Guaranteeing the Future

Center for Global Development Discussion Syllabus March 31, 2006 Microfinance Development Model Microfinance Investment Landscape MicroCredit Enterprises Described Innovative Guarantor Model Policy Discussion

Microfinance Investment Landscape (1) 3 Levels of Sustainability Impoverished women entrepreneurs: Create and grow successful small businesses, repay their loans and invest in their children Leading MFIs around the world: Creditworthy and operationally self-sufficient; borrow and repay loans MicroCredit Enterprises & Others: Raising private sector capital, making MFI loans and repaying capital sources

Microfinance Methodology (2) Trust, Solidarity and Grit Tiny business loans finance a poor woman to succeed at the very thing she is already determined to do: Feed and Clothe Her Children New loans start as low as $25 Simple skills, home-based businesses: fishing; making soap; selling eggs; tending flocks; weaving; growing crops Weekly repayment; short 4-to-6 month loans Village-level peer solidarity and responsibility

Microfinance Investment Landscape (3) MFIs: Banking for the Poor Locally-controlled, non-governmental mini- banks Character collateral banking “character…before money or property or anything else…” -- J. P. Morgan (on the lending criteria of the famed Morgan bank, 1912) Sustainable, creditworthy High transaction costs High interest rates, but fair (not loan sharking) 97+% client loan repayment rate worldwide Need affordable expansion capital

Microfinance Methodology (4) Not a Cure-All Microfinance Does Not…. Build roads, schools or clinics Stop wars or clear mine fields Provide clean water or electricity Teach people to read or write Advance human or political freedom Clothe or house tsunami victims End drug, sex or human trafficking Preserve pristine rivers or protect endangered species Restore cultural treasures or save tribal cultures

Microfinance Investment Landscape (3) Sources of Foreign Investment $1.6 billion in foreign investment

Microfinance Investment Landscape (4) Foreign Investment Instruments $1.6 billion in foreign investment

Microfinance Investment Landscape (5) DFI MFI Recipients by Type $1.6 billion in foreign investment

Microfinance Investment Landscape (6) MFI Recipients by Geography $1.6 billion in foreign investment

MicroCredit Enterprises Described (1) Organizational Profile Founded: 2005 First loan, January, $700,000 to Credito con Educacion Rural (CRECER) 68,000 women clients 70% live in the mountainous Andes, Bolivia 99.6% loan payment rate Average client loan = $ Cumulative loans, to date: $1.3 million; serving about 13,000 women/clients Africa; Asia; Latin America, Anywhere Alliances: Calvert Social Investment Foundation Freedom from Hunger Oxfam America

MicroCredit Enterprises Described (2) Organizational Status Today $9 million of collateral pledged 9 Guarantors $4.5 million to loan Up to 45,000 poor client/borrower beneficiaries Up to 225,000 people with food security Next Stages 2006: $20 million total pledged; 20 individual Guarantors; $10 million to lend; up to 100,000 loans Ultimately: $100 million by diversified Guarantors, including corporate and foundation partners

Guarantor Model (1) Basic Elements Guarantor controls assets, keeps all financial gains Not a donation or grant Not an investment Shared pro rata risk 18-month liquidity commitment (rolling term, determined by the Guarantor) Private sector, accountable results Reaches the very impoverished in so- called “second tier” MFIs

Guarantor Model (2) Follow the $$Opportunity$$ Microfinance Institution (MFI) Lender/Foundation Line of Credit Guarantors ($1 million units)

Guarantor Model (3) Hypothetical Risk Analysis Assumptions with 10 Guarantors: One MFI defaults, $700,000 loan (largest loan, to date) Guarantor earns modest 5% on $1 million of assets Default Loss = $700,000 First Dollar Loan Loss Acct. = $35,000 Balance Due/All Guarantors = $665,000 Balance Due/One Guarantor = $67,000 Guarantor’s earnings = $50,000 Guarantor’s net loss = $17,000

Guarantor Model (4) 5 Inherent Risk Factors No MFI collateral or viable assets Imperfect MFI due diligence No credible MFI default or bankruptcy data Foreign currency risk Normal overseas investment risk

Guarantor Model (5) 8 Risk Mitigation Factors 60% borrowing cap per Guarantor All Guarantors share risk equally Rigorous, posted criteria for MFIs Loan portfolio geographic diversification First-dollar Loan Contingency Account (5%) Endowment for Microfinance Sustainability Thorough due diligence, fiscal review (next slide) Microfinance network collaboration (next slide)

Guarantor Model (6) Innovative Due Diligence Quantitative Assessment: Financial statements, social performance, creditworthiness factors, etc. done by MicroCredit Enterprises Qualitative Assessment: Management, organizational stability, board quality, etc. done by respected microfinance network

Questions, Topics and Discussion (1) Evaluating financial (and social) returns: Who is accountable for what and to whom? Investor beware? Will there be a “philanthropic investment bubble”? Do international vs. local capital markets matter?

Questions, Topics and Discussion (2) Does mission drift matter? Aren’t there enough poor people to go around? Can microfinance cure malaria? Should banks for the poor give away toasters? Thank you!