Capital Markets Initiatives and Social Empowerment A Presentation to 7 th Annual BYU MicroEnterprise Conference by Alex Counts, Julie Stahl, Anne Hastings and Chris Dunford March 12, 2004 Grameen Foundation USA

 Investors and lenders demand increased efficiency and transparency  New efficiencies can mean lower costs to borrowers  Increased transparency and professionalism leading to lower risk of error and fraud  Tapping into virtually unlimited sources of capital for expansion  Reduction of time management spends “ fund- raising ” Benefits of Commercialization Benefits of Commercialization

 Exclusion of poorest people and areas  to reduce perceived portfolio risk among MFI lenders/owners  Phasing out of complementary services (BDS, credit with education) and social impact experimentation  to reduce costs and increase profits  “ Mission Drift ” : Overarching poverty reduction objective slowly diluted/lost  Ownership is increasingly foreign and from traditional banking sector Risks of Commercialization Risks of Commercialization

 Right mix of incentives for MFI loan officers  Grameen Bank Five Star System  3 stars for financial performance  2 for social impact  Apex organizations choice of MFIs  Case of SHARE & GF-USA  MFI choices for key management and governance posts (case of Fonkoze)  Donors/Investors attention and valuing of:  Poverty targeting, poverty impact (monitoring & results), experimentation & complementary services  Ensuring that ownership is predominantly local and ideally includes clients themselves Risk Mitigation Risk Mitigation

GF-USA’s Partners in India SHAREASACFTSSKS Grameen Koota SNEHATotal # of Active Clients 197,94368,78127,76921,9469,0836,059331,581 Branches Cum Loans Disbursed (US$) 71,031,21914,124,87111,183,3635,529,6701,228,9171,824,421104,922,461 Portfolio O/S (US$) 16,773,4503,528,1452,213,3631,766,496494,654483,18925,259,296 PAR > 30 Days 0%2.7%4.44%0%  $2.1 million invested since December 2000  Quadruple growth from 80,000 to 330,000 borrowers in 3 years

Securitization: Creating a Secondary Market for Micro-finance

Securitization: Structure and Credit Enhancement  Bank identifies an MFI’s portfolio for buyout Based on fulfillment of minimum criteria and past performance of portfolio  MFI assigns portfolio to Bank and receives payment for value of principal assigned at Par or at a Premium  MFI continues to collect receivables from the borrowers thus maintaining its relationships  MFI provides Bank a credit enhancement in the form of a First Loss Deficiency Guarantee (FLDG)  FLDG is based on the expected losses in the portfolio Expected loss rates derived from detailed study of past portfolio data

Securitization: Pricing  Advantage: Can differentiate the financial risk of an MFI from its operational risk  Pricing based on:  Past portfolio performance  Quality of MFI’s governance & management, operating systems & MIS  Credit Enhancement (FLDG) improves rating of portfolio thus achieving highly competitive pricing  Typical pricing:  Applicable Securitization Discounting Rate: 8-8.5%  Interest rate on term loans to MFIs from banks: 11-14%

Example: SHARE Securitization  SHARE sold $4.3 million of its portfolio to ICICI Bank in Jan 04  42,000 loans from 26 branches as of  Continues to act as collection agent  ICICI discounted the FV of principal and interest of these receivables at 8.75%  Repayments will all be made by Jan 05  All future loans originated in these branches will be thru Partnership Model  Boosts SHARE’s ROA and ROE

Grameen Foundation USA role in SHARE securitization GF-USA supporting SHARE since 2000 – total investments of approx. $650k Grant to SHARE of $325,000 for 8% FLDG (in cash collateral account at ICICI) Achieved leverage of 12x on donors’ ‘investment’ Key part of GF-USA’s 5 yr Strategic Plan Pre-cursor to work of Grameen Capital India

ICICI Bank Partnership Model  ICICI Bank partners with selected MFIs on long-term basis  MFI sets up field organization as a service provider for promotion and management of borrowers  ICICI Bank provides credit, savings and other services such as insurance directly to the borrowers  MFI plays active role in monitoring and collection (incented to maintain low PAR by required FLDG)  ICICI Bank provides working capital assistance to MFI to meet cost of promotion during initial years  MFI repays the working capital loan from donor funds when available or from service charges

Partnership Model Example: CASHPOR Pilot ICICI Bank 1 check Individual checks CFTS Uttar Pradesh Rural Bank Branch Group formation Loan applications 6% service fee Batched loan applications for approval Individual repayments at 12.5% interest Batch repayment

Benefits of Securitization and Partnership Model  Releases funding constraints so MFI can expand outreach exponentially  Frees up MFI management time spent on fundraising  Enables each party to do what it does best MFIs do the social mobilization Banks provide financing  The FLDG structure retains the incentive for the MFI to strictly monitor PAR – assuring constant pipeline of good quality assets for banks/investors  Will permit deepening of the market and entry of new investors for micro finance – foreign banks, mutual funds, retail investors

The Vision: Commercially Viable Business Models for Delivering MF to the Poorest  Partnerships have worked best with MFIs that have demonstrated capability in:  Poverty targeting (focus on the poorest)  Managing information systems  Maintaining high levels of performance and governance standards  Dedicated action research team (ICICI’s SIG)  Product development  Impact assessment/due diligence of partner MFIs  Key volunteers pushing the frontiers  Partnerships with other service providers  Capacity building for emerging MFIs  Systems, Training, Rating

Grameen Capital India  GF-USA, ICICI, and Citigroup launching company that will drive mainstreaming of capital markets financing for MFIs  Key businesses:  FLDGs to facilitate securitizations and other structured finance transactions for MFIs  Advisory services to MFIs and banks/investors  Standardization efforts for financial measurement/ reporting and data transfer  Set up to take integration of MF with capital markets to other regions with similar potential

GRAMEEN CAPITAL INDIA $1m initial capital GF-USA and Citigroup $ 505k seed capital ICICI Bank & Local Partner $495k seed capital Years 2-5: Additional $10-15 m in credit guarantees/grants to be raised from development institutions (AID, Ford, IFC), individuals and foundations resulting in $100 million in MFI funding and outreach to 1 million BPL households. MFIs (SHARE, ASA, CFTS, SKS, etc) End Borrowers Grameen Capital India: Year 1 Capital Markets Initial $7.5m leveraged from sale of MFI commerci al paper Credit Enhancements/Guarantees: ~$800k initial