NewBank Microfinance: Microcredit in the Ukraine Fuqua School of Business Duke University Holly Dice, Andrew Khoo, Sara Ki...
Agenda <ul><li>Scenario </li></ul><ul><li>What is Microfinance? </li></ul><ul><li>Characteristics of Microfinance Loans </...
Scenario <ul><li>Ukrainian-American entrepreneur wants to give back to his native country by fostering small and family ow...
What is Microfinance? <ul><li>Providing financial services to the poor and micro enterprises </li></ul><ul><li>Currently 7...
Characteristics of Microfinance Loans <ul><li>Size: $25 to $100,000 </li></ul><ul><li>Term: 6 months to 2 years </li></ul>...
Overview of Ukraine <ul><li>Declared independence from Soviet Union in August 1991 </li></ul><ul><li>Population: 49.8 mill...
Overview of Ukraine (cont.) <ul><li>Economy </li></ul><ul><li>Post-independence GDP contraction   </li></ul><ul><ul><li>Ap...
Ukrainian Banking Sector <ul><li>Primarily finance state-run enterprises </li></ul><ul><li>Suffers from problem loan rate ...
Business Plan <ul><li>Utilize microcredit lending models to construct a sustainable for-profit microcredit bank in Ukraine...
Business Plan <ul><li>Initially set up 1 branch growing to 8 in year 5 </li></ul><ul><li>Loan advisors will handle 15-25 a...
Results of Model <ul><li>5000+ loans issued by 2010  </li></ul><ul><li>Total loan portfolio value in 2010 of approx. $25MM...
Real Options <ul><li>Opportunity to expand into other financial services  </li></ul><ul><li>Ability to scale-back operatio...
Risks - Firm Specific <ul><li>Funding </li></ul><ul><li>Market demand for microfinance loans </li></ul><ul><li>Competition...
Risks - Ukraine <ul><li>Political instability </li></ul><ul><li>Economic environment </li></ul><ul><li>Currency exposure  ...
Cost of Equity Calculations
Interest Rate Calculations <ul><li>Ukraine Commercial (lower bound) – 50% </li></ul><ul><li>Ukraine Informal Moneylenders ...
Conclusion <ul><li>Feasible at 29.4% Cost of Capital  </li></ul><ul><li>Anticipated financial return of $1.9MM </li></ul><...
Key Takeaways <ul><li>Risk assessment </li></ul><ul><ul><li>Microfinance </li></ul></ul><ul><ul><li>Ukraine </li></ul></ul...
Potential Development Bank Funds
Profile of Similar Banks
Cost of Debt <ul><li>Debt Markets </li></ul><ul><li>II Credit Rating – 17.7  </li></ul><ul><li>Opacity – use Russia as pro...
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  1. 1. NewBank Microfinance: Microcredit in the Ukraine Fuqua School of Business Duke University Holly Dice, Andrew Khoo, Sara Kirchoff, Robert M. Little & Hartaj SIngh
  2. 2. Agenda <ul><li>Scenario </li></ul><ul><li>What is Microfinance? </li></ul><ul><li>Characteristics of Microfinance Loans </li></ul><ul><li>Overview of Ukraine </li></ul><ul><li>Business Plan </li></ul><ul><li>Key Takeaways </li></ul><ul><li>Conclusion </li></ul>
  3. 3. Scenario <ul><li>Ukrainian-American entrepreneur wants to give back to his native country by fostering small and family owned businesses </li></ul><ul><li>Willing to provide $2.5MM in interest free loans </li></ul><ul><li>Wants to verify feasibility and sustainability of a for-profit microfinance lending institution in the Ukraine </li></ul>
  4. 4. What is Microfinance? <ul><li>Providing financial services to the poor and micro enterprises </li></ul><ul><li>Currently 7,000 microfinance Institutions worldwide ($2.5 billion). </li></ul><ul><li>Individual and group-based lending </li></ul><ul><li>Small size of loans makes it inefficient for commercial banks to target these markets </li></ul><ul><li>Successfully pioneered by Grameen Bank in 1976 </li></ul>
  5. 5. Characteristics of Microfinance Loans <ul><li>Size: $25 to $100,000 </li></ul><ul><li>Term: 6 months to 2 years </li></ul><ul><li>Collateral: typically none </li></ul><ul><li>High interest rates: 25% to 51% in Asia </li></ul><ul><li>Low default rates: <5% </li></ul><ul><li>Labor and resource intensive to administer and monitor </li></ul><ul><li>Dependent upon social pressures for loan repayment </li></ul><ul><li>Aggressive penalty structures </li></ul>
  6. 6. Overview of Ukraine <ul><li>Declared independence from Soviet Union in August 1991 </li></ul><ul><li>Population: 49.8 million </li></ul><ul><li>GDP: $30.4 billion ($610/capita) </li></ul><ul><li>Inflation: 28.5% </li></ul><ul><li>Currency: Hryvnia (5.6 hryvnia/US$1) </li></ul><ul><li>Prime lending rate: 42% </li></ul><ul><li>Major industries: coal, electric power, metals, machinery & equipment, agriculture </li></ul><ul><li>Moody’s Credit Rating: Caa1 </li></ul>
  7. 7. Overview of Ukraine (cont.) <ul><li>Economy </li></ul><ul><li>Post-independence GDP contraction </li></ul><ul><ul><li>Approximately 40% of pre-independence size </li></ul></ul><ul><ul><li>First year of GDP growth (5.6%) in 2000 </li></ul></ul><ul><li>Shadow economy accounts for 60% of total economy </li></ul><ul><li>Periods of hyperinflation in the early 1990s </li></ul><ul><li>Economy expected to grow in 2001-2002 </li></ul>
  8. 8. Ukrainian Banking Sector <ul><li>Primarily finance state-run enterprises </li></ul><ul><li>Suffers from problem loan rate of 20% </li></ul><ul><li>Loans of short maturities, usually 6 months </li></ul><ul><li>Nominal interest rate is currently around 50% </li></ul><ul><li>Inadequate development of financial services </li></ul><ul><li>Banks are information source for tax collectors </li></ul><ul><li>Viewed as inefficient and lacking in small loans expertise </li></ul>
  9. 9. Business Plan <ul><li>Utilize microcredit lending models to construct a sustainable for-profit microcredit bank in Ukraine </li></ul><ul><li>Target business opportunities: </li></ul><ul><ul><li>Below the ‘high-end’ lending activities of the World Bank, EBRD and various for-profit multinational banks </li></ul></ul><ul><ul><li>Above the ‘low-end’ lending activities of Grameen Bank model in Bangladesh </li></ul></ul><ul><ul><li>Loan sizes to range from $10,000 to $100,000 </li></ul></ul>
  10. 10. Business Plan <ul><li>Initially set up 1 branch growing to 8 in year 5 </li></ul><ul><li>Loan advisors will handle 15-25 accounts </li></ul><ul><li>Require groups of 5 or more to cross guarantee loans (assumed default rate of 10%) </li></ul><ul><li>Collateral: depending on size of loan (10-20% in savings account) </li></ul><ul><li>Interest rates: 50% </li></ul><ul><li>Source of funding: </li></ul><ul><ul><li>interest-free loan of $2.5MM for first 3 years </li></ul></ul><ul><ul><li>staged equity financing totaling $6.5MM in years 2-5 </li></ul></ul><ul><ul><li>approach capital markets or commercial sources </li></ul></ul>
  11. 11. Results of Model <ul><li>5000+ loans issued by 2010 </li></ul><ul><li>Total loan portfolio value in 2010 of approx. $25MM </li></ul><ul><li>Interest-free loan repaid by Year 5 </li></ul><ul><li>NPV $1.9MM </li></ul><ul><li>CAGR 34% </li></ul>
  12. 12. Real Options <ul><li>Opportunity to expand into other financial services </li></ul><ul><li>Ability to scale-back operations during periods of economic turmoil </li></ul><ul><li>Option to provide larger loans ($100K+) to proven borrowers </li></ul><ul><li>Value associated with proving the financial-viability of model to encourage establishment of other banks as conditions improve </li></ul>
  13. 13. Risks - Firm Specific <ul><li>Funding </li></ul><ul><li>Market demand for microfinance loans </li></ul><ul><li>Competition </li></ul><ul><li>Default rate and late payment of loans </li></ul><ul><li>Lack of collateral </li></ul><ul><li>Financial sustainability </li></ul><ul><li>Improper management </li></ul><ul><li>Recruitment of loan advisors </li></ul>
  14. 14. Risks - Ukraine <ul><li>Political instability </li></ul><ul><li>Economic environment </li></ul><ul><li>Currency exposure </li></ul><ul><li>Regulatory environment </li></ul><ul><li>Expropriation </li></ul>
  15. 15. Cost of Equity Calculations
  16. 16. Interest Rate Calculations <ul><li>Ukraine Commercial (lower bound) – 50% </li></ul><ul><li>Ukraine Informal Moneylenders (upper bound) – unknown? </li></ul><ul><li>Microcredit Summit recommended rate: 35% to 51% for Asia </li></ul>
  17. 17. Conclusion <ul><li>Feasible at 29.4% Cost of Capital </li></ul><ul><li>Anticipated financial return of $1.9MM </li></ul><ul><li>Investment in this bank would be attractive to: </li></ul><ul><ul><li>Development banks </li></ul></ul><ul><ul><li>Companies with a long-term development stake </li></ul></ul>
  18. 18. Key Takeaways <ul><li>Risk assessment </li></ul><ul><ul><li>Microfinance </li></ul></ul><ul><ul><li>Ukraine </li></ul></ul><ul><li>Calculation of cost of capital and interest rates </li></ul><ul><li>Trade-offs between financial and socio-economic returns </li></ul>
  19. 19. Potential Development Bank Funds
  20. 20. Profile of Similar Banks
  21. 21. Cost of Debt <ul><li>Debt Markets </li></ul><ul><li>II Credit Rating – 17.7 </li></ul><ul><li>Opacity – use Russia as proxy (O-Factor 84, Tax Equiv 43%, Op Risk Prem – 1,225) </li></ul><ul><li>Development Banks </li></ul><ul><li>Worldbank – 12% to 15% for Asian economies </li></ul><ul><li>European Bank of Reconstruction and Development – LIBOR + 3% = </li></ul>
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