Risk Management and Microfinance: In Search of Market Failures

Transcription

1 Risk Management and Microfinance: In Search of Market Failures FACILITATOR: Thomas Debass (USAID/MD) PANELISTS: Tanir Helayel (MF Analytics, Ltd.), Konstantin Andreev (Cygma Corporation) Microfinance Learning and Innovations After Hours Seminar Series July 16, 2008

2 Risk Management & Microfinance Access to Private Capital Agenda USAID/MD Thomas Debass

3 Laundry List of Risks Portfolio Foreign Exchange Institutional/Management Regulatory Political Inflation

4 Solutions USAID Commercial guarantee and TA for capacity building Microfinance Analytics, Ltd Portfolio risk monitoring services Cygma Corporation, MFX Solutions Foreign Exchange Risk Hedging OPIC Insurance Political and regulatory risk

5 Connecting MFIs to Capital Markets Risk Management Toolkits and the Road to Financial Sustainability July 16, 2008 Analytics, Ltd.

6 USD bn USD bn Background Current Situation Significant Current and Future Demand # microcredit loans has grown 39% / yr since million current borrowers; 1 billion in total demand Estimated funding need = USD 275 billion Penetration rates in India, Nigeria and Brazil < 3% Volume of Microloans Microfinance Funding Gap (USD bn) 25 Increasing Supply Most MFIs that access capital markets do so indirectly via MIVs 250 Untapped demand Current Supply : MIV investment levels doubled, reaching USD 2 billion in 2006 Over 80 MIVs are in operation, with USD 3 billion under management International Investments Private Investors DFIs/IFIs Sources: CGAP, Deutsche Bank, The Microfinance Bulletin 6

7 Background Understanding Risk As MFIs grow, they often develop their portfolio risk management capabilities piecemeal. In many cases, these risk management systems fail to keep pace with the growing complexity of their portfolios. Tier 1 MFIs Of 10,000 MFIs ~ 30 are Tier 1 MFIs with loan portfolios > USD 100 million Tier 2 MFIs Tier 2 MFIs ability to absorb private investment are hobbled by lack of accurate loan portfolio detail Why Risks Aren t Accurately Measured: Non-standardized definitions of risk parameters Rush to gain market share Huge portfolio growth hides early warning signs Tier 1: ~ 2% of MFIs Tier 2: ~ 8% of MFIs Tier 3: ~ 20% of MFIs Dearth of risk management tools Microfinance Banana Skins 2008 Notes: Tier 4: ~ 70% of MFIs Systematic lack of recognition of the urgent need for deep risk analysis Sources: CGAP, Deutsche Bank, The Microfinance Bulletin 7

8 Background Information Issues Appropriate data analytics enable MFIs to constantly monitor their portfolio s health. DFIs, IFIs, investors, regulators, and other bodies also have vested interest in this information. Organization MFIs and SMEs DFIs and IFIs Regulators Investors Policy Makers and Academics Use of Portfolio Information Internal risk management Identification of top revenue generating products and market segments Loan office and loan officer performance Institutional sustainability Prevention of mission drift Exception reports Systematic risk assessment Profitability Fiscal sustainability Investment risk Systematic risk assessment Policy recommendations 8

9 Value Proposition Why PAES? MFA s Portfolio Analysis Expert System (PAES) achieves: 1. Detailed risk analysis & portfolio characteristics for MFIs, investors, and other stake holders. 2. Aggregate information at the regional, national, and international level, gauging overall financial health of the industry, as well as the benchmarking of any particular MFI aganist a set of peers. Organization MFIs and SMEs DFIs and IFIs Regulators Investors Policy Makers and Academics The PAES Difference Dashboard of portfolio risks drilled down to problematic loans 360 degree view of portfolio by relevant parameters Branch office and officer performance reports Best performing products and market segments Predictive tools for future capital allocation Track financial performance, outreach, and sustainability of all institutions they have a vested interest in Attain a system-wide view of MFI & SME sector performance, and can track effects of regulatory changes Receive a comprehensive financial & portfolio level performance report that can be viewed over time and compared to their peers See the macro-picture and carry out value-added research that ties in institutional performance with the larger socio-economic environment 9

10 The PAES Process Overview MFA works with IT team to gather loan portfolio data, passing it through extensive checks to verify data integrity. Once data is cleaned and readied for further analysis, underwriting standards and portfolio management practices are reviewed and considered. Finally, batteries of statistical & predictive analysis techniques are applied to the portfolio. PAES achieves the above objectives while catering to each institutions unique underwriting standards, legal jurisdiction, and MIS system. Note: These analytical steps are essential precursors to creating structured products. Data Categorization Techniques Used to understand portfolio characteristics and risk factors at the aggregate level and provide initial indications of portfolio trends, distribution, and risk concentrations. Examples: categorizing the loan portfolio by borrower age and gender, branch office, interest rate, product type, etc. Data Correlation Techniques Used to identify and understand correlation between portfolio factors. Especially useful to determine which client/loan characteristics are statistically relevant as risk drivers correlated with delinquencies, write-offs, and prepayments. Examples: correlating delinquencies by branch office, gender, product type, duration of loan, level of education, etc. Predictive Techniques Constitutes the application of statistics, data mining, pattern recognition, and machine learning techniques to analyze current and historical data. Though the heuristics behind the techniques vary, outputs attempt to predict future trends and behavior. Examples: predict probability of default based on client characteristics, etc. 10

11 The PAES Process What Next Link to Capital Markets: Socially inclined capital falls significantly short of satisfying liquidity demand of MFIs Harnessing the local institutional investors as well as the large Western institutional investors is of paramount importance To catalyze private investment into microfinance the following steps must be achieved: 1. Standardization and accuracy in delinquency and prepayment reporting 2. Necessary tools to assess and monitor portfolios 3. Growth of a secondary market in future MFI bonds 4. Agency education into how to accurately rate bonds 5. Monitoring of individual borrowers credit 11

12 MF Analytics About Us About MF Analytics, Ltd.: MF Analytics, Ltd. (MFA) is specialist financial services company focused on creating turnkey structured finance solutions in emerging markets. Our services include the structuring of securities, analytics, and reporting. MFA has developed PAES as part of its innovative capital structure solutions for emerging market financial institutions and their investors. MFA currently manages risk for portfolios with a total of over US$ 700 million in loans corresponding to over 5 million borrowers. Contact: Tanir G. Helayel tghelayel@mfanalytics.com 12

13 Hedging Foreign Exchange Risk in Microfinance USAID After Hours Seminar on Risk Management and Microfinance Washington, DC - July

14 Investing in Dollars TODAY IN ONE YEAR USD 1, % USD 1,070 3 soles / dollar PEN 3,000 3 soles / dollar PEN 3,210 FX Risk

15 Investing in Nuevo Sol TODAY IN ONE YEAR USD 1,000 3 soles / dollar USD 1,070 3 soles / dollar FX Risk PEN 3, % PEN 3,210

16 Hedging Foreign Exchange Rates TODAY IN ONE YEAR USD 1, % USD 1,070 SPOT: 3 soles / dollar Forward Rate: 3.1 soles / dollar PEN 3, % PEN 3,315

17 Benefits of Local Currency Funding Hard Currency Loan Pricing Often Doesn t Fully Consider the Currency Risk Component Hedging Local Currency Identifies the FX Risk Component Currency Risk Eliminated Through Hedge Currency Risk Cost of FX Hedge Loan Spread Credit Risk Credit Risk Loan Spread

18 Cygma offers a suite of hedging services tailored to the microfinance industry It begins with creating access to currency hedges Established Market (e.g. Mexico, Russia) Establish trading relationships; facilitate the execution process Consolidate deal flow to attract bank interest Limited Market (e.g. Indonesia, Peru) Advise on hedging structures within market constraints Provide hedges that exceed the tenors available in markets No Market (e.g. Uganda, Honduras) Provide hedges in currencies where a market doesn t exist Provide indications (40+ currencies)

19 Cygma offers a suite of hedging services tailored to the microfinance industry and expands to include a broad range of services. Portfolio Assessment and Planning Evaluate your portfolio currency risk and recommend portfolio hedging strategies Determine availability of hedges and provide indications Provide educational materials for your borrowers Recommend counterparties Negotiate ISDAs Loan-Level Planning Advise on loan structures that can be most effectively hedged. Propose potential hedging strategies and pricing. Advise on means of providing rate commitments to borrowers Advise on extending hedges Loan Closing through Maturity Run auction / negotiate price Assist with currency delivery Provide ongoing hedge valuations Assist with repatriating interest and principal payments. Assist unwinding trades

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