1. NewBank Microfinance: Microcredit in the Ukraine
Fuqua School of Business
Duke University
Holly Dice, Andrew Khoo, Sara Kirchoff, Robert M. Little & Hartaj SIngh
January 13, 2019
Emerging Markets Corporate Finance

2. Emerging Markets Corporate Finance
Agenda
Scenario
What is Microfinance?
Characteristics of Microfinance Loans
Overview of Ukraine
Business Plan
Key Takeaways
Conclusion
Emerging Markets Corporate Finance
January 13, 2019

3. Emerging Markets Corporate Finance
Scenario
Ukrainian-American entrepreneur wants to give back to his native country by fostering small and family owned businesses
Willing to provide $2.5MM in interest free loans
Wants to verify feasibility and sustainability of a for-profit microfinance lending institution in the Ukraine
Emerging Markets Corporate Finance
January 13, 2019

4. Emerging Markets Corporate Finance
What is Microfinance?
Providing financial services to the poor and micro enterprises
Currently 7,000 microfinance Institutions worldwide ($2.5 billion).
Individual and group-based lending
Small size of loans makes it inefficient for commercial banks to target these markets
Successfully pioneered by Grameen Bank in 1976
Emerging Markets Corporate Finance
January 13, 2019

5. Characteristics of Microfinance Loans
Size: $25 to $100,000
Term: 6 months to 2 years
Collateral: typically none
High interest rates: 25% to 51% in Asia
Low default rates: <5%
Labor and resource intensive to administer and monitor
Dependent upon social pressures for loan repayment
Aggressive penalty structures
Emerging Markets Corporate Finance
January 13, 2019

6. Emerging Markets Corporate Finance
Overview of Ukraine
Declared independence from Soviet Union in August 1991
Population: 49.8 million
GDP: $30.4 billion ($610/capita)
Inflation: 28.5%
Currency: Hryvnia (5.6 hryvnia/US$1)
Prime lending rate: 42%
Major industries: coal, electric power, metals, machinery & equipment, agriculture
Moody’s Credit Rating: Caa1
Emerging Markets Corporate Finance
January 13, 2019

7. Overview of Ukraine (cont.)
Economy
Post-independence GDP contraction
Approximately 40% of pre-independence size
First year of GDP growth (5.6%) in 2000
Shadow economy accounts for 60% of total economy
Periods of hyperinflation in the early 1990s
Economy expected to grow in
Emerging Markets Corporate Finance
January 13, 2019

8. Ukrainian Banking Sector
Primarily finance state-run enterprises
Suffers from problem loan rate of 20%
Loans of short maturities, usually 6 months
Nominal interest rate is currently around 50%
Inadequate development of financial services
Banks are information source for tax collectors
Viewed as inefficient and lacking in small loans expertise
Emerging Markets Corporate Finance
January 13, 2019

9. Emerging Markets Corporate Finance
Business Plan
Utilize microcredit lending models to construct a sustainable for-profit microcredit bank in Ukraine
Target business opportunities:
Below the ‘high-end’ lending activities of the World Bank, EBRD and various for-profit multinational banks
Above the ‘low-end’ lending activities of Grameen Bank model in Bangladesh
Loan sizes to range from $10,000 to $100,000
Emerging Markets Corporate Finance
January 13, 2019

10. Emerging Markets Corporate Finance
Business Plan
Initially set up 1 branch growing to 8 in year 5
Loan advisors will handle accounts
Require groups of 5 or more to cross guarantee loans (assumed default rate of 10%)
Collateral: depending on size of loan (10-20% in savings account)
Interest rates: 50%
Source of funding:
interest-free loan of $2.5MM for first 3 years
staged equity financing totaling $6.5MM in years 2-5
approach capital markets or commercial sources
Emerging Markets Corporate Finance
January 13, 2019

11. Emerging Markets Corporate Finance
Results of Model
5000+ loans issued by 2010
Total loan portfolio value in 2010 of approx. $25MM
Interest-free loan repaid by Year 5
NPV $1.9MM
CAGR 34%
Emerging Markets Corporate Finance
January 13, 2019

12. Emerging Markets Corporate Finance
Real Options
Opportunity to expand into other financial services
Ability to scale-back operations during periods of economic turmoil
Option to provide larger loans ($100K+) to proven borrowers
Value associated with proving the financial-viability of model to encourage establishment of other banks as conditions improve
Emerging Markets Corporate Finance
January 13, 2019

13. Emerging Markets Corporate Finance
Risks - Firm Specific
Funding
Market demand for microfinance loans
Competition
Default rate and late payment of loans
Lack of collateral
Financial sustainability
Improper management
Recruitment of loan advisors
Emerging Markets Corporate Finance
January 13, 2019

14. Emerging Markets Corporate Finance
Risks - Ukraine
Political instability
Economic environment
Currency exposure
Regulatory environment
Expropriation
Emerging Markets Corporate Finance
January 13, 2019

15. Cost of Equity Calculations
Emerging Markets Corporate Finance
January 13, 2019

16. Interest Rate Calculations
Ukraine Commercial (lower bound) – 50%
Ukraine Informal Moneylenders (upper bound) – unknown?
Microcredit Summit recommended rate: 35% to 51% for Asia
Emerging Markets Corporate Finance
January 13, 2019

17. Emerging Markets Corporate Finance
Conclusion
Feasible at 29.4% Cost of Capital
Anticipated financial return of $1.9MM
Investment in this bank would be attractive to:
Development banks
Companies with a long-term development stake
Emerging Markets Corporate Finance
January 13, 2019

18. Emerging Markets Corporate Finance
Key Takeaways
Risk assessment
Microfinance
Ukraine
Calculation of cost of capital and interest rates
Trade-offs between financial and socio-economic returns
Emerging Markets Corporate Finance
January 13, 2019

19. Potential Development Bank Funds
Emerging Markets Corporate Finance
January 13, 2019

20. Profile of Similar Banks
Emerging Markets Corporate Finance
January 13, 2019

21. Emerging Markets Corporate Finance
Cost of Debt
Debt Markets
II Credit Rating – 17.7
Opacity – use Russia as proxy (O-Factor 84, Tax Equiv 43%, Op Risk Prem – 1,225)
Development Banks
Worldbank – 12% to 15% for Asian economies
European Bank of Reconstruction and Development – LIBOR + 3% =
Emerging Markets Corporate Finance
January 13, 2019