Guaranteeing the Future www.MCEnterprises.org Center for Global Development Discussion Syllabus March 31, 2006 Microfinance Development Model Microfinance Investment Landscape MicroCredit Enterprises Described Innovative Guarantor Model Policy Discussion www.MCEnterprises.org 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 www.MCEnterprises.org 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 www.MCEnterprises.org Microfinance Investment Landscape (3) MFIs: Banking for the Poor Locally-controlled, non-governmental minibanks 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 www.MCEnterprises.org 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 www.MCEnterprises.org 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 75% 80% 70% 60% 50% 40% 25% 30% 20% 10% 0% Public Sector Private Sector $1.6 billion in foreign investment www.MCEnterprises.org Microfinance Investment Landscape (4) Foreign Investment Instruments 68% 70% 60% 50% 40% 30% 24% 20% 8% 10% 0% Debt Capital Equity Loan Guarantees $1.6 billion in foreign investment www.MCEnterprises.org Microfinance Investment Landscape (5) DFI MFI Recipients by Type 90% 80% 82% 70% 60% 50% 40% 30% 20% 10% 0% 18% Regulated MFIs NGO MFIs $1.6 billion in foreign investment www.MCEnterprises.org Microfinance Investment Landscape (6) MFI Recipients by Geography 87% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 13% Latin America/Eastern Europe Other Regions $1.6 billion in foreign investment www.MCEnterprises.org MicroCredit Enterprises Described (1) Organizational Profile Founded: 2005 First loan, January, 2006 - $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 = $185.00 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 www.MCEnterprises.org 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 www.MCEnterprises.org 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 socalled “second tier” MFIs www.MCEnterprises.org Guarantor Model (2) Follow the $$Opportunity$$ Lender/Foundation Line of Credit Microfinance Institution (MFI) Guarantors ($1 million units) www.MCEnterprises.org 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 = First Dollar Loan Loss Acct. = Balance Due/All Guarantors = Balance Due/One Guarantor = Guarantor’s earnings = Guarantor’s net loss = www.MCEnterprises.org $700,000 $35,000 $665,000 $67,000 $50,000 $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 www.MCEnterprises.org 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) www.MCEnterprises.org 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 www.MCEnterprises.org 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? www.MCEnterprises.org 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! www.MCEnterprises.org