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
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 “fundraising”
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
Risk Mitigation
Right mix of incentives for MFI loan officers
Grameen
3
Bank Five Star System
stars for financial performance 2 for social impact
Apex MFI
organizations choice of MFIs
of SHARE & GF-USA
Case
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
GF-USA’s Partners in India
$2.1 million invested since December 2000 Quadruple growth from 80,000 to 330,000 borrowers in 3 years
SHARE
# of Active Clients Branches Cum Loans Disbursed (US$) Portfolio O/S (US$) PAR > 30 Days
ASA
68,781
27
CFTS
27,769
17
SKS
21,946
9
Grameen Koota
9,083
9
SNEHA
6,059
4
Total
331,581
165
197,943
99
71,031,219
14,124,871
11,183,363
5,529,670
1,228,917
1,824,421
104,922,461
16,773,450 0%
3,528,145 2.7%
2,213,363 4.44%
1,766,496 0%
494,654 0%
483,189 0%
25,259,296
Securitization: Creating a Secondary Market for Micro-finance
Securitization: Structure and Credit Enhancement
Bank identifies an MFI’s 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
Securitization: Pricing
Advantage: Can differentiate the financial risk of an MFI from its operational risk Pricing based on: Past portfolio performance Quality of MFI’s 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%
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 SHARE’s ROA and ROE
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-USA’s 5 yr Strategic Plan Pre-cursor to work of Grameen Capital India
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
Partnership Model
Example: CASHPOR Pilot
ICICI Bank 1 check
Batched loan applications for approval
Batch repayment
CFTS
Individual checks Uttar Pradesh
• Group formation • Loan applications • 6% service fee
Rural Bank Branch
Individual repayments at 12.5% interest
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
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 (ICICI’s 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
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
Grameen Capital India: Year 1
GF-USA and Citigroup
$ 505k seed capital
GRAMEEN CAPITAL INDIA
$1m initial capital
$495k seed capital
ICICI Bank & Local Partner
Credit Enhancements/Guarantees: ~$800k initial
MFIs (SHARE, ASA, CFTS, SKS, etc)
Initial $7.5m leveraged from sale of MFI commerci al paper
Capital Markets
End Borrowers
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.