BYU - 3/15/03 Incorporating Microfinance Institutions into Capital Markets Drew Tulchin Social Enterprise Associates BYU, 6 th Conference on Microenterprise March, 2003 If it talks like a duck, walks like a duck & looks like a duck, it is more readily treated like a duck

BYU - 3/15/03 Incorporating Microfinance Institutions into Capital Markets Introduction Understanding the Duck Talking like a Duck Walking like a Duck Looking like a Duck Duck Examples - Microfinance & the Capital Markets Q & A

BYU - 3/15/03 Introduction Drew Tulchin Social Enterprise Associates A network of professionals making communities better by applying business skills & sustainable practices. Who are you? What brought you here today? Who am I?

BYU - 3/15/03 Definitions & Assumptions Terminology –MFI = Microfinance Institution –Define Microfinance, Micro-credit, Micro-debt, etc. Microfinance in Development –Microfinance is NOT a universal development panacea –MFIs have proven the model & shown profitability –The promise of microfinance as a sustainable effective development tool is still unrealized Microfinance Moving Forward –The industrys next decade will be one of extensive change – failures & consolidations –Profit is NOT a dirty word

BYU - 3/15/03 Incorporating Microfinance Institutions into Capital Markets If it talks like a duck, walks like a duck & looks like a duck, then it can be more readily treated like a duck with regards to accessing capital markets.

BYU - 3/15/03 PICTURE Est. MFI Portfolio Annual Asset Turnover $4 B Est. Total Customer Need / Demand $300 B Where is this money going to come from?

BYU - 3/15/03 Understanding the Duck

BYU - 3/15/03 Understanding the Duck 99% of MFIs are funded by donors DONORS give money MFIs experienced (& good at) pitching them Current model: 5 years as NGO w/ donations, 2 years to transform into commercial bank What happens when donors go away? Where does $$$ come from for MFIs?

BYU - 3/15/03 Understanding the Duck INVESTORS make investments MFIs less experienced (& good at) pitching them Investors vary: individuals, socially responsible investors (SRI), institutions (The Street) What happens when MFIs dont perform? Where does $$$ come from for Capital Markets?

BYU - 3/15/03 Understanding the Duck INVESTMENTS produce return MFIs face results oversight, potential mission drift Investments are easiest when: –Industry is known; vehicle is understood –Viable exit strategy –Risk factors are known, identified & measured –Comparable to other investments –Have a track record / history What happens when MFIs cannot compete? What do investors expect from capital markets?

BYU - 3/15/03 PICTURE ANNUAL giving of all US Foundations (2000) $5 B DAILY transactions on Wall Street (2000) $1 T Which pot of money would you rather be drawing from?

BYU - 3/15/03 Talking like a Duck

BYU - 3/15/03 Talking Like a Duck Language –Is a communication tool –Is an indicator of behavior MFIs & Investors –Do not speak the same language –Do not use the same vocabulary Investors expect to hear their language & their vocabulary

BYU - 3/15/03 Talking Like a Duck MFI LanguageInvestor Language ClientsCustomers OutreachMarketing SustainabilityProfitability Language for donors w/ a social motive Language of returns w/ a financial motive

BYU - 3/15/03 PICTURE Number of Counted MFIs 1% % financially self-sufficient, (a.k.a. profitable) 10,000 Which group would you prefer to belong to?

BYU - 3/15/03 Walking like a Duck

BYU - 3/15/03 Walking Like a Duck MFI Characteristics When Seeking Investment Non-Profit Organization (NGO) Mission driven –promote need for service to help impoverished people Informal Metrics of success # of loans madejobs created # people helpedloan size

BYU - 3/15/03 Walking Like a Duck Investment Barriers for MFI Characteristics Are NGOs known for professionalism, as investment option? (There are exceptions: public housing, CDFIs, LISC, etc.) Is there accountability, reporting, strong systems? Who owns the entity? The Board of Directors? Given the social mission, is management prudent, financial management practiced & are risks assessed? Do investors understand & care about the metrics?

BYU - 3/15/03 Walking Like a Duck Investment Advances for MFIs Characteristics Professional presentation Ensure the house is in order –timely reporting; management systems in place Be realistic, cautious in management & growth Address governance – establish a commercial entity Have ownership represented by Board of Directors Promote double bottom line – economic & social return

BYU - 3/15/03 PICTURE Growth Which side of the line returns an investment? Amazon.com (the early years) Gas Companies (Cash Cow) Profitability

BYU - 3/15/03 Looking like a Duck

BYU - 3/15/03 Looking Like a Duck MFIs Need to be Savvy & Business-like Understand the investor customer Develop investment products customers want Differentiate customers –They are NOT all the same Tailor products to increase sales – e.g. Mercedes Benz, but also Ben & Jerrys

BYU - 3/15/03 Looking Like a Duck MFI ChallengePotential Solution Not Profitable Reduce Growth (a la picture) Relatively Small Size Merge w/ Other Programs Balance Sheet Debt/Equity Ratio Seek Equity, Quasi- Equity, Retain Earnings Extensive Risks: i.e. Country & Currency Secure Guarantees, Partner w/ North

BYU - 3/15/03 PICTURE How much return are investors seeking? (Source: Morino Institute) DonationInvestment $ Return? NO $ Return? YES

BYU - 3/15/03 Duck Examples - Microfinance & the Capital Markets

BYU - 3/15/03 Duck Examples – MFIs in the Capital Markets Prisma Microfinance US for-profit international MFI Wholly owned subsidiaries by country Raised $1.25 mil venture capital to date, –In same manner as any US high growth start-up

BYU - 3/15/03 Duck Examples – MFIs in the Capital Markets Trinidad & Tobago MFI Affiliated with development bank –Offering received BB Rating from private company Bond Offering: $2.8 mil –Well structured - Coupon paid quarterly, 10 year (w/ renewal), Liquid (w/ put option) –Customers given board placement - dev bank, private investors (insurance companies), IADB (MIF)

BYU - 3/15/03 Duck Examples – MFIs in the Capital Markets Investment Models Avail. to Individuals Calvert Social Investment Fund (US SR Mutual Fund) & Wisconsin Coordinating Council on Nicaragua (WCCN) Investors: choose returns, neg rate 10%, med term. Size = $50 mil, $3 mil Oikocredit (Dutch based religious org) Investors: negligible return, market rates, short term. Size = $30 mil disbursed in 2001 Blue Orchard (Swiss Investment Firm, not really individuals) Investors: averaged 8% return to date, market rates, short term. Size = $12 mil

BYU - 3/15/03 Duck Examples – MFIs in the Capital Markets More Examples Credit Unions generally, WOCCU specifically Compartamos: $10 mil bond offering –Mexican MFI Commercial Bank, ACCION affiliate –3 tranches, all fully subscribed Investments w/ Minimal Return, but Worth Mentioning –Shorebank Advisory Services: Chicago CDFI, US domestic –Alterfin: Belgium bank offering secure CDs, then onlends them –Canadian Cred Union: FDIC insured savings (shhh!)

BYU - 3/15/03 PICTURE Is the timing good for MFIs to access Capital Markets? $$$ in SR Funds (millions) US Interest Rates

BYU - 3/15/03 Recap Introduction Investors methods for capital investments are different than donors methods Investors as a market & their expectations MFI typical behavior = barriers to investment New approaches possible –in language, structure & behavior Case Studies of MFIs & investment options Our Duck

BYU - 3/15/03 Q & A Drew Tulchin Social Enterprise Associates Thanks for listening, quack!