Sanjay Sinha, Deputy CFO — Microcredit Enterprises November 13, 2008 Micro-finance & Sub-prime Mortgages Is There Another Crisis on the Horizon? TBLI CONFERENCE EUROPE 2008

Micro-finance

&

Sub-prime Mortgages

Is There Another Crisis on the Horizon?

Topics covered Evolution of the sub-prime market How are the two similar? How do they differ? Lessons learned from sub-prime debacle Challenges for micro-finance Self-regulation Summary

Evolution of the sub-prime market

How are the two similar?

How do they differ?

Lessons learned from sub-prime debacle

Challenges for micro-finance

Self-regulation

Summary

Sub-prime mortgages – How did we get here? Realizing the American dream Home ownership

Realizing the American dream

Home ownership

Sub-prime mortgages Evolution of the Market Easing of regulations Housing bubble Low interest rates Oversupply of capital High returns Innovative products

Evolution of the Market

Easing of regulations

Housing bubble

Low interest rates

Oversupply of capital

High returns

Innovative products

What do they two have in common? PURPOSE COST COMPENSATION Subprime Microfinance Offer credit to more borrowers Offer credit to borrowers in under-served sectors Risk of higher defaults Higher administration costs Higher Interest Rates

How do they differ? LOAN STRUCTURE UNDERLYING ASSET/COLLATERAL VALUE OF UNDERLYING ASSET Subprime Microfinance LT, high value loans to high risk borrowers ST, low value loans to no-credit history borrowers Real property Personal character Real property vs. Personal character

Lessons learned Don’t forget the basics Stay close to clients Avoid predatory lending Transparency

Don’t forget the basics

Stay close to clients

Avoid predatory lending

Transparency

Challenges for Microfinance Liquidity – Larger (MFIs) attracting bulk of the funding Higher Inflation – Eroding Purchasing Power Exchange Rate Fluctuations – Currency Mismatch Transparency – What Interest Rates Do MFIs Charge?

Liquidity – Larger (MFIs) attracting bulk of the funding

Higher Inflation – Eroding Purchasing Power

Exchange Rate Fluctuations – Currency Mismatch

Transparency – What Interest Rates Do MFIs Charge?

Self regulation Establish & follow financial discipline Stay close to customer Diversify Funding sources Identify /implement best practices “ What can we do to deal with challenges?”

Establish & follow financial discipline

Stay close to customer

Diversify Funding sources

Identify /implement best practices

Self regulation – What have we done? 4/08 – Pocantico Declaration 25 Industry leaders adopted code of conduct: Avoid reckless lending Transparent pricing/non-abusive collection methods Restructure non-payment loans

4/08 – Pocantico Declaration

25 Industry leaders adopted code of conduct:

Avoid reckless lending

Transparent pricing/non-abusive collection methods

Restructure non-payment loans

Self Regulation – What have we done? 9/08 – Campaign for client protection in microfinance (Clinton Global Initiative) In 3 Years engage 50% of world’s 500 largest MFIs Develop & implement best practices and engage investors

9/08 – Campaign for client protection in microfinance (Clinton Global Initiative)

In 3 Years engage 50% of world’s 500 largest MFIs

Develop & implement best practices and engage investors

Summary Although purpose & high interest rates are common features; the two differ markedly Technological advances & funding sources are limited; size much smaller Remote chance of layered products Socially driven mission should keep returns lower & most speculators away “ Character not collateral”

Although purpose & high interest rates are common features; the two differ markedly

Technological advances & funding sources are limited; size much smaller

Remote chance of layered products

Socially driven mission should keep returns lower & most speculators away

Summary Attempts at self regulation & transparency Should minimize predatory lending Provide more funding for smaller MFIs Note: Conceptual frame work for this presentation was based upon articles by Cecelia Beirne at Microvest Capital Management. “ Character not collateral”

Attempts at self regulation & transparency

Should minimize predatory lending

Provide more funding for smaller MFIs

Note: Conceptual frame work for this presentation was based upon articles by Cecelia Beirne at Microvest Capital Management.