Microfinance – An Emerging Asset Class?
 The Role of Capital Markets for the Expansion of the Industry



        Creating...
Microfinance – An Emerging Asset Class?
              The Role of Capital Markets for the Expansion of the Industry


1. M...
IFC is the world’s largest multilateral institution
              focused on private sector development
• IFC is the main ...
IFC’s core objective in microfinance is to connect
                microfinance to commercial capital
• Offering market ba...
IFC is at the forefront of the microfinance
                              industry’s development
• Leader in “crowding in”...
Microfinance – An Emerging Asset Class?
              The Role of Capital Markets for the Expansion of the Industry


1. M...
As Microfinance is more commercial and integrated in the
mainstream financial sector, it is more exposed to the crisis
• T...
Heightened refinancing and deposit withdrawal risk
      for MFIs slows the microfinance industry’s growth
• Resources for...
However, the microfinance industry has proven to
            be fairly resilient in spite of the crisis
Growth and profita...
Microfinance – An Emerging Asset Class?
               The Role of Capital Markets for the Expansion of the Industry

1. M...
Microfinance has yet to become an established
              asset class for institutional investors
Asset class:
• Definit...
New opportunities to develop microfinance as an asset
         class are encouraging – IFIs can also help
Challenges:
• Le...
Microfinance – An Emerging Asset Class?
              The Role of Capital Markets for the Expansion of the Industry


1. M...
Compartamos: tapping the
                                                                           local bond market in M...
IFMR Capital: Securitization of micro-loans
                                       originated by multiple MFIs in India
  ...
Contact Information

               IFC Paris
          66, Avenue d‟Iéna
         75116 Paris, France
           +33 1 40...
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Microfinance as an asset class and related case studies

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Microfinance as an asset class and related case studies

  1. 1. Microfinance – An Emerging Asset Class? The Role of Capital Markets for the Expansion of the Industry Creating Opportunities in Emerging Markets André Laude, Chief Investment Officer Global Financial Markets March 10, 2010
  2. 2. Microfinance – An Emerging Asset Class? The Role of Capital Markets for the Expansion of the Industry 1. Microfinance and IFC 2 2. Microfinance and the Financial Crisis 7 3. Microfinance as an Asset Class 11 4. Case Studies 15 Creating Opportunities 2
  3. 3. IFC is the world’s largest multilateral institution focused on private sector development • IFC is the main driver of private sector development in the World Bank Group • IFC‟s purpose is to create opportunity for people to escape poverty and improve their lives by:  Promoting open and competitive markets in developing countries  Supporting companies and other private sector partners where there is a gap  Helping to generate productive jobs and deliver essential services to the underserved  Catalyzing and mobilizing other sources of finance for private enterprise development • In FY09, IFC committed US$10.5 billion and mobilized an additional US$4.0 billion for 447 investments in 103 developing countries • In FY09, IFC‟s committed portfolio amounted to US$34.5 billion, representing investments in 1,579 companies • IFC will typically contribute 5%-20% in equity investments and maintain the investment for 8 to 15 years • IFC is profit oriented, charging market rates for its products and services • IFC‟s bonds are in strong demand all over the world and are assigned the highest rating (AAA/Aaa) by Moody‟s, S&P and Fitch • To be close to clients, more than half of IFC‟s 3,402 staff work in field offices Creating Opportunities 3
  4. 4. IFC’s core objective in microfinance is to connect microfinance to commercial capital • Offering market based financing, in pricing, structures and monitoring practices • Engaging regulatory authorities on a case-by-case basis development • Creating collective investment vehicles suitable for social and impact commercial investors (AIM, ProCredit, LFS, PlaNet/MicroCred, Shorecap, etc.) • Enabling the access of MFIs to local currency funding in domestic build large capital markets by providing credit enhancement to bond issues sustainable MF business cases and other instruments private capital invests only • As a member of the World Bank Group, supporting in profitable businesses disclosure standards and information private sector resources vital for large scale dissemination through the Consultative sustainable microfinance Group to Assist the Poor (CGAP) only large scale = meaningful development impact microfinance is a poverty reduction tool Creating Opportunities 4
  5. 5. IFC is at the forefront of the microfinance industry’s development • Leader in “crowding in” the private US$ million IFC’s Cumulative and Annual Commitments and Client Growth „000 clients (Fiscal Years 1995-2009) sector through risk sharing and 1,400 9,000 1,291 market placement transactions 8,057 8,000 1,200 • Strategic partnerships with leading 7,000 global networks and banks 1,000 5,682 918 • Milestones: 6,000 4,300  ProCreditBiH was IFC‟s first investment in 800 5,000 microfinance 3,500 602 4,000  2000-2002: Roll-out of Pro Credit model 600 and transformation of Acleda and 2,537 407 3,000 Compartamos 400 1,388 373 315  2003-2007: Diversification into debt & 890 275 2,000 225 equity funds, (AIM, Shorecap, GMF, EFSE), 200 398 195 133 132 credit enhancement for bonds / 85 93 1,000 50 50 49 syndications for individual MFIs - - (Compartamos, Edyficar, MiBanco) 1995-2002 2003 2004 2005 2006 2007 2008 2009 Cumulative Commitments ($M) - LHS Annual New Commitments ($M) - LHS Number of clients ('000) - RHS Crisis Response: Microfinance Enhancement Facility (MEF)  Signing & launch: Feb 5, 2009  Target fund size: US$500 million (IFC: US$150 million / KfW: US$130 million / OeEB: US$25 million / German Gvt: US$36 million / EIB: US$50 million)  Objective: Support sound microfinance institutions worldwide that are facing funding shortfalls Creating Opportunities 5
  6. 6. Microfinance – An Emerging Asset Class? The Role of Capital Markets for the Expansion of the Industry 1. Microfinance and IFC 2 2. Microfinance and the Financial Crisis 7 3. Microfinance as an Asset Class 11 4. Case Studies 15 Creating Opportunities 6
  7. 7. As Microfinance is more commercial and integrated in the mainstream financial sector, it is more exposed to the crisis • The global microfinance sector has nearly reached US$30 billion in asset size reaching 130 million clients worldwide • 15 years of successful growth – exposed to various types of crises (political threats, inflation, recessions, and financial sector break-downs) • Previous crises were confined to countries/regions • According to CGAP‟s survey of 400 microfinance institutions (MFIs):  About 60% of respondents indicated that their clients are finding it harder to repay their loans This phenomenon is most severe in the Europe, Central Liquidity constraints for ECA Asia (ECA) and Latin America (LAC) regions MFIs next 6-12 months  MFIs indicated that clients are spending more of their income on food compared to October 2008, especially 33% in Asia and Sub-Saharan Africa  The quality of MFI portfolios world-wide is deteriorating: no 69% of respondents reported an increase in portfolio 67% yes at risk (PAR)  ECA MFIs will face more liquidity needs next year Creating Opportunities 7
  8. 8. Heightened refinancing and deposit withdrawal risk for MFIs slows the microfinance industry’s growth • Resources for refinancing are quickly drying up locally and internationally, leading to an increase in borrowing costs for MFIs - Bank lines are being pulled and in some cases deposits are being eroded  Strong MFIs cannot tap commercial refinancing for growth, either through loans, securitizations or deposit mobilization –Tier II and III MFIs appear to be struggling more with liquidity issues  MFIs with savings have been less affected by the credit crunch, and 57% reported they were willing to expand their loan portfolio in the next six months  Deposit taking institutions are less exposed to refinancing risk. • News of international banks collapsing can lead to deposit withdrawal – as experienced in ECA in September 2008  The ECA region is hit the hardest by loan delinquency, where 88% of the surveyed institutions report increasing PARs • MFIs slowing growth (30-40% annual growth could drop to 8-15%) - 23% of MFIs will downsize their staff to trim costs. This marks a clear reversal of the expansionary trend in staff levels over the past years Creating Opportunities 8
  9. 9. However, the microfinance industry has proven to be fairly resilient in spite of the crisis Growth and profitability slow down: • PAR > increased during Q1 2009 • Loan loss provisioning rising • Cost of financing / cost of hedging increasing …but industry fundamentals remain strong Microfinance Investment Vehicles (MIVs) and Development Finance Institutions (DFIs) funding growth: • 104 microfinance investment funds with US$6.5 billion in assets / 35% growth in 2008 • 11 new microfinance funds in 2008 • 16 DFIs had $4.8 billion outstanding as of December 2008 / 24% growth in 2008 • Half of the DFIs increased 2009 projections to respond to the financial crisis Lessons learned & opportunities: • Some markets overheated through over availability of foreign funding (Bosnia, Nicaragua, Morocco) • Focus on growth hand-in-hand with weak underwriting criteria and risk management policies of MFIs • Opportunity for consolidation and required adjustments on the operational/risk management of MFIs • Greater need for deposit-led approach for building stable financial systems Creating Opportunities 9
  10. 10. Microfinance – An Emerging Asset Class? The Role of Capital Markets for the Expansion of the Industry 1. Microfinance and IFC 2 2. Microfinance and the Financial Crisis 7 3. Microfinance as an Asset Class 11 4. Case Studies 15 Creating Opportunities 10
  11. 11. Microfinance has yet to become an established asset class for institutional investors Asset class: • Definition: an asset that is suitable for inclusion in an investment portfolio • Criteria: in order to be suitable, the asset class must fulfill certain requirements:  Recognizable as a distinct kind of asset  Relied upon to perform consistently in similar circumstances  Liquid: so managers can trade, portfolios need volume, ratings, listings and research  Establish track record: all Microfinance as an Asset Class: • Development: Not there yet, but its homogeneity brings it close to the definition - however it remains illiquid  Markets are not likely to develop until there is a critical mass of exposure among a large number of investors so that willing buyers can be matched with willing sellers • What can help?  Microfinance remains uncorrelated to other emerging market assets - reducing volatility  Further rating agency involvement in rating microfinance institutions (MFIs) and collateralized debt obligations (CDOs)  Further bank involvement in the asset class  IFIs involvement through credit enhancement and ability to invest in market downturns Creating Opportunities 11
  12. 12. New opportunities to develop microfinance as an asset class are encouraging – IFIs can also help Challenges: • Less data available for MFIs than larger financial institutions; less data available for microfinance investment vehicles (MIVs) than standard CDOs (average 2-3 three years track record) • MIVs are less diversified than standard CDOs (i.e.., 20 MFIs in 9 countries) • CDO Portfolios have shorter maturities (5-7 years) • Risk perception • Current market leads to limited investor appetite even from socially-responsible investors (SRIs) New Opportunities: • Financial Institutions are increasingly involved in CDO placements and invest in equity/first loss tranches along side IFIs (Citi and IFC in the Global Microfinance Facility), JP Morgan • Rating agencies are analyzing the underlying portfolio of MFIs (track record in rating individual MFIs – Fitch), fund management performance, and role of IFIs • MFIs completing successful bond offerings and securitizations (ProCredit, BRAC, Compartamos, Edyficar, MiBanco) are establishing a track record Role of IFIs: • Products: Credit Enhancement, Local Currency Products, and Mezzanine Finance • Value addition: Global knowledge, AAA status and expertise Creating Opportunities 12
  13. 13. Microfinance – An Emerging Asset Class? The Role of Capital Markets for the Expansion of the Industry 1. Microfinance and IFC 2 2. Microfinance and the Financial Crisis 7 3. Microfinance as an Asset Class 11 4. Case Studies 15 Creating Opportunities 13
  14. 14. Compartamos: tapping the local bond market in Mexico Compartamos: Snapshot • The leading microfinance company in Mexico; offers micro loans (avg. US$400) primarily to women in rural areas • Started operations in 1992 as an NGO; was transformed into a SOFOL in 2000; received banking license in May 2006 • Total assets of US$590 million, total equity of US$207 million (12/31/08) • Shareholders: Compartamos A.C. (founding NGO), ACCION, IFC, individual shareholders Main Challenge • Access to long-term funding in local currency • Not allowed to take deposits • Corporate rating is not sufficient to reach institutional investors Partial Credit Guarantee Structure Bond size MXN500 million (US$44 million equiv.) in 2-3 tranches Security unsecured, pari-passu with the bondholders Maturity 5 years - 3 year grace, monthly amortization Rating Upgrade mxA+ on its own / enhanced mxAA by S&P and Fitch IFC Guarantee 34% of the outstanding principal, covers debt service Target Investors pension funds, mutual funds, insurance companies Currency disbursement in MXN becomes a USD loan to IFC Arranger Banamex/Citibank Benefits of the structure • Investors: Lower probability of default, increase rate of recovery, and IFC‟s supervision and monitoring of covenants • Mexican capital markets: Diversify investment paper, institutional investors tapping a new sector, expand the range of AA papers, and introduce microfinance as a new asset class • Compartamos: Access MXN resources, reach institutional investors, ensure longer maturity, and access a larger and more stable funding base Creating Opportunities 14
  15. 15. IFMR Capital: Securitization of micro-loans originated by multiple MFIs in India Originators: Snapshot • Asirvad Microfinance Pvt Ltd, Sahayata Microfinance Pvt Ltd, Satin Creditcare Network Ltd, and Sonata Finance Pvt Ltd: Small/Mid-sized MFIs operating in India • No past track record of rated micro-loans pools as Originators/Servicers Main Challenge • Smaller MFIs have limited capital market access • Small/Mid-sized MFIs lack substantial amounts of capital to generate enough unencumbered portfolio for a securitization Multi-Originator Micro-loans Securitization Structure Size Rs.308 million (US$6.5 million equiv.) in 2 tranches Maturity 11 months Senior P1+ rated Rs.237 million (US$5 million equiv.) Average loan size Between Rs.4,200-15,000 tranche Subscribed by the treasury department of a bank (US$88-316) Unrated subordinated Rs. 71 million (US$1.5 million equiv.) Credit enhancement Rs.41 million cash collateral tranche Subscribed by IFMR Capital to meet shortfalls in pool securitized by Originators Number of contracts 42,079 Benefits of the structure • Investors: Benefit from diversification via an asset backed by 42,000 micro-loans originated by a geographically diverse set of MFIs, and low correlation to other asset classes • Indian capital markets: Diversify investment paper, institutional investors tapping a new sector, expand the range of P1+ (short term) papers, and introduce microfinance as a new asset class • Originators: Diversify sources of funding, and reduced funding costs from the credit enhancement structure Creating Opportunities 15
  16. 16. Contact Information IFC Paris 66, Avenue d‟Iéna 75116 Paris, France +33 1 4069 3060 André M. Laude Chief Investment Officer, Global Financial Markets – Microfinance Group Website: http://www.ifc.org Creating Opportunities 16

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