Microfinance and Subprime Mortgages

Sanjay Sinha, Deputy CFO — Microcredit Enterprises

November 13, 2008

Micro-finance&

Sub-prime Mortgages

Is There Another Crisis on the Horizon?

TBLI CONFERENCE EUROPE 2008

Topics coveredTopics covered

Evolution of the sub-prime market

How are the two similar?

How do they differ?

Lessons learned from sub-prime debacle

Challenges for micro-finance

Self-regulation

Summary

Sub-prime mortgages – How did we get here?

Sub-prime mortgages – How did we get here?

Realizing the American dream

Home ownership

Sub-prime mortgagesSub-prime mortgages

Evolution of the Market

Easing of regulations

Housing bubble

Low interest rates

Oversupply of capital

High returns

Innovative products

What do they two have in common?

Subprime Microfinance

Offer credit to more borrowers

Offer credit to borrowers in under-

served sectorsRisk of higher

defaults Higher administration costs

Higher Interest Rates

PURPOSE

COST

COMPENSATION

How do they differ?

Subprime Microfinance

LT, high value loans to high risk borrowers

ST, low value loans to no-credit history

borrowers

Real property Personal character

Real property vs. Personal character

LOAN STRUCTURE

UNDERLYING ASSET/COLLATERAL

VALUE OF UNDERLYING ASSET

Lessons learnedDon’t forget the basics

Stay close to clients

Avoid predatory lending

Transparency

Challenges for Microfinance

• Liquidity – Larger (MFIs) attracting bulk of the funding

• Higher Inflation – Eroding Purchasing Power

• Exchange Rate Fluctuations – Currency Mismatch

• Transparency – What Interest Rates Do MFIs Charge?

Self regulationSelf regulation

Establish & follow financial discipline

Stay close to customer

Diversify Funding sources

Identify /implement best practices

“What can we do to deal with challenges?”

Self regulation – What have we done?

• 4/08 – Pocantico Declaration

• 25 Industry leaders adopted code of conduct:

• Avoid reckless lending

• Transparent pricing/non-abusive collection methods

• Restructure non-payment loans

Self Regulation – What have we done?

• 9/08 – Campaign for client protection in microfinance (Clinton Global Initiative)

• In 3 Years engage 50% of world’s 500 largest MFIs

• Develop & implement best practices and engage investors

Summary

Although purpose & high interest rates are common features; the two differ markedly

Technological advances & funding sources are limited; size much smaller

Remote chance of layered products

Socially driven mission should keep returns lower & most speculators away

“Character not collateral”

Summary

Attempts at self regulation & transparency

Should minimize predatory lending

Provide more funding for smaller MFIs

Note: Conceptual frame work for this presentation was based upon articles by Cecelia Beirne at Microvest Capital Management.

“Character not collateral”