of the main ideas that Accion

gave was the idea of having the group members cross-

guarantee each other’s loans. The bank, Banco Lempira began as an attempt to transfer their operations to a chartered bank that focused on aiding the poor.

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They were able to obtain a charter because of the prominence and quality of the shareholders. Developing countries have long had small informal markets. Recent efforts have focused on transforming these markets into more formal structures without taking away from their unique culture. Government funding has assisted in these efforts. Lending Operations One of the pivotal ideas of the plan was group lending. Customers desiring a loan had to prose the request in groups of three or more and sign jointly. This strategy was very effective

in the Latin American culture because the people are very community oriented. They were prompt and complete in their payments so not

to lose face with the other members of their loan contract. Another central theme is frequent repayments. Instead of

biannual or monthly payments, the customers made weekly payments. Size and length of loans grew steadily provided all payments were made on time. Many of the loans were unsecured, and funding was not used to formally investigate the businesses, but representatives were able to personally visit them and update information. Funding Sources Although funding was mainly from shareholders in the beginning, early success allowed for customers to give deposits. Because of the success, commercial financing seemed a feasible idea in the near future.

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There was one main concern however, the liquidity of the bank’s assets. The idea of securitization emerged. If Banco could

sell their assets, they might eventually be able to begin and sell micro finance loans rather than merely a permanent holder. The Proposed Transaction To solve this dilemma, the ABA was formed. ABA is a special

finance company that would be established by Accion and two other investors. They would give access to equity and also a line of

credit from a major lender, such as Citibank. Although it seemed that Banco Lempira did not have much to offer, they had an amazing history of loan repayment to work in their favor. Crown Capital and Twin Capital were chosen to be the equity investors. They also would provide managerial services.

It was decided that the loan documents would be drawn up by a cooperative effort of a U.S. counsel and a Honduras counsel. Citibank was assured by the one million dollars of equity that they found in the ABA, as well as the million dollars of over collateralization. questions. However, there were still many concerns and

What should Susan Murphy do?

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CASE: Banco Lempira de Honduras QUESTIONS: 1.Might Securitization contribute to Banco Lempira’s liquidity?
Yes, Securitization of small company loans would greatly contribute to Banco Lempira’s liquidity. 2.How might Banco Lempira change in Character if this were to occur? As of right now Banco Lempira’s collection strategy is to visit with its debtors and collect money weekly. If Banco Lempira were to go forward with Securitization of the small company loans then the responsibility the collecting of payment would be on the individuals who had claims on the loans. 3.Could this bank continue growing at such very rapid rate without incurring serious problems? Based on their past performance, and the fact that so many individuals in Honduras need funding to get started or maintain their business, we believe that Banco Lempira could continue to grow at its present rate, with out incurring serious problems. 4.Could a connection be made between microfinance based on the most traditional forms of village trust and thoroughly modern techniques such as Securitization? A connection could be made between micro-finance based on the most traditional forms of village trust and Securitization. Both of these have a level of trust involved, with micro-finance the bank trust the solidarity groups to pay them on time, and the persons funding the securitized assets trust the bank not sell them ones that will default. 5.Could Banco Lempira make economic sense? Definitely. Although the loans are small, and it may seem doubtful that the loans could be repaid, the people are loyal to Banco Lempira and are faithful to their businesses and their contract partners. With the added draw of the securitization offered by joining with Citibank, it is foreseeable that the Honduran economy and the bank will continue to grow and prosper. 6.Could adverse selection be minimized? In some ways it could. The process is effective as it stands because of the security of the group loans. The loan partners in effect screen the selection applicants for the bank, they don’t want to be partnered with someone who is dishonest or irresponsible. However, there is some merit for closer, more accurate investigation of the individuals and businesses that the bank chooses to loan out to. Especially with the backing of Citibank, it will become necessary for Banco Lempira to keep a closer watch on their customers and applicants.

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DEFINITIONS 1. Economies of Scale – Exist when inputs are increased by some percentage and output increases by a greater percentage, causing unit costs to fall. 2. Secured Loans – A loan that is secured by some sort of collateral. 3. Securitization – The term is most often used to mean the process by which traditional bank assets, mainly loans of mortgages, are converted into negotiable securities. More broadly, refers to the development of markets for a variety of new negotiable instruments. 4. Revolving credit – Like a credit card. 5. GDP/Capital – The gross domestic product divided by its population. 6. GDP – The total market value of all final goods and services produced annually within a country’s borders. 7. Inflation – An increase in the price level. 8. Exchange Rate – The price of one currency in terms of another currency. 9. Exports – Total foreign spending on domestic (U.S.) goods. 10. Fixed Capital Investment – 11. Surplus – A condition in which quantity supplied is greater than quantity demanded. Surpluses occur only at prices above equilibrium price. 12. Deficits – A condition in which quantity supplied is less than quantity demanded. 13. Nominal Rates – The interest rate determined by the forces of supply and demand in the loanable funds market. The Nominal interest rate = Real interest rate + Expected inflation rare. 14. M2 – Includes currency held outside banks + checkable deposits + traveler’s checks + small-denomination time deposits + savings deposits + money market accounts + overnight purchase agreements + overnight Eurodollar deposits. 15. Economies of Scale – Exist when inputs are increased by some percentage and output increases by a greater percentage, causing unit costs to fall. 16. Secured Loans – A loan that is secured by some sort of collateral. 17. Securitization – The term is most often used to mean the process by which traditional bank assets, mainly loans of mortgages, are converted into negotiable securities. More broadly, refers to the development of markets for a variety of new negotiable instruments.

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