risk management and microfinance: in search of market failures · 2017-12-08 · risk management...
TRANSCRIPT
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
Risk Management & Microfinance
Access to Private Capital Agenda
USAID/MD
Thomas Debass
Laundry List of Risks
• Portfolio
• Foreign Exchange
• Institutional/Management
• Regulatory
• Political
• Inflation
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
Analytics, Ltd.
July 16, 2008
Connecting MFIs to Capital Markets Risk Management Toolkits and the Road to Financial Sustainability
Background | Current Situation
6
Significant Current and Future Demand
# microcredit loans has grown 39% / yr since 2001
100 million current borrowers; 1 billion in total
demand
Estimated funding need = USD 275 billion
Penetration rates in India, Nigeria and Brazil < 3%
Sources: CGAP, Deutsche Bank, The Microfinance Bulletin
Increasing Supply
Most MFIs that access capital markets do so
indirectly via MIVs
2005-2006: MIV investment levels doubled,
reaching USD 2 billion in 2006
Over 80 MIVs are in operation, with USD 3 billion
under management
4
17
25
0
5
10
15
20
25
30
2001 2005 2006
USD
bn
Volume of Microloans
250
25
Microfinance Funding Gap (USD bn)
Untapped demand
Current Supply
1
2.5 0.64
2
0
1
2
3
4
5
2004 2006
USD
bn
International Investments
Private Investors
DFIs/IFIs
Background | Understanding Risk
7
Tier 1: ~ 2% of MFIs
Tier 2: ~ 8% of MFIs
Tier 3: ~ 20% of MFIs
Tier 4: ~ 70% of MFIs
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
300-400 Tier 2 MFIs’ ability to absorb private investment
are hobbled by lack of accurate loan portfolio detail
Sources: CGAP, Deutsche Bank, The Microfinance Bulletin
Why Risks Aren’t Accurately Measured:
Non-standardized definitions of risk parameters
Rush to gain market share
Huge portfolio growth hides early warning signs
Dearth of risk management tools
Microfinance Banana Skins 2008 Notes:
Systematic lack of recognition of the urgent need for
deep risk analysis
Background | Information Issues
8
Organization Use of Portfolio Information
MFIs and SMEs
• Internal risk management
• Identification of top revenue generating products and
market segments
• Loan office and loan officer performance
DFIs and IFIs • Institutional sustainability
• Prevention of mission drift
• Exception reports
Regulators • Systematic risk assessment
Investors • Profitability
• Fiscal sustainability
• Investment risk
Policy Makers and
Academics
• Systematic risk assessment
• Policy recommendations
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.
Value Proposition | Why PAES?
9
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 The PAES Difference
MFIs and SMEs
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
DFIs and IFIs Track financial performance, outreach, and sustainability of all institutions they
have a vested interest in
Regulators Attain a system-wide view of MFI & SME sector performance, and can track
effects of regulatory changes
Investors Receive a comprehensive financial & portfolio level performance report that can
be viewed over time and compared to their peers
Policy Makers and
Academics
See the macro-picture and carry out value-added research that ties in institutional
performance with the larger socio-economic environment
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.
10
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.
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
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
12
www.cygmafinancial.com
Hedging Foreign Exchange Risk
in Microfinance
USAID After Hours Seminar on
Risk Management and Microfinance
Washington, DC - July 2008
www.cygmafinancial.com
Investing in Dollars
3 soles /
dollar
PEN 3,210 PEN 3,000
3 soles /
dollar
USD 1,000 7.0%
TODAY IN ONE YEAR
USD 1,070
FX
Risk
www.cygmafinancial.com
Investing in Nuevo Sol
PEN 3,000
3 soles /
dollar
USD 1,000
TODAY
3 soles /
dollar
USD 1,070
IN ONE YEAR
PEN 3,210 7.0%
FX
Risk
www.cygmafinancial.com
Hedging Foreign Exchange Rates
10.5%
Forward
Rate:
3.1
soles /
dollar
PEN 3,315 PEN 3,000
SPOT:
3 soles /
dollar
IN ONE YEAR TODAY
7.0% USD 1,000 USD 1,070
www.cygmafinancial.com
Benefits of Local Currency Funding
Hard Currency Loan
Pricing Often Doesn’t Fully
Consider the Currency
Risk Component
Currency Risk
Credit Risk
Loan
Spread
Eliminated
Through
Hedge
Hedging Local Currency
Identifies the FX Risk
Component
Credit Risk
Cost of FX
Hedge
Loan
Spread
Currency Risk
www.cygmafinancial.com
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)
Limited Market
(e.g. Indonesia, Peru)
No Market (e.g. Uganda,
Honduras)
Provide hedges in currencies where a market doesn’t
exist
Provide indications (40+ currencies)
Advise on hedging structures within market
constraints
Provide hedges that exceed the tenors available in
markets
Establish trading relationships; facilitate the execution
process
Consolidate deal flow to attract bank interest
www.cygmafinancial.com
Cygma offers a suite of hedging services
tailored to the microfinance industry
Portfolio Assessment
and Planning
Loan-Level
Planning
Loan Closing
through Maturity
…and expands to include a broad range of services.
– 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
– 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
– Run auction / negotiate price
– Assist with currency delivery
– Provide ongoing hedge
valuations
– Assist with repatriating
interest and principal
payments.
– Assist unwinding trades
www.cygmafinancial.com
Thank You
For more information, please contact us at
+1 484 731 0199 or [email protected]
Thank you!
A screencast of this presentation will be available
shortly at www.microlinks.org/afterhours