This document summarizes research on using charity funds to securitize microfinance receivables. It is divided into four parts: 1) current structured microfinance products, 2) charity funds, 3) regulations, and 4) partners. Examples of past microfinance securitizations are provided from India and Bangladesh. While regulatory hurdles exist, the research finds charities could expand microfinance by providing credit enhancement or purchasing securitized receivables.
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Final term paper emerging market finance (1)
1. Research Paper on feasibility of using charity funds for
securitization of Microfinance receivables
Prepared for: Professor Ron Schramm
FIN417E: Emerging Markets Finance
Prepared by: Andrew CAI (091010) – Chase CHEN(091018) –Kenichi Iwakura(092004)
- Lehana SINGH(091133) – William Li(091081)
Submitted Date: 28 August 2010
This is to certify that this work is entirely and exclusively my/our own, except for those cited and noted.
China Europe International Business School
2. Executive Summary (Andrew Cai)
Initially we started out to explore the various charity funds in the market which are putting
money in structured financial products. But during the course of our study, we found that the real
hurdle was on the demand side from micro-finance industry. Hence, we focused our research on
the current scenario in micro-finance industry. We analyzed the current financial markets and
evolution of structured products. We explored the cases in which microfinance receivables have
been structured in the past. We analyzed all the key stakeholders which can be used for using
charities for structuring of receivables. Our research shows that though there is some process
related hurdles, charities can give a new dimension to the microfinance industry. In all, our paper
is divided into 4 parts as under.
A. Current structured products in Microfinance (Lehana Singh)
a) Traditional Model and evolution of current system
b) Mechanism behind securitization of Microfinance receivables
c) Problems in the current system
d) Current Examples of MFS (Main Focus on India)
e) Future Course
B. Charity Funds (Kenichi Iwakura)
a) Research by exploring existing securities and Charity products/derivatives being
marketed especially in developed countries
1. World Bank Global Bond
2. Vaccine Bonds
3. As a product of private banking (provided by RBS Coutts)
4. Charity Notes
b) How can charitable derivatives be converted / used in to Micro-Finance based securities
of emerging markets?
1. Credit enhancement from Multi-Lateral Agencies
2. Involvement of MFI supporting funds
3. Introduction of DPFs.
4. BBVA CODESPA Microfinance Fund
c) How can charity be leverage for increasing the scale/fund raising of micro-finance?
C. Regulations (William Li)
a) What are tax benefits for investors in investing into charitable funds?
b) Are there some regulatory hurdles?
c) What are the regulatory mechanisms required for sustainable Micro-Finance models?
D. Partners (Chase Chen)
a) How can NGO's be leveraged to sell microfinance based securities?
b) How can existing firms be leverage to sell MF Securities?
3. A. Market for Micro Finance based securities
Traditional Model
Commercial banks perform the role of financial intermediation. They lend to big corporate
1. in the form of loans
2. Subscribing to their debt issuances
Implications – In this process they take direct exposures on the overall credit risks of the
underlying borrowers or corporate assets.
In traditional model, Credit risk consists of the following types of Risks
1. Industry risk
2. Business risk
3. Financial risk
4. Project risk
5. Management risk
All these risks are faced by the big corporations and hence banks end up taking lending decisions
without fully understanding and appreciating the nature of the multiple risks that represent the
borrowing organizations.
Evolution of other traditional Models
Asset Backed Securities - To reduce the risk from external factors of the corporations, banks
came up with new ideas. They de-constructed assets into different buckets, evaluated separately
and allocated thereafter to various lenders or investors as per their needs and risk appetites. This
approach intended to move the lenders from the traditional platform of lending to an
undifferentiated organization to a new improved paradigm of lending against specific assets and
represented an improvement over the traditional lending model.
Receivables backed Securities included specific cash flow receivables as collateral trapped in
escrow arrangements. Next, the lenders interests were strengthened by enabling them to have
exclusive first charge on the underlying designated cash flows with other bankers / lenders
formally agreeing to such an arrangement.
Securitization - Modern markets involve complete isolation of the borrowing entities from
designated cash flow and the same are transferred to the lenders.
Mechanism behind securitization – Securitization is based on the mechanism of converting
credit into securities. This involves 3 assumptions
1. The security is accurately priced by the issuer
2. Credit can be fully calculated for such as security
3. The rating assigned by the rating agency full reflects the risk in such a security
4. These assumptions led to creation of Credit Derivatives, where
1. Risk could be measured and traded as a commodity with the underlying financing involved
but All the risks and rewards associated with underlying pool are transferred to the buyer
2. Financing and the credit could be stripped as two different Products
3. Risk could be undertaken by guaranteeing the total expected return from the credit
transaction
4. PTC Issuance - When an investor buys these debt instruments, the investor is given a PTC.
However, this does not mean that the investor owns the assets. Rather, when the original
lender recovers money from the original borrower (as interest or otherwise), it is then passed
on to the SPV, which then disburses it to the investor in the form of a fixed income1.
5. Credit Enhancement Risks – Credit Enhancement is provided to an SPV to cover the losses
associated with the pool of assets and is divided into 2 parts
a) First Loan Facility (as part of the process in bringing the securities issued by the SPV to
investment grade). The provider of the facility bears the bulk (or all) of the risks
associated with the assets held by the SPV
d) Second Loan Facility in terms of Liquidity Facility is provided to assure investors of
timely payments. These include smoothening of timing differences between payment of
interest and principal on pool of assets and payments due to investors.
6. The transaction structure should be such that the bankruptcy of seller does not affect the
underlying pool but it could not be reinforced in case of massive failures such as in the
financial crisis or 2007.
7. There is no recourse to seller once the underlying pool is sold but the US and other leading
government is enforcing new laws to hold the issuer / seller responsible for the underlying
risks of the original securities.
1
PTC ( Pass Through Certificates)
http://www.investopedia.com/terms/p/passthroughcertificate.asp
http://www.daytradingshares.com/quick_learning/pass_through_certificate_PTC.html
5. Problems/ Gaps in Modern Credit Derivatives (Aftermath of Financial Crisis)
Banks played on the greed and more and more derivatives started to be created without
underlying risk considerations. The credit rating agencies joined the game. This led to the
financial crisis of 2007-09. With the increase in the securitization of the cash flow loans, major
gaps were created between Deal (asset based) and financed amount due to
1. Increase in discount of the receivables for the fear that they will not be collected as was the
case with Home based mortgages.
2. Banks have started to put cap on the amount of loans / exposure to individual firms
Gaps Identification through Stakeholder Mapping ( Reference Banco Sol Class Case)
Traditionally MFI (Microfinance Institutions have been trying to put an independent equity
structure through an SPV (Special Purpose Vehicle). There are 2 prime purpose of putting an
SPV
1. SPV helps in maintaining Equity / Debt ratio good enough to attract 2nd party
2. SPV structure ensures the 2nd party that the SPV will have first right to the receivables in
case of any default or fall back in the whole arrangement.
Advantages to MFI
From an MFI’s perspective, there’s an important difference between securitization and portfolio
buy-outs.
1. While portfolio buy-outs can be conducted only by banks, securitized micro-loans can be
purchased by banks as well as by other institutional investors, such as mutual funds.
2. Existing lenders will also be able to take larger exposures as they now have the tools to
evaluate risk of loan pools and risk-manage exposures on their balance sheets
3. A high-quality MFI can also lower its cost of funding by signaling its quality via the rating
that a securitization carries
4. Securitization and bonds are two different financing structures. Micro-loan-backed securities
represent claims on the repayment cash flows from a specific pool of loans, while bonds
represent claims on the organization that issues the bonds.
Modes of Involvement of Bank – Primarily there are 2 modes for a bank to enter into
microfinance market
1. The bank either enters into a partnership model with these organizations wherein funds
are provided in order to generate micro finance loans for the bank’s books directly
2. Securitize the micro finance portfolios already generated by the MFIs / NGOs, thus, in turn,
freeing up their equity capital and contributing to enhanced generation of micro finance
assets
Mezzanine Level of Involvement of Bank 2 - In both the above mentioned cases, the bank
provides the organizations with financial support at a mezzanine level in order to enable them
offer credit protection on the micro finance portfolios to a reasonable extent. The bank needs to
use a credit rating agency to develop a process to help the bank in securitizing these debts. The
benefits to the MFI in this involvement of bank are
2
Role of a Rating Agency ‐ http://www.icra.in/files/PDF/Pressreleases/March%2022,%202010‐GVMFL‐March‐2010.pdf
http://www.microcapital.org/microcapital‐brief‐share‐microfin‐ltd‐of‐india‐raises‐11m‐through‐non‐convertible‐debentures‐
ncd‐with‐assistance‐from‐standard‐chartered/
6. 1. Parsimonious capital instead of costly capital from existing lenders (even with P2P platform)
2. Unlimited capital from the Money market (with respect to the risk calculated by rating
agency)
MFI
Collateral +
3
Guarantee (X+Y)
(X+Y) Credit
2nd Party SPV 1st Party Investors
(Equity Partners)
Investors
X Credit Y
Equity
3
1. Course Pack – Emerging Market Finance (Case on Micro ‐ Finance)
2. IFMR (Institute of Financial Management and Research)
7. Current Examples of Structuring of MF receivables in India
1. Equitas Deal
MFI - Equitas45
Financer (Non Banking Institution) – IFMR
Securitization – $ 0.96 m
Rating Agency – CRISIL
Transaction Partner - IFMR
Underlying Assets – Receivables of Samruddhi from Loans to farmers for Crop Production
Transaction Structure - Par
The transaction is structured at par
Capital Structure of Securitization
PTC Yield Principal Principal % Expected Legal Rating
Terms (Rs. mn) Maturity Final
(Months) Maturity
(Months)
Series A1 Fixed 125.4 80% 14 20 AA(so)
Series A2 Residual 31.3 20% 20 20 BBB(so)
Cash 18.3 11.7% of n/a 20 Unrated
Collateral issue size of
PTCs
Deal Evaluation
1. The Pass Thorough Credits (PTCs) will be issued by a special purpose vehicle, IFMR
Trust Pioneer I (SPV), set up specifically for the purpose of this securitization
2. IFMR Capital, the sole structure and arranger, also provides mezzanine financing in the
form of an investment in 100% of the BBB(so) rated Series A2 securities
3. The senior tranche of PTCs, rated AA and equal to 80% of the portfolio, will be
purchased by an institutional investor, while the junior tranche, rated BBB and equal to
20% of the portfolio, will be held by IFMR Capital. The junior tranche is completely
subordinated to the senior tranche.
4. Moreover, IFMR Capital as a mezzanine investor in the BBB-rated securities will
improve the overall credit appetite for such assets.
5. Investors in Series A1 PTCs enjoy credit protection in the form of subordination of the
Series A2 PTCs, the cash collateral stipulated for the transaction, and the excess interest
spread (EIS) that is trapped in the structure. Credit protection available to Series A2 PTCs
is in the form of cash collateral and EIS.
4
http://www.equitas.in/PressRelease_9Mar09.html
5
http://dealcurry.com/2010047‐Share‐Microfin‐Raises‐Rs‐100‐Cr‐From‐SIDBI.htm
http://www.dnb.co.in/Arcil2008/Securitisation%20in%20India.asp
8. 2. Bhartiya Samruddhi Finance Limited (Samruddhi)
MFI - Samruddhi, established in 1996
Banks - ICICI Bank, HDFC and IFC- Washington
Securitization – $ 0.96 m
Underlying Assets – Receivables of Samruddhi from Loans to farmers for Crop Production
Transaction Structure - Par6
Deal Evaluation
1. Excess spread collected from the receivable is used in the following activities
a) Paying Collection agent for collection cost (Samrudhi in this case)
b) Guarantee purchase by Bank Consortium for 15% collection
2. Risk Reduction and Disciplining of MFI
All the payments to MFI were kept in an account hypotheticated to one of the partners in the
banking consortium (ICICI in this case). Hence, the MFI had a strong incentive for being
disciplined and diligent in its operations.
3. The banks consortium showed high confidence in the underlying assets as they accepted the
par structure where the default or prepayment of higher interest rate loans in the pool will
reduce the excess interest spread (EIS) if available in the form of credit enhancement
6
1. http://www.careratings.com/Content/CreditRatings/Securitisation1.pdf
9. 7
4. Share Microfin Limited (Share) Deal
MFI - Share (Largest MFI of India)
Banks - ICICI Bank
Securitization – $ 4.9 m8
Underlying Assets – Receivables of Share from Loans to farmers for multiple agriculture
purposes
Transaction Structure - Premium9 (Default or prepayment of higher interest rate loans in the
pool will lead to premium loss)
Deal Evaluation
1. The bank calculated NPV of the $4.9m by using WACC based on the risk computed by the
internal departments for Credit risk management. Later an agreement was reached with MFI
and independent 3rd party rating agency.
2. Risk Reduction and Disciplining of MFI
a) Partial Credit Protection by a guarantee from Share (MFI) to ICICI for 8% of
receivables
b) Since, the transaction was a premium, bank (ICICI) settled for lesser guarantee than in
case of Samrudhi (15% = nearly double of 8%)
7
http://www.sharemicrofin.com/resouces.html
8
http://dealcurry.com/2010047‐Share‐Microfin‐Raises‐Rs‐100‐Cr‐From‐SIDBI.htm
9
1. http://www.careratings.com/Content/CreditRatings/Securitisation1.pdf
10. Some famous examples of structuring of MF deals outside India
1. BRAC (Bangladesh Rural Advancement Committee) Deal10, 2006
MFI – BRAC, the largest national Non-Government Organization (NGO)
Bank - Citigroup, RSA Capital (Bangladesh),FMO (Netherlands) and Kiwi (Germany)
Securitization - US$180 million (Term Period 0f 6 years)
Rating Agency – CRAB (Credit Research Agency of Bangladesh)
Deal Evaluation
1. 150% collateralized by micro-loans, at the beginning of the transaction (approx. 400,000
loans to cover each US$15 million issue)
2. AAA rated
3. In the initial tranche of US$15 million in equivalent BDT, (a) FMO has directly invested
US$5 million, (b) Citibank has funded US$5 million against FMO guarantee, and (c) the
remaining US$5 million has been syndicated (participated by Citibank and two other local
banks).
4. Initial pool selection has been done using software developed by MF Analytics (U.S.), which
generates a pool similar in key parameters to the total loan portfolio of BRAC. The
securitized pool is a “sub-portfolio”, which reproduces characteristics of BRAC’s total loan
book and hence it is diversified across product type and geography
5. The transaction has no direct credit enhancements, but it is over collateralized with micro-
loans to achieve a higher credit rating
6. Due diligence was supported by the fact that BRAC has received “The CGAP Award for
7. Financial Transparency” demonstrating high level of MIS reporting systems, Audit and
Controls, and data available in various segments that facilitate analysis and decision-making11.
10
http://www.alliancemagazine.org/en/content/case‐study‐brac‐launches‐worlds‐first‐microcredit‐securitization
11
http://www.themix.org/sites/default/files/MBB%2014%20‐%20Building%20Domestic%20Capital%20Markets.pdf
http://www.microcapitalmonitor.com/cblog/index.php?/archives/544‐BRACs‐USD‐180mn‐Microfinance‐Securitization‐wins‐
Recognition‐from‐International‐Financing‐Review‐Asia‐and‐CFO‐magazine.html
11. 2. BOLD 2 (BlueOrchard loan for development 2))
MFI – BRAC, the largest national Non-Government Organization (NGO)
Bank - Morgan Stanley and BlueOrchard finance
Securitization - US$100 million CLO (Collateralized Loan Obligation for a Term Period 0f 5
years)
Rating Agency – Unrated (Ratings taken only for various tranches)
There seems to be mismatch between the various tranches offered to rating agencies. Hence,
information is not transparent.
3. Banco Compartamos SA ‐ Still exploring details.
Negative evaluations by rating agencies had been rejected by the MFI. Hence, there is a lack of
transparent information about the parties and deal.
4. Credit Ease Fixed Income Ltd.
Only results used to get general idea. Details of the same are excluded from this research paper
due to some confidentiality issues.
Future Course of developments
1. Consolidation12 ‐ With the increase in competition the small players will not be able to
match the scale and efficiency of the big players. Also, this will limit their ability to attract
capital at lower cost. Kiva has already crossed $100 m loan portfolio and some of the other
big companies are also approaching massive scales. The global microfinance sector has nearly reached
US$30 billion in asset size reaching 130 million clients worldwide
2. Integration of Bidding based P2P systems13 is increasing with traditional MFI’s.
3. The market for securitized micro-loans is much larger than the market for portfolio buy-outs,
and this can ultimately lower MFIs' cost of funding. Via rated securitizations, microfinance
can now become an “asset on its own merit.”
4. Escaping from current conservatism of rating agency - The level of credit enhancement for
the current securitization is relatively high. It is very premature to compare securitization
with other sources of funding for MFIs as micro loans represent a new asset class and thus
lack a track record.
5. Due to the recent financial crisis, rating agencies are conservative. Hence the large amount
of credit enhancement is evident in the current deals. As more micro loan securitizations are
done, and these securities build a track record, the level of credit enhancement is expected to
decrease. And as confidence in the asset class builds, demand from investors will grow,
which will also lower MFIs’ cost of funding.
12
http://www.microfinancefocus.com/news/2009/11/05/kiva‐microfinance‐loans‐touches‐100‐million/
13
http://www.micrograam.com/showUserHome.do?method=searchProjectsInGrid&status=open
http://www.microfinancefocus.com/news/2010/03/12/micrograam‐e‐bay‐of‐microfinance‐launches‐online‐marketplace/
12. B. Charity Funds
Research by exploring existing securities and Charity products/derivatives being marketed
especially in developed countries
There are certain instruments which provide an investor in a developing country to make an
investment in Charity related activities. In this sector we will explore and provide an overview of
the instruments available today.
1. World Bank Global Bonds
The world’s largest institutional investor in the sector of social development, the World Bank,
issues global bonds through its subsidiary, the International Bank for Reconstruction and
Development (IBRD). The investor is aware that the proceeds will be utilized for international
development by the investing, debt providing activities taken by the World Bank. With an
excellent AAA credit14 it is the safest and easiest form of investment for charitable causes. The
World Bank has issued Green Bonds which are issued to finance the activities which are
environmentally conscious, and prevent global warming. The feature of these bonds is that they
rely on the credit worthiness of the World Bank, and are not linked to specific projects.
2. Vaccine Bonds
Although very similar to the World Bank Global Bonds, there are some bonds which are tied to
specific causes or deeds. A successful instrument is the “Vaccine Bond” which was successfully
marketed in Japan by HSBC Securities, Mitsubishi UFJ Securities and Daiwa Securities. The
issuer of the bond is the International Finance Facility for Immunisation (IFFI)15. The proceeds
of the bonds issued are used solely for the purpose of financing the activities of the GAVI
Alliance 16 , a public-private partnership of major stakeholders in immunization, to promote
immunization in developing countries. This bond structure enables investors to support
“charitable” deeds which are visible to the investors, with the credit support of cooperating
governments. However, the credit is derived from the credit worthiness of the supporting
governments, and not the profitability of the immunization activities, which is basically the same
story with the World Bank Global Bonds.
3. As a product of private banking (provided by RBS Coutts)
The English private bank, RBS Coutts, provides investment opportunities to its clients.
14
The bonds are supported by the 187 government members, including the United States, Japan, UK, France and Germany.
15
The IFFI was launched in 2006 due to the initiative of the United Kingdom Government. IFFIm is also supported by France,
Italy, Spain, Sweden, The Netherlands, Norway and South Africa who have together pledged to contribute US$ 5.3 billion to
IFFIm over 20 years. This strong financial base enables IFFIm to have a triple‐A rating from the three major rating agencies. IFFIm
raises finance by issuing bonds in the capital markets and so converts the long‐term government pledges into immediately
available cash resources. The long‐term government pledges will be used to repay the IFFIm bonds.(From the website of IFFI:
http://www.iff‐immunisation.org/01_about_iffim.html)
16
It includes developing country and donor governments, the World Health Organization, UNICEF, the World Bank, the vaccine
industry in both industrialised and developing countries, research and technical agencies, civil society organisations and the Bill
& Melinda Gates Foundation. Since it was launched at the World Economic Forum in 2000, GAVI has prevented more than 3.4
million future deaths and helped protect 213 million additional children with new and under‐used vaccines. (http://www.iff‐
immunisation.org/supporting_gavi.html)
13. According to their website17, “Our experienced charity investment team works with high net
worth donors, trustees and charities. Taking into account your objectives, we will help to devise a
robust and truly bespoke investment strategy that will enable you to grow your assets, and
maximize the impact of your charitable activities.” However, there are no structured products
provided, which means this service is tailor-made and not a generic conventional product which
can be marketed and traded in the securities market.
4. Charity Notes
Credit Suisse provides a structured derivative product with a charitable aspect added on called
Charity Notes18. According to the Credit Suisse website, “The Charity Bonus Note is a structured
derivative with capital protection. It is based on a global portfolio of 20 underlying equities that
Credit Suisse analysts expect to increase in value. In addition, an annual amount of 1% of the
nominal value of the Note is paid to the charity Symphasis each year. Even if the overall
performance of the portfolio is negative, the investor receives repayment of at least 100% at
maturity.” The Symphasis Charity is a fund set-up by Credit Suisse, and is the social
development arm of the Credit Suisse group. This investment instrument utilizes a portion of the
entire fund to be donated to charitable activities within Switzerland, but the payment risks are not
related to those activities.
b) How can charitable derivatives be converted / used in to Micro-Finance based
securities of emerging markets?
As we have studied in the previous section, the risk of the charitable activity and the payment
risk of the investment instrument are disconnected. A structure has been set-up that either (a)
there is an issuer with good credit and the project risk is totally disconnected with the risk of the
issuer, or (b) a certain amount is set aside from the original fund and is used to make a donation
into charitable activities. In other words, the risk of the charitable or social development aspect is
totally disconnected. However, there are ways we can utilize these structures to support the fund
raising activities of MFIs.
Credit enhancement from Multi-Lateral Agencies
One way to make CPs viable is to involve creditworthy Multi-Lateral Agencies (MLAs) into the
structure, relying on the MLA’s credit. MLAs are financial institutions founded for the purpose
of development of certain regions. Candidate MLAs are, the Inter-American Development Bank
(IDB) for Latin and South America, African Development Bank (AFDB) for Africa and the
Asian Development Bank (ADB) for Asia. As described in section A. above, it is very important
for credit support for marketable securities, but it will be very difficult for specific institutions to
provide credit for the issuance of these securities. No recourse is an important factor for financial
institutions since the control of the balance sheet is extremely important under the Bank of
International Settlement (BIS) Basel II regime. Micro-Finance Receivables (MFRs) which are
highly diversified are may be sufficient in terms of risk-taking, however, a credit worthy
supporter will make these products marketable in developed markets.
17
http://www.coutts.com/private‐banking/charity‐services/charity‐investments/
18
https://www.credit‐suisse.com/news/en/media_release.jsp?ns=39556
14. However, if MFRs are wholly guaranteed by MLAs, they will be indifferent from MLA issued
bonds, therefore, there must be a differentiator factor in order for the MLAs to accept providing
credit support. We think that the risk sharing concept will be the key. To be specific, the MLAs
will provide a 90% guarantee, and the remaining 10% risk will be borne by the certificate holder.
Under these terms, we believe these products will be both accepted by the investor and the MLA.
Please refer to Exhibit B1 for the structure of this transaction. An important feature of this
structure is that the MFI will sell the receivables without any recourse, and can convert the
receivables to cash for further lending.
(Exhibit B)
Involvement of MFI supporting funds
There are some Debt Providing Funds (DPF) to MFIs set up by charity foundations and financial
institutions. The main purpose for these funds is to provide loans to MFIs and indirectly lend to
microfinance borrowers. However, we propose that these DFPs not provide loans but actually
purchase securitized assets from MFIs. The biggest difference from the DPF’s perspective is that
they are not taking the corporate risk of the MFI. They are actually taking the diversified risks of
the obligors. If the DPF are already taking the risks of MFIs, then they shall take it in the forms
of securitization. In the future, if the MFIs have a good track record, and the DPFs are receiving
stable payments from the obligors, it will be a good sign for investors other than DPFs to enter
this sector and invest in receivable backed securities. In the world of finance, track record is very
important. There are many institutions which are very hesitant due to the reason of no track
records. Therefore, in order to develop the micro-finance based asset backed securities market
viable, DPFs are the best front-runners in this sector.
Introduction of DPFs.
DEXIA Micro-Credit Fund (DMCF)19
According to the Blue Orchid Website, the DMCF is described as “The DMCF is a Luxembourg
investment company dedicated to direct debt financing of microfinance programs worldwide.”
BBVA CODESPA Microfinance Fund20
19
http://www.dexia.com/e/discover/sustainable_funds2.php
20
http://www.blueorchard.com/jahia/Jahia/pid/464
15. The Blue Orchid website introduces this fund as “Launched by the Spanish bank Banco Bilbao
Viscaya Argentaria (BBVA), this fund invests in microfinance institutions located in Latin
America, providing them with loans in the respective local currencies whenever possible. The
aim of the fund is to promote sustainable development across Latin America by enabling greater
provision of basic financial services to boost the activities of micro-entrepreneurs.”
c) How can charity be leverage for increasing the scale/fund raising of micro-finance?
In the U.S.A. and the U.K., charity donations are tax exempted, so this is an advantage for fund
raising. However for the purchase of asset backed securities of MFIs, this is a gray zone area,
and regulatory authorities must make regulations clear so that “Charity related investments” are
tax exempted. Other than the tax exempted aspect, I believe there is no concrete reasoning how
charity can leverage the fund raising of micro-finance. One idea is that the government imposes
regulations for companies to spend a certain ratio of their costs or profits for charitable activities,
and of course microfinance is one option.
16. C. Regulations
D. What are tax benefits for investors in investing into charitable funds?
The laws regulate the tax benefits principles and intensify tax supervision. The fund can be
supported and supervised by tax. Tax reduction and tax-free comprise the measurement for the
fund development. Some developing countries have the laws which regulate that foundation,
donors and beneficiaries have the right to enjoy tax benefits. Investments in charity fund are tax
deductible expenses. These investments can reduce donors’ taxable income and lower their tax
bill.
If someone itemizes deductions on his or her tax return, he or she may be able to take an income
tax deduction for a gift to a qualified charitable fund. The actual cost of his or her donation is
therefore reduced through his or her savings on his or her taxes. For instance, if you are in the 33%
tax bracket, you would save $33 on a donation of $100. 21 However, the investment in the
charitable funds has the amount limitation. If someone donates more than 20% of his or her
adjusted gross income to charity funds, he or she has to consult with the tax advisors to see the
amount of tax deduction.
E. Are there some regulatory hurdles?
In most developing countries such as China, the laws need to be completed in investment in
charitable funds because of the start of charitable funds. The tax benefits policies are scattered in
many laws or relative files. Sometimes, laws have the problems in implementation. For example,
in China, the preferential policies have not been fully executed. Only 10 the state charitable
funds have the rights to conduct tax deduction, but the local funds aren’t authorized to conduct
tax deduction. This hinders the incentive of charity power. Some developing countries’
governments push, advocate and lead the development of charitable funds’ policies and make the
public investment in charitable funds. That leads to the unclear charitable responsibilities.
In western countries, corporations belong to juridical association and charitable funds belong to
consortium as a juridical person. They are in the same level. That means that the charitable funds
are the separated operators and they cannot be administrated by governments and corporations.
But in such developing countries as China, they haven’t set up the concept of the consortium as a
juridical person. Almost all of the charitable funds are managed by corporations without
independence. Moreover, the governments intervene the charitable funds.
c) What are the regulatory mechanisms required for sustainable Micro-Finance models?
Investment and running in the charitable funds play an important role in the development of the
charitable funds. The laws must define the open, transparent principles and improve supervision
management mechanisms. The charitable funds must have the policies for their charity, record it
clearly writing, and keep it under regular review- if they have delegated their investment
function to an investment manager these are legal requirements.22
The regulations must address the following considerations: enough resources for the charity to
carry out its present and future activities effectively; the level of acceptable risk and how to
21
http://nonprofit.about.com/od/fordonors/tp/taxdeductionsforcharity.htm
22
http://www.charity‐commission.gov.uk/Publications/cc43.aspx
17. manage it. The charitable funds must invest in diversification, i.e. having different types of
investment, and different investment within each type. This will reduce the risk of losses
resulting from concentrating on a particular investment.
The laws require the charitable funds to accept the annual audit and the supervision from the
taxation department. The annual working report must be published through mass media and
charitable funds must accept the supervision and investigation from the society. The charitable
funds must make the public know the future public benefit activities and the detailed fund-using
plan. The laws should focus on the establishment of internal regulation mechanism. The
charitable funds can set up the institutional framework. The regulation must determine the
taxation benefits and intensify the taxation supervision.
18. D. Partners
a) How can NGO's be leveraged to sell microfinance based securities?
b) How can existing firms be leverage to sell MF Securities?
Today, microfinance is developing to be a worldwide movement. As an effective weapon against
poverty and hunger, microfinance has been changing people’s lives for better. Not through
charity but providing loans to the poor.
Today, China is the home to microfinance institutions. Major actors include NGOs and
international organizations such as the United Nations Development Program, government
agencies such as the Agricultural Bank of China and Rural Credit Cooperatives (RCCs). They
all operate with different guidelines and goals.
While other countries are more open to accept international services, nongovernmental
organizations within China currently do not have any legal standing to provide small loans, yet
often operate with temporary licenses issued by the national government. For NGOs and
international organizations such as the UN, the capital is raised through private sources and
governmental funding. Strict restrictions on operations in China, however, often undermine the
19. effectiveness.
State-own banks and agencies are driven by policy considerations, leading to microfinance
operations tend to resemble welfare sponsors. In hunger of profitability, the country’s largest
banks, such as the Bank of China and China Construction Bank, have largely withdrawn from
rural operation. Currently, the Agricultural Bank of China (ABC) is the only national
government institution which has ventured into small financial services. Yet, because the banks
remain controlled by the state, project sustainability is disregarded for political considerations,
leading to excessive project failures.
RCCs have been a fixture in rural since the 1950s. From the1970s to the mid 1990s, the RCCs
were under the control of the ABC, later under the direction of the People’s Bank of
China. Since June 2003, control of the RCCs has been transferred to provincial governments,
leading to their transformation into rural commercial banks. RCCs provide most financial
services to the rural sector with 85% of China’s agricultural loans. The institutions provide
credit to rural entrepreneurs remain bogged down under unclear regulatory frameworks and
inadequate loan control. According to a survey, the RCCs have a non-performing loan ratio of
44%.
In a shift for the government, lending between citizens was legalized in March 2009. Once
underground lenders, previously operated outside any legal framework yet provide an estimated
two trillion RMB in loans a year. A 2008 survey claims that about 69% of rural households in
eight provinces had borrowed from private lenders, many of them are ineligible to borrow from
anywhere else. Private lenders often place very high interest rates on their loans—poverty
alleviation is not their goal.
.
The problem in China is that the demand is not yet being met, not because it is too big, but
because the market is not open. In the rural, there are few financial options. In order to solve this
problem, the market has to be opened and new financial institutions are needed to place loans to
rural areas.
One popular provider of microfinance loans are Non-governmental organizations (NGOs).
NGOs normally conduct value formation seminars and entrepreneurial skills training for those
people who are prospective borrowers of funds. Commercial banks do not offer this kind of
services to poor borrowers. Microfinance loans are approved fast. These small loans do not often
meet the commercial banks requirements on borrowers’ cash flows. The poor borrowers do not
need to go to commercial banks, wait for long periods in the banks. These are psychological
costs that the poor borrowers do not incur if they borrow from an NGO in the countryside. Poor
borrowers prefer NGOs to commercial banks. The NGO credit service is more customized, with
more intensive supervision and monitoring of the utilization of funds.
There are cases where donor agency or government absorbs some of the costs of credit for the
poor, so-called subsidized interest rates. In these cases, the microfinance programs distort the
market and generally suffer, low repayment rates, limit growth and institutional dependency.