Mobilising Capital for Emerging Markets
Doris Köhn Editor Mobilising Capital for Emerging Markets What Can Structured Finance Contribute?
Editor Doris Köhn Senior Vice President Africa and Middle East Palmengartenstr. 5 KfW Entwicklungsbank 60325 Frankfurt am Main Germany info@kfw-entwicklungsbank.de ISBN 978-3-540-92224-7 e-isbn 978-3-540-92225-4 DOI 10.1007/978-3-540-92225-4 Springer Heidelberg Dordrecht London New York Library of Congress Control Number: 2011932331 Springer-Verlag Berlin Heidelberg 2011 This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer. Violations are liable to prosecution under the German Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Cover design: estudio Calamar S.L. Cover illustration: www.shutterstock.com Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com)
Preface Is structured finance dead? Many have asked this question after the financial crisis. Or is structured finance evil and therefore should it be dead? We at KfW think neither nor. Structured finance is an instrument which can be very useful if well used in an appropriate context. It can also be useful for reaching development objectives. As any instrument, not just in the financial sector, it can also be misused or applied under inappropriate conditions. This was certainly the case in the US subprime housing market and in a few other cases. However financial sectors in emerging markets have proven to be far more resilient in the crisis and we believe there are many examples where structured finance has proven an effective tool to support financial sector development. The development of financial sectors in emerging markets is a key pillar in KfW s strategy to fight poverty. Over the past two decades we have increased our efforts in this area, especially in microfinance. We consider providing capital and investment opportunities to be an effective tool for developing markets to boost enterprise growth, employment and fight poverty. In our approach we support our development partners in developing enabling sector policies, legislation, and regulation. This is complemented by building institutions at the regulatory as well as the market intermediary levels. Mobilizing domestic capital through savings and the capital markets in order to facilitate productive investment is at the heart of this approach. However, emerging markets often require additional efforts to introduce good international practice, modern management skills and long term capital. Recognizing this need we have over the last decade selectively introduced and subsequently increased the use of structured finance, including securitization. Relying on its dedicated emerging market and securitization know-how KfW Group is using structured finance (i) in the securitization of SME and microfinance portfolios, and (ii) in funds with risk subordination to boost private investment. We work with private and public investment partners based on their reputation as patient and responsible investors and rather avoid investors and investees with a short term orientation. This shared long term view has proven to be useful during the recent global financial crisis, which was partly triggered by inappropriate structured finance. We are proud to say that more than three years since onset of the crisis our structured finance investments in emerging markets are doing well, although some countries have been hit hard. The patience of investors and reinforced efforts of supporting affected partner institutions played an important part in this success. Irrespective of this positive experience the crisis has shown the widespread abuse of instruments in the absence of transparency, sound judgment of market V
VI Preface participants, and often a lack of prudent oversight. Structured finance in emerging markets therefore requires debate of the lessons learnt from a crisis that originated in the West with the collapse of the sub-prime housing market in the US. This book reflects feed-back that we seek from development and market partners and experts to undertake a reality check and outlook for future operations. Structured finance in developing countries was the topic of KfW s financial sector symposium in November 2007, when the crisis was about to unfold. The authors of the chapters to take into account the experience of the crisis. In light of the crisis Michael Klein sets the stage with his overview discussing structured finance as an ambiguous financial tool. This is followed by the various authors inquiry under which conditions structured finance is suitable for emerging markets The second part of the book looks at the applications of structured finance in support of SME and microfinance. This includes activities as diverse as mitigation and adaptation to climate change, infrastructure development, remittances, rural livelihood, and Shari ah-compliant Islamic finance. The diverse application of structured finance underscores its usefulness as a tool for mobilizing capital for development and the need to carefully assess the motivations and backgrounds of investment partners and the soundness of investments. Short-sighted return motivation and overly complex structures are certainly warning signs. Structured finance and securitization will remain an important instrument for development finance. I would like to thank the German Government and FMO of the Netherland for sponsoring the International Symposium, the authors for their efforts in preparing and revising the papers and not least my colleagues who made this publication possible especially Cerstin Sander, Rainer Hartel and Giuseppe Violante, for editing and overseeing the production of this book. April 2011 Doris Köhn KfW Entwicklungsbank Senior Vice President Private and Financial Sector and Africa and Middle East Regions
Table of Contents Chapter 1 Securitization: Wonder Drug or Financial Alchemy?...1 Michael Klein Chapter 2 Mobilising Capital for the Poor How Does Structured Finance Fit in Emerging Markets?...13 Klaus Maurer Chapter 3 The Role of Public and Private Investors for Structured Finance in Emerging Markets...29 Peter Hartig Chapter 4 Structured Finance Mobilising New Means to Attract Capital...41 Ann Rutledge Chapter 5 Mobilising Structured Finance for Development Potential Welfare Benefits and Challenges of Securitisations in Large Emerging Markets...51 Mehdi Mostowfi Chapter 6 Structured Finance for Development Outlook for New Applications...63 Andreas A. Jobst VII
VIII Table of Contents Chapter 7 Shari ah Compliant Structured Finance Characteristics, Analogies and Legal Risks in Common Law Jurisdictions...93 Paul U. Ali Chapter 8 Securitization of Worker Remittances...101 Heather Hughes, Chapter 9 Structured Finance Approaches to Livelihood Projects in India...111 Bindu Ananth and Anand Sahasranaman Chapter 10 The Use of Structured Finance for a Deposit Based MSME Banking Group in Emerging Markets The Case of ProCredit...119 Martin Godemann Chapter 11 Using the Toolbox Solutions in Customizing Structured Finance...123 Richard Senior Chapter 12 Microcredit as an Asset Class: Structured Microfinance...137 Gregor Dorfleitner, Michaela Leidl, and Christopher Priberny Index...155