Broadbasing Investments in Microfinance Tapping an eBa y ® like marketplace (with PayPal ® ) to sustainably deliver lower cost capital to Microfinance Institiutions DRAFT (Please send comments to [email_address] and [email_address] ) About the qualified entrepreneur Name: Puja Patel Loan Amount: $80 Purpose: Fish net for income generation About the NGO administering the loan Location: Gujarat, India Avg Repayment Rate: 97% Website: www.microfinance-ngo.org Powered by Fund a micro-business – help uplift the working poor Category: India > Gujarat State > Fishing Industry

Contents Exec Summary The Opportunity The Concept Information Requested from MFIs Appendix

Exec Summary

The Opportunity

The Concept

Information Requested from MFIs

Appendix

Executive Summary PROBLEM STATEMENT In the last 30 years, Microfinance Institutions (MFIs) have successfully lent billions in working capital to the world’s poor However, MFIs reach only a fraction of the qualified loan seeking poor worldwide and capital is one of the biggest constraints to growth In the West, the story of microcredit continues to grow in popularity, but this broadbased interest is not effectively tapped to source low cost capital for MFIs PROPOSED SOLUTION Create an eBay like marketplace that allows internet users to find and fund (an MFI approved) micro-entrepreneur Utilize PayPal to cost-effectively aggregate donations and mini-loans ($<200), to eventually fund low cost MFI bulk loans. Also, use PayPal to remit funds back to internet lender. Leverage existing MFI processes (borrower screening, disbursement, collections, etc) to keep new overhead cost low and lender repayment rates high

PROBLEM STATEMENT

In the last 30 years, Microfinance Institutions (MFIs) have successfully lent billions in working capital to the world’s poor

However, MFIs reach only a fraction of the qualified loan seeking poor worldwide and capital is one of the biggest constraints to growth

In the West, the story of microcredit continues to grow in popularity, but this broadbased interest is not effectively tapped to source low cost capital for MFIs

PROPOSED SOLUTION

Create an eBay like marketplace that allows internet users to find and fund (an MFI approved) micro-entrepreneur

Utilize PayPal to cost-effectively aggregate donations and mini-loans ($<200), to eventually fund low cost MFI bulk loans. Also, use PayPal to remit funds back to internet lender.

Leverage existing MFI processes (borrower screening, disbursement, collections, etc) to keep new overhead cost low and lender repayment rates high

Contents Exec Summary The Opportunity The Concept Information Requested from MFIs Appendix

Exec Summary

The Opportunity

The Concept

Information Requested from MFIs

Appendix

Background: Microfinance by the numbers… Poor people in developing countries use small loans to generate more income Microfinance Institutions (MFIs) Organizations in developing countries that administer loans to poor people MicroFinance Institutions (MFIs) Poor People (Borrowers) Loans Repayments Borrowers to date 30 mm Potential worldwide 300 mm ($300 B) Typical loan $10-200 Repayment rates > 95% Interest rates 10%-60% (alt is Loan sharks 100-1,000%) Loans to date $50 B Total MFIs worldwide ~10,000 Growth rate ~30% MFIs Positioned for commercial capital ~100 Cost of capital 8-20% Avg ROA 2.5% 2 2 MicroBanking Bulletin Poor People

MFIs: Capital is a major constraint to growth Capital is key for MFI expansion 1 World Bank asked 140 MFIs to rank the following constraints to growth: Lack of funds Lack of infrastructure Government regulations Weak systems Lack of staff Lack of market “ Lack of funds” ranked highest Demand significantly outstrips supply 2 Estimated Demand = $300-700B Estimated Supply = $4B Cost of capital is expensive 3 South Asia Estimate: 13 – 15% Global range: 8 – 20% CGAP / MIX Study on MFI Demand for Funding, 2004 (Ivatury). “ Tapping Financial Markets for Microfinance” Grameen Bank USA Paper, Jennifer Meehan Microcredit Interest Rates in Bangladesh: ‘Capping v Competition’ David L. Wright. Data above is author’s averages for all of South Asia. 14% 20% 2% 7% 43% MFI Borrower Interest Rate Composition Average across South Asia (6 = highest / 1 = lowest)

Capital is key for MFI expansion 1

World Bank asked 140 MFIs to rank the following constraints to growth:

Lack of funds

Lack of infrastructure

Government regulations

Weak systems

Lack of staff

Lack of market

“ Lack of funds” ranked highest

Demand significantly outstrips supply 2

Estimated Demand = $300-700B

Estimated Supply = $4B

Cost of capital is expensive 3

South Asia Estimate: 13 – 15%

Global range: 8 – 20%

CGAP / MIX Study on MFI Demand for Funding, 2004 (Ivatury).

“ Tapping Financial Markets for Microfinance” Grameen Bank USA Paper, Jennifer Meehan

Microcredit Interest Rates in Bangladesh: ‘Capping v Competition’ David L. Wright. Data above is author’s averages for all of South Asia.

Donors: Need an affordable way to give that feels personal and results in something sustainable Traditional Charities (e.g. United Way) Affordability: High (any donation accepted) Sponsor a child / Adopt a “XYZ” Programs (e.g. Save the Children) Affordability: High ($17 / month) Ways To “Do Good” with Your Money: Opportunities Landscape Socially responsible shopping (e.g. Girl Scout Cookies) Affordability: Medium (some premium) Donation (I give and get nothing tangible back) Investment (I give and get something tangible back) Personal (I feel like I’m supporting a specific person) Institutional (I feel like I’m supporting an organization) Microfinance Investment Funds (e.g. Unitus, Blue Orchard) Affordability: Low ($10-50k minimum investment) Open space for giving opportunity that is Personal Affordable Sustainable Results Affordability (Number of people who can participate) circle size = (“teach a man to fish…”)

Open space for giving

opportunity that is

Personal

Affordable

Sustainable Results

Contents Exec Summary The Opportunity The Concept Information Requested from MFIs Appendix

Exec Summary

The Opportunity

The Concept

Information Requested from MFIs

Appendix

The Concept: A Microfinance “Trading Floor” MFIs/Funds Individuals Loans Repayments MicroFinance Trading Floor Loans Repayments Provide an online marketplace where individuals can easily find and invest in MicroFinance Short term: US donors US social investors Long term: Traditional investors worldwide Short term: MFI Funds Unregulated MFIs Long term: Regulated MFIs Individual borrowers (?) Short term: Facilitate Donations sub-market rate loans Long term: Facilitate market rate loans securities trading Investment Listings (all intermediaries & all worthy MFIs) Donations Individual investors Microfinance Institutions

Short term:

US donors

US social investors

Long term:

Traditional investors worldwide

Short term:

MFI Funds

Unregulated MFIs

Long term:

Regulated MFIs

Individual borrowers (?)

Short term:

Facilitate

Donations

sub-market rate loans

Long term:

Facilitate

market rate loans

securities trading

The mechanics Sample timeline for a single batch of borrowers Day 1 : MFI approves a batch of borrowers for a loan Disburses loans Days 91 - 100 : We send MFI a single bulk loan check MFI deposits check in reserves 2 . End of 1 yr loan term MFI repays bulk loan in local currency Funds deposited to our local bank account; available to fund a future MFI batch if sufficient sponsorship Internet lender receives final mini-repayment Day 3 : We post each borrower’s profile on our website 1 Day 2 : MFI emails us basic data on each borrower Days 4 - 90 : Internet users select individual borrowers to fund Funds aggregated in a U.S. PayPal account During 1 yr loan term : MFI emails us periodic repayment reports for the original batch of borrowers Based on repayment report, we regularly update website and remit mini-payments to lenders via PayPal 3 Notes: 1. Photos are often part of the MFI loan application. If needed, we can provide a digital camera or scanning equipment. If obtaining photos is an issue, a generic photo of the asset will work (e.g. sewing machine). 2. At this point, the MFI has already disbursed loans to this batch of borrowers (and have likely started collections). Our bulk loan – which costs significantly less than the MFI’s average cost of capital -- can be used at the MFI’s discretion (e.g. pay down expensive debt, hire staff, lend to more borrowers, etc). 3. The funds for the periodic mini-repayments will be sourced from incoming funds sent by internet users sponsoring the next batch of borrowers. These funds will be guaranteed by the repaid bulk loan from the previous batch. “ After 6 months, this borrower has already repaid >60% of the loan!” About the qualified entrepreneur Name: Puja Patel Loan Amount: $80 Purpose: Fish net for income generation About the NGO administering the loan Location: Gujarat, India Avg Repayment Rate: 97% Website: www.microfinance-ngo.org Powered by Fund a micro-business – help uplift the working poor Category: India > Gujarat State > Fishing Industry

Day 1 :

MFI approves a batch of borrowers for a loan

Disburses loans

Days 91 - 100 :

We send MFI a single bulk loan check

MFI deposits check in reserves 2

.

End of 1 yr loan term

MFI repays bulk loan in local currency

Funds deposited to our local bank account; available to fund a future MFI batch if sufficient sponsorship

Internet lender receives final mini-repayment

Day 3 :

We post each borrower’s profile on our website 1

Day 2 :

MFI emails us basic data on each borrower

Days 4 - 90 :

Internet users select individual borrowers to fund

Funds aggregated in a U.S. PayPal account

During 1 yr loan term :

MFI emails us periodic repayment reports for the original batch of borrowers

Based on repayment report, we regularly update website and remit mini-payments to lenders via PayPal 3

The potential to deliver significant low-cost capital is high Low financial commitment – A micro-loan typically requires $100 - $200 and is very likely (+90%) to be repaid in full. For most loans, the total cost will be <$10 in lost interest. High bang for the buck – Access to a relatively small amount of cash (especially given the dollar’s strength) can change someone’s life in the developing world. Personal connection – Lender learns about a borrower (akin to “Sponsor A Child” charities) and knows exactly who their money is helping. More difficult with larger charities. Philosophical appeal – Microcredit’s ‘market centered’ / ‘teach a man to fish’ approach is hard to find in other charities and is an important factor for many business-minded donors. Profile – Internet enabled, middle class individual interested in a smart, easy, low-cost way to participate in sustainable global poverty reduction. Large number of people – Since the required financial commitment is low and internet adoption is high, the pool of prospective lenders is huge. Can be reached with low cost – The uniqueness and simplicity of “Make a loan to a poor entrepreneur in the developing world” makes it ideal for word-of-mouth and email based marketing. Promotion in conjunction with eBay (TBD) could also drive lender interest. PayPal – Allows anyone with an email address to make or receive a payment with minimal transaction costs. Will be used to collect funds from internet donor/lenders and well as to disburse loan repayment. Email & Excel – All exchange of borrower information will be conducted via email and Microsoft Excel Digital Photography – Digital photos of the entreprenuer or the asset to be purchased will enable a more personal giving experience. Unique value proposition (vs. typical charitable opportunities) Internet “micro-donor/lenders” are a large, reachable segment Popular technologies can be leveraged to keep admin / transaction costs low

Low financial commitment – A micro-loan typically requires $100 - $200 and is very likely (+90%) to be repaid in full. For most loans, the total cost will be <$10 in lost interest.

High bang for the buck – Access to a relatively small amount of cash (especially given the dollar’s strength) can change someone’s life in the developing world.

Personal connection – Lender learns about a borrower (akin to “Sponsor A Child” charities) and knows exactly who their money is helping. More difficult with larger charities.

Philosophical appeal – Microcredit’s ‘market centered’ / ‘teach a man to fish’ approach is hard to find in other charities and is an important factor for many business-minded donors.

Profile – Internet enabled, middle class individual interested in a smart, easy, low-cost way to participate in sustainable global poverty reduction.

Large number of people – Since the required financial commitment is low and internet adoption is high, the pool of prospective lenders is huge.

Can be reached with low cost – The uniqueness and simplicity of “Make a loan to a poor entrepreneur in the developing world” makes it ideal for word-of-mouth and email based marketing. Promotion in conjunction with eBay (TBD) could also drive lender interest.

PayPal – Allows anyone with an email address to make or receive a payment with minimal transaction costs. Will be used to collect funds from internet donor/lenders and well as to disburse loan repayment.

Email & Excel – All exchange of borrower information will be conducted via email and Microsoft Excel

Digital Photography – Digital photos of the entreprenuer or the asset to be purchased will enable a more personal giving experience.

Resource requirements for the MFI can be low Task 1: Provide borrower data Task 2: Provide borrower photo (optional) Task 3: Provide borrower repayment updates Description Select a batch of recently funded borrowers Gather the following data Name Loan purpose Loan amount Transmit data to us by Email in Excel or Post in paper form Obtain individual photos for the batch of borrowers If photo is already part of each loan application, this works best Transmit data to us by Email (digitally) or Post in paper form / will be returned via DHL Gather repayment data for that batch of borrowers Name Amount repaid to date Transmit data to us by Email in Excel or Post in paper form Resources required Info from loan application Photo of borrower Note: A digital camera or photo scanner can be provided free of cost Repayment information per borrower Required MFI bandwidth Low; if info is captured as part of loan app and entered into MIS Low; if digital photo exist Low; if photos can be mailed (we will scan and return) Low; if info is captured periodically and entered into MIS Frequency Once (done at the beginning) Once (done at the beginning) Monthly or Quarterly

Select a batch of recently funded borrowers

Gather the following data

Name

Loan purpose

Loan amount

Transmit data to us by

Email in Excel or

Post in paper form

Obtain individual photos for the batch of borrowers

If photo is already part of each loan application, this works best

Transmit data to us by

Email (digitally) or

Post in paper form / will be returned via DHL

Gather repayment data for that batch of borrowers

Name

Amount repaid to date

Transmit data to us by

Email in Excel or

Post in paper form

Info from loan application

Photo of borrower

Note: A digital camera or photo scanner can be provided free of cost

Execution Plan Stage 1: Brochureware Incorporate Build brochure-ware Build coalition of supporters Close first round of funding Start SEC Compliance process Stage 2: US Based Lending Create templatized listing engine Enable PayPal transaction engine Complete SEC Compliance Process Form partnership with “role-model” US based Funds Run pilot Launch consumer-facing loan service Stage 3: International Lending Sign up more US based MF Funds Expand service to international MFIs Private label with 1 brokerage Stage 4: Securities trading Create securities trading capability Launch securities trading service Sign up more International MFIs Private label through many brokerages

Stage 1: Brochureware

Incorporate

Build brochure-ware

Build coalition of supporters

Close first round of funding

Start SEC Compliance process

Stage 2: US Based Lending

Create templatized listing engine

Enable PayPal transaction engine

Complete SEC Compliance Process

Form partnership with “role-model” US based Funds

Run pilot

Launch consumer-facing loan service

Stage 3: International Lending

Sign up more US based MF Funds

Expand service to international MFIs

Private label with 1 brokerage

Stage 4: Securities trading

Create securities trading capability

Launch securities trading service

Sign up more International MFIs

Private label through many brokerages

Team Working Team Premal Shah, Co-founder Premal is a Senior Product Manager at PayPal, an eBay company, and has over 5 years of experience building the world's largest online payment service. He has architected a number of key products, including PayPal's ATM/Debit Card (with MasterCard) and credit program (with GE Capital), and has helped lead the company's thinking around reducing transaction costs and improving buyer conversion. Prior to PayPal, he was a strategy consultant at Mercer Management Consulting. Premal has had a long standing interest in development and microfinance. He was awarded a grant from Stanford University to research one of India's largest microfinance institutions, the Self Employed Women's Association. More recently, Premal took a sabbatical from PayPal to work full time at an Indian NGO, where he focused on how eBay and PayPal could be used to generate income for slum women artisans. Premal graduated with a B.A. in Economics from Stanford University. Tracey Pettengill, Co-founder As a social entrepreneur, Tracey was most recently the CFO and head of marketing for ApproTEC, a microenterprise organization that designs and sells tools enabling people to escape poverty. Tracey is the founder and former CEO of 4charity, an online marketplace for charitable giving. Previous to 4charity, she executed M&A transactions at Robertson Stephens Investment Bank. While at Stanford Business School, Tracey spent a summer working with Calvert Ventures, the first social venture capital fund, and served as a strategy consultant to the Grameen Bank, the world-renowned micro-lending institution. Early in her career, Tracey was a strategy consultant for Mercer, and before that she worked at the U.S. Committee for Refugees in Sudan, ten miles from the front lines of the civil war. Tracey graduated with a B.A. in Engineering/Economics from Dartmouth College and an MBA from Stanford University. Advisors (formal board to be created) Jerry Held Kleiner Perkins EIR Elizabeth Funk Unitus Vice-Chairman Tim Oden Schwab Institutional Vice President Sarah Leshner Women’s World Banking Nandini Pandhi Women’s World Banking Dave McClure SimplyHired VP Marketing Aman Verjee PayPal Strategy Robert Chatwani eBay Internet Marketing

Contents Exec Summary The Opportunity The Concept Information Requested from MFIs Appendix

Exec Summary

The Opportunity

The Concept

Information Requested from MFIs

Appendix

See MFI Survey

Sample MFI Survey Output Cost of Providing Borrower Information Task 1: Provide borrower data Task 2: Provide borrower photo (optional) Task 3: Provide borrower repayment updates Legal / Accept-able? Already Captured? # of hrs req’d for batch of 100 # of hrs req’d for batch of 500 $ wage per hour of staff member Legal / Accept-able? Already Captured? # of hrs req’d for batch of 100 # of hrs req’d for batch of 500 $ wage per hour of staff member Legal / Accept-able? Already Captured? # of hrs req’d for batch of 100 # of hrs req’d for batch of 500 $ wage per hour of staff member MFI Name Sample   1 1 3   1 5    1 1  SEWA SKS

Contents Exec Summary The Opportunity The Concept Information Requested from MFIs Appendix

Exec Summary

The Opportunity

The Concept

Information Requested from MFIs

Appendix

APPENDIX

Example ‘ Microcredit Loan Request’ on eBay.com Digitial photo of MFI approved loan applicant (helps to establish personal connection) Key info on the individual loan seeker, purpose, terms, etc* Description of the MFI (helps to establish credibility) *This info is already captured as part of the MFI loan application process (no new info is needed) Note: While eBay may be ideal platform for the pilot phase, an independent website may be more suitable in the longer term unless an eBay category were created.

Mechanics Detail on how our “Pay as you go” system works INTERNAL - DRAFT

Current Microfinance Landscape Emerging Mkt Banks Microfinance Institutions (MFIs) MFIs (Loan Administrators) $15B Borrowers International Banks Sources of Capital Capital Repayments Intermediaries $550mm Loans Repayments Capital Repayments Capital Repayments Guarantee products Challenge = distribution A secondary market is needed Venture Funds (Unitus, FINCA) Private Placements (MicroVest) Governments $900mm (80% direct) Poor People Individual Investors

Representative MF Funds Regional Multi-Regional Global Legend: Circle size = Fund size Circle color = Debt rate (red = market, green = below market, yellow = equity only) 1 3 2 5 4 6 7 8 9 10 11 12 13 14 15 16 17 Debt/ Equity 100% Debt 20/80% 80/20% 60/40% 40/60% 100% Equity Source: Unitus 2003

Differentiation Player: Venture funds (Unitus, FINCA, Accion) Private placements (MicroVest) Insurance products (Grameen Foundation) Rating agencies (MicroRate, MCRIL) Information services (the MIX, Microfinance Gateway) Mission: Raise $ from high net worth indivduals and invest in a small group of high-potential MFIs Raise debt fund and invest in a portfolio of low-risk, later stage MFIs High Net Worth individuals can pledge a $ amount to guarantee loans, unlocking commercial capital Credit ratings (e.g. Moody’s, S&P, Fitch) Details/data about MFIs MTF Relationship: Listed on MTF Listed on MTF Listed on MTF Partnership (TBD): Info provided on MTF Partnership (TBD): Info provided on MTF

Player:

Venture funds (Unitus, FINCA, Accion)

Private placements (MicroVest)

Insurance products (Grameen Foundation)

Rating agencies (MicroRate, MCRIL)

Information services (the MIX, Microfinance Gateway)

Mission:

Raise $ from high net worth indivduals and invest in a small group of high-potential MFIs

Raise debt fund and invest in a portfolio of low-risk, later stage MFIs

High Net Worth individuals can pledge a $ amount to guarantee loans, unlocking commercial capital

Credit ratings (e.g. Moody’s, S&P, Fitch)

Details/data about MFIs

MTF Relationship:

Listed on MTF

Listed on MTF

Listed on MTF

Partnership (TBD): Info provided on MTF

Partnership (TBD): Info provided on MTF

Supply of Capital Individual Investors Socially screened (SRI) funds = $610B 1 - $2T 7 1996 Emerging market mutual funds = $43.5B 4 Emerging market debt Issuance >$140B/yr 5 Donations = $240B/yr 6 Current interest in Microfinance = $6B 3 -$24B 2 Desired returns = 0%-15% 1 “Social Investors on the Sidelines” MicroEnterprise Americas 2002 Enterprising Solutions Global Consulting Amy Domini, Domini Social Index Funds 1996 Data; “US Emerging Market Funds: Hot Money or Stable Source of Investment Capital” John Rea, Investment Co Institute 2003 S&P Global Fixed Income Research, Thompson Financial Association of Fundraising Professionals Social Investment Forum

1 “Social Investors on the Sidelines” MicroEnterprise Americas 2002

Enterprising Solutions Global Consulting

Amy Domini, Domini Social Index Funds

1996 Data; “US Emerging Market Funds: Hot Money or Stable Source of Investment Capital” John Rea, Investment Co Institute

2003 S&P Global Fixed Income Research, Thompson Financial

Association of Fundraising Professionals

Social Investment Forum

From Philanthropic Capital to Commercial Capital Citigroup/Banamex $44 million bond issuance to local institutional investors Peso-denominated proceeds to be used by Compartmentos, a Mexican MFI IFC (private-sector arm of the World Bank) issued a 34% guarantee on the bonds Received an AA rating from S&P and Fitch MicroVest 1 $20 million equity fund raised from accredited investors only Large direct investments and loans into financial institutions that provide microfinance to low-income base enterprise Expect returns of 8-10% ROIC BlueOrchard Finance first U.S. dollar-denominated microfinance bonds seven-year $40 million subordinated debt issue $30 million credit guarantee from OPIC yield .55% over Treasuries; 3 junior tranches offer between 1-5% over Treasuries. Proceeds will help 40,000 microentrepreneurs Examples of Microfinance Securitizations

Citigroup/Banamex

$44 million bond issuance to local institutional investors

Peso-denominated proceeds to be used by Compartmentos, a Mexican MFI

IFC (private-sector arm of the World Bank) issued a 34% guarantee on the bonds

Received an AA rating from S&P and Fitch

MicroVest 1

$20 million equity fund raised from accredited investors only

Large direct investments and loans into financial institutions that provide microfinance to low-income base enterprise

Expect returns of 8-10% ROIC

BlueOrchard Finance

first U.S. dollar-denominated microfinance bonds

seven-year $40 million subordinated debt issue

$30 million credit guarantee from OPIC

yield .55% over Treasuries; 3 junior tranches offer between 1-5% over Treasuries.

Proceeds will help 40,000 microentrepreneurs

Value Proposition to Individual Investors Education/awareness Interest is growing ( Grameen Bank success story, etc) 2005 is the UN ‘Year of Microcredit’ Viewed as a dignified and sustainable way to uplift the working poor Viable investments MF is emerging as a viable asset class with market rate returns A way to diversify portfolio Access currently no way to invest unless you are affluent Some MF investment funds are available (e.g. Unitus, BlueOrchard) but typically require minimums of $10,000 – $50,000 One-stop shop for information User-friendly, searchable information (eg eBay) Credit ratings Personal borrower stories (e.g. Sally Struther’s $17/mo to sponsor a child) Easy, efficient way to invest in new asset class earn a market rate of return Low financial commitment Typical microloan will be $100-200 Internet technologies (like PayPal), enable cost effective smaller transactions Make available to non-accredited mom & pop investors Investor Needs Microfinance Trading Floor Solution

Education/awareness

Interest is growing ( Grameen Bank success story, etc)

2005 is the UN ‘Year of Microcredit’

Viewed as a dignified and sustainable way to uplift the working poor

Viable investments

MF is emerging as a viable asset class with market rate returns

A way to diversify portfolio

Access

currently no way to invest unless you are affluent

Some MF investment funds are available (e.g. Unitus, BlueOrchard) but typically require minimums of $10,000 – $50,000

One-stop shop for information

User-friendly, searchable information (eg eBay)

Credit ratings

Personal borrower stories (e.g. Sally Struther’s $17/mo to sponsor a child)

Easy, efficient way to invest in new asset class

earn a market rate of return

Low financial commitment

Typical microloan will be $100-200

Internet technologies (like PayPal), enable cost effective smaller transactions

Make available to non-accredited mom & pop investors

Marketing strategy: Contract with private banks Investment listings MicroFinance Trading Floor Individual investors Individual investors Individual investors Individual investors MTF intends to contract with existing private banks, sharing the transaction fee, to distribute MF investment products to their mom and pop investors

Our Economics ROI % 0-8% Individual lender MTF Funds Final borrower interest rate 3% 0-30% 10-60% 10% 1 MFI admin costs Current Sources of Capital Private Funds Venture Funds Governments/ Bilateral Institutions Commercial Banks Cost to MFI 4-12% 2 0-10% 15-30% 10-30% 2.5% 3 MFI spread 1 Women’s World Banking 2 MicroVest expects 8-10%, GrayGhost expects 4-5% 3 MicroFinance Gateway FAQs 0-5% Default rate DRAFT

Listing criteria Our listing criteria: Phase 1: US based Funds only Phase 3: Phase 2: All Funds Tier 2/3 MFIs <5% default rate MicroRate and MCRIL credit ratings (like S&P, Moody’s) Listed on The Mix (MF Information Exchange) Ability to report required metrics 2 yrs operating history

Our listing criteria:

Phase 1:

US based Funds only

Phase 3:

Phase 2:

All Funds

Tier 2/3 MFIs

<5% default rate

MicroRate and MCRIL credit ratings (like S&P, Moody’s)

Listed on The Mix (MF Information Exchange)

Ability to report required metrics

2 yrs operating history

Targeted MFI for Pilot DRAFT - APPENDIX SEWA Bank & Ahmedabad Self Help Group District Association

Background on Indian Microfinance and the example of SEWA Bank / Ahmedabad SHG District Association In India, most “microcredit” is done via a government sponsored Self-Help Group - Bank Linkage Program A Self Help Group (SHG) consists of 10 – 20 individuals (usually women) living in the same neighborhood. The normal pattern is for NGOs to build groups and then to introduce them to commercial banks. Note: These groups are different from the Bangladesh Grameen Bank type of groups, often known as solidarity groups, which facilitate the banking transactions between their members and the Bank but do not actually themselves, as groups, borrow or lend. Today, over 1,200,000 SHGs are linked to Indian commercial banks. 1 This is the largest microfinance program in the world in terms of sustainability and outreach However, this still accounts for less than 3% of the potential market needing credit. 2  Plenty of work remains to accelerate SHG formation and capacity building. SEWA Bank, one of India’s most successful banks in terms of reaching the poor, currently makes bulk loans (@ 18% interest) to the Ahmedabad SHG District Association, an NGO that provides centralized support for 700 SHGs around Ahmedabad (India’s 10 th largest city). These funds are then on-lent to SHG Leaders (@21% interest rate). The 3% (21% - 18%) spread is kept for NGO operations (including building more SHGs) When a SHG member wants a loan, it is first discussed and approved at the group level. If the group approves, the SHG Leader disburses funds to the member (@ 24% interest rate) The 3% (24% - 21%) interest rate spread is kept to fund a collective savings account The average loan amount is $150 USD, and is paid back in 12 installments over a year. Repayment rates are 98%. 1. National Bank for Agricultural and Rural Development (NABARD) Annual Report 2004 2. V. Mahajan, BASIX, Adapting India’s Financial System in a Globalising World, November 2002 Background: Indian Micro-finance market today Example: SEWA Bank & A’bad SHG District Assocs. SEWA Pilot Case Study

In India, most “microcredit” is done via a government sponsored Self-Help Group - Bank Linkage Program

A Self Help Group (SHG) consists of 10 – 20 individuals (usually women) living in the same neighborhood. The normal pattern is for NGOs to build groups and then to introduce them to commercial banks.

Note: These groups are different from the Bangladesh Grameen Bank type of groups, often known as solidarity groups, which facilitate the banking transactions between their members and the Bank but do not actually themselves, as groups, borrow or lend.

Today, over 1,200,000 SHGs are linked to Indian commercial banks. 1

This is the largest microfinance program in the world in terms of sustainability and outreach

However, this still accounts for less than 3% of the potential market needing credit. 2

 Plenty of work remains to accelerate SHG formation and capacity building.

SEWA Bank, one of India’s most successful banks in terms of reaching the poor, currently makes bulk loans (@ 18% interest) to the Ahmedabad SHG District Association, an NGO that provides centralized support for 700 SHGs around Ahmedabad (India’s 10 th largest city).

These funds are then on-lent to SHG Leaders (@21% interest rate).

The 3% (21% - 18%) spread is kept for NGO operations (including building more SHGs)

When a SHG member wants a loan, it is first discussed and approved at the group level. If the group approves, the SHG Leader disburses funds to the member (@ 24% interest rate)

The 3% (24% - 21%) interest rate spread is kept to fund a collective savings account

The average loan amount is $150 USD, and is paid back in 12 installments over a year. Repayment rates are 98%.

Breakdown of borrower interest rate: SEWA Bank / Ahmedabad Self Help Group District Association 8% 3% 10% Spread captured by bank Spread captured by SHG operations 3% 24% 18% 6% Interest rate SEWA Pilot Case Study

SEWA Bank / Ahmedabad SHG District Association Pilot Status I approached SEWA Bank in January 2005 about piloting the eBay / PayPal p2p microcredit concept with 50 recently approved loan applicants Indian banking regulations prevent SEWA Bank from directly participating, but there is an opportunity to directly fund the Ahmedabad SHG District Association (an unregulated NGO which acts as an intermediary between commercial banks and the SHGs). The following slides outline the proposed process steps and timeline for a pilot. Discussions are still underway, with a final decision re: pilot expected in June 2005. In the meantime, I’m actively interested in finding other MFIs that would be interested in conducting a pilot. SEWA Pilot Case Study

I approached SEWA Bank in January 2005 about piloting the eBay / PayPal p2p microcredit concept with 50 recently approved loan applicants

Indian banking regulations prevent SEWA Bank from directly participating, but there is an opportunity to directly fund the Ahmedabad SHG District Association (an unregulated NGO which acts as an intermediary between commercial banks and the SHGs).

The following slides outline the proposed process steps and timeline for a pilot. Discussions are still underway, with a final decision re: pilot expected in June 2005.

In the meantime, I’m actively interested in finding other MFIs that would be interested in conducting a pilot.

Proposed process: Lender to Borrower eBay member (Internet surfing ‘ do-gooder’ in U.S.) Ashutosh (local project coordinator) Shrutibhen (SEWA Bank / SHG Dist Assc Liason) District Assc. (SHG staff who work with SHG Leaders) SHG Borrower (Self Employed Woman) Finds an approved SHG loan applicant on eBay.com website Sends requested amount via PayPal to Ashutosh Withdraws funds from PayPal account at a local ATM Keeps record of each eBay lender and intended loan applicant Note – All preceding steps can be audited anytime by viewing PayPal and eBay records online Receives from Ashutosh 100% of the requested loan amount (in cash) for each eBay sponsored loan applicant Keeps record of loan applicants that have an eBay sponsor (a list in Excel is sufficient) Disburses funds to Deposits cash in bank account Receives bulk loans from SEWA Bank at 18% (as normal) On lends funds to SHG leaders at 21% (as normal) Receives funds from SHG Leader at 24% All other processes as normal Optional –eBay sponsored loan applicants can be tracked separately for lower interest rates. Not necessary, however, as extra interest income could be used for SHG expansion. SEWA Pilot Case Study $ $ $ $

Finds an approved SHG loan applicant on eBay.com website

Sends requested amount via PayPal to Ashutosh

Withdraws funds from PayPal account at a local ATM

Keeps record of each eBay lender and intended loan applicant

Note – All preceding steps can be audited anytime by viewing PayPal and eBay records online

Receives from Ashutosh 100% of the requested loan amount (in cash) for each eBay sponsored loan applicant

Keeps record of loan applicants that have an eBay sponsor (a list in Excel is sufficient)

Disburses funds to Deposits cash in bank account

Receives bulk loans from SEWA Bank at 18% (as normal)

On lends funds to SHG leaders at 21% (as normal)

Receives funds from SHG Leader at 24%

All other processes as normal

Optional –eBay sponsored loan applicants can be tracked separately for lower interest rates. Not necessary, however, as extra interest income could be used for SHG expansion.

Proposed process: Borrower to Lender eBay member Ashutosh Shrutibhen SHG Leader / District Assc Field Staff SHG Borrower Repays 10% of outstanding debt each month (as normal) Collects funds from field (as normal) Transfers funds to Shrutibhen (as normal) Periodically (e.g. once every 3 months) calculates the total repaid principal for each eBay sponsored borrower (using existing SEWA loan performance records and eBay sponsored Excel tracking list) Once calculations are complete, total eBay sponsored repaid principal is given to Ashutosh in cash Ashutosh repays each eBay lender the appropriate amount via PayPal Note – This step can be audited at anytime by viewing PayPal payment records online. Receives principal repayment in installments Assumes risk of principal loss if default Receives thank you email; feels good about helping the poor help themselves; potentially makes another loan  SEWA Pilot Case Study $ $ $ $

Repays 10% of outstanding debt each month (as normal)

Collects funds from field (as normal)

Transfers funds to Shrutibhen (as normal)

Periodically (e.g. once every 3 months) calculates the total repaid principal for each eBay sponsored borrower (using existing SEWA loan performance records and eBay sponsored Excel tracking list)

Once calculations are complete, total eBay sponsored repaid principal is given to Ashutosh in cash

Ashutosh repays each eBay lender the appropriate amount via PayPal

Note – This step can be audited at anytime by viewing PayPal payment records online.

Receives principal repayment in installments

Assumes risk of principal loss if default

Receives thank you email; feels good about helping the poor help themselves; potentially makes another loan 

Proposed Timeline Day 55 (?) : Borrower makes 1 st repayment to District Assc (as normal) Day 115 : Borrower makes 3 rd repayment to District Assc (as normal) Day 121 : Ashutosh remits partial principal to each eBay lender via PayPal Days 15 : Shrutibhen disburses loans to SHG District Association; eBay sponsored loan applicants receive lower interest rate Day 1 : Loan applicant approved by SEWA Loan Committee Day 14 : Ashutosh delivers to Shrutibhen final list of eBay sponsored loan applicants and requested amount in cash Day 2 : Approved loan applicant info given to Ashutosh; loan request posted on eBay Days 2 - 12 : eBay members have 10 days to select and sponsor a loan request Day 25 (?) : District Assc on lends to SHG Leader; Leader on lends to SHG borrower Day 85 : Borrower makes 2 nd repayment to District Assc (as normal) Day 120 : Shrutibhen calculates the total repaid principal for each eBay sponsored borrower so far ; remits to Ashutosh in cash Day 121 - 325 : Borrower continues to repay 10% each month Day 330 : Final repaid principal calculation for each eBay sponsored borrower and funds transfer to Ashutosh Day 331 : Final repayment via PayPal to eBay lender SEWA Pilot Case Study

Cost of Capital: Room for improvement Source: Microcredit Interest Rates in Bangladesh: ‘Capping v Competition’ David L. Wright. Data above is author’s averages for all of South Asia. 10% Spread for operations 44% 14% Interest rate 20% 2% 7% If capital costs could be reduced from 14% to 4%, operating budget increases by 35% MFI Borrower Interest Rate Composition -- average across South Asia

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