Capital Markets Initiatives and Social Empowerment A Presentation to 7 th Annual BYU MicroEnterprise Conference by Alex

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

2. Benefits of Commercialization • 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”

3. Risks 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

4. Risk Mitigation • 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

5. GF-USA’s Partners in India • $2.1 million invested since December 2000 • Quadruple growth from 80,000 to 330,000 borrowers in 3 years

6. Securitization: Creating a Secondary Market for Micro-finance

7. 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

8. 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%

9. 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 10.31.03 • 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

10. 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

11. 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

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

13. 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

14. 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

15. 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

16. Grameen Capital India: Year 1 GF-USA and Citigroup GRAMEEN CAPITAL INDIA $1m initial capital $495k seed capital ICICI Bank & Local Partner $ 505k seed capital Credit Enhancements/Guarantees: ~$800k initial Initial $7.5m leveraged from sale of MFI commercial paper Capital Markets MFIs (SHARE, ASA, CFTS, SKS, etc) 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. End Borrowers