Download - p2p microfinance presentation before Kiva
Broadbasing Investments in Microfinance
Tapping an eBay® like marketplace (with PayPal®) to sustainably deliver lower cost capital to Microfinance Institiutions
DRAFT(Please send comments to [email protected] and
About the qualified entrepreneurName: Puja PatelLoan Amount: $80Purpose: Fish net for income generation
About the NGO administering the loanLocation: Gujarat, IndiaAvg Repayment Rate: 97%Website: www.microfinance-ngo.org
Powered by
Fund a micro-business – help uplift the working poorCategory: India > Gujarat State > Fishing Industry
2
Contents
• Exec Summary
• The Opportunity
• The Concept
• Information Requested from MFIs
• Appendix
3
Executive Summary
PROBLEM STATEMENT1. In the last 30 years, Microfinance Institutions (MFIs) have successfully lent
billions in working capital to the world’s poor
2. However, MFIs reach only a fraction of the qualified loan seeking poor worldwide and capital is one of the biggest constraints to growth
3. In the West, the story of microcredit continues to grow in popularity, but this broadbased interest is not effectively tapped to source low cost capital for MFIs
PROPOSED SOLUTION1. Create an eBay like marketplace that allows internet users to find and fund (an
MFI approved) micro-entrepreneur
2. Utilize PayPal to cost-effectively aggregate donations and mini-loans ($<200), to eventually fund low cost MFI bulk loans. Also, use PayPal to remit funds back to internet lender.
3. Leverage existing MFI processes (borrower screening, disbursement, collections, etc) to keep new overhead cost low and lender repayment rates high
4
Contents
• Exec Summary
• The Opportunity
• The Concept
• Information Requested from MFIs
• Appendix
5
Background: Microfinance by the numbers…
Poor people in developing countries use small loans to generate more
income
Microfinance Institutions
(MFIs)
Organizations in developing countries that administer loans to poor people
MicroFinance Institutions (MFIs)
Poor People (Borrowers)
Loans
Repayments
Borrowers to date30 mm
Potential worldwide 300 mm($300 B)
Typical loan $10-200Repayment rates > 95%
Interest rates 10%-60% (alt is Loan sharks 100-1,000%)
Loans to date $50 B
Total MFIs worldwide~10,000
Growth rate ~30%
MFIs Positioned for commercial capital ~100
Cost of capital 8-20%Avg ROA 2.5%2
2 MicroBanking Bulletin
Poor People
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MFIs: Capital is a major constraint to growth
• Capital is key for MFI expansion1
– World Bank asked 140 MFIs to rank the following constraints to growth:
• Lack of funds• Lack of infrastructure• Government regulations• Weak systems• Lack of staff• Lack of market
– “Lack of funds” ranked highest
• Demand significantly outstrips supply2
– Estimated Demand = $300-700B– Estimated Supply = $4B
• Cost of capital is expensive3
– South Asia Estimate: 13 – 15%– Global range: 8 – 20%
1. CGAP / MIX Study on MFI Demand for Funding, 2004 (Ivatury). 2. “Tapping Financial Markets for Microfinance” Grameen Bank USA Paper, Jennifer Meehan3. Microcredit Interest Rates in Bangladesh: ‘Capping v Competition’ David L. Wright. Data above is author’s averages for all of South Asia.
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Average Cost ofFunds
AdministrativeExpenses
Loan Losses DesiredCapitalization
Rate
Final BorrowerInterest Rate
14%
20%
2%7%
43%
MFI Borrower Interest Rate Composition
Average across South Asia
(6 = highest / 1 = lowest)
7
Donors: Need an affordable way to give that feels personal and results in something sustainable
Traditional Charities(e.g. United Way)
Affordability: High (any donation accepted)
Sponsor a child / Adopt a “XYZ” Programs
(e.g. Save the Children) Affordability: High ($17 / month)
Ways To “Do Good” with Your Money: Opportunities Landscape
Socially responsible shopping
(e.g. Girl Scout Cookies)Affordability: Medium (some premium)
Donation (I give and get nothing
tangible back)
Investment (I give and get something
tangible back)
Personal(I feel like I’m supporting a specific person)
Institutional (I feel like I’m supporting an organization)
Microfinance Investment Funds(e.g. Unitus, Blue Orchard)
Affordability: Low ($10-50k minimum investment)
Open space for giving
opportunity that is• Personal• Affordable• Sustainable Results
Affordability (Number of people who can participate)
circle size =
(“teach a man to fish…”)
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Contents
• Exec Summary
• The Opportunity
• The Concept
• Information Requested from MFIs
• Appendix
9
The Concept: A Microfinance “Trading Floor”
MFIs/FundsIndividuals
Loans
Repayments
MicroFinance Trading Floor
Loans
Repayments
Provide an online marketplace where
individuals can easily find and invest in MicroFinance
Short term:• US donors• US social
investors
Long term:• Traditional
investors worldwide
Short term:•MFI Funds•Unregulated MFIs
Long term:• Regulated MFIs
• Individual borrowers (?)
Short term:•Facilitate
• Donations• sub-market rate
loans
Long term:•Facilitate
• market rate loans• securities trading
Investment Listings (all intermediaries &
all worthy MFIs)
DonationsIndividual investors
Microfinance Institutions
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The mechanics Sample timeline for a single batch of borrowers
Day 1:
•MFI approves a batch of borrowers for a loan
•Disburses loans
Days 91 - 100:
•We send MFI a single bulk loan check
•MFI deposits check in reserves2
.
End of 1 yr loan term
•MFI repays bulk loan in local currency
•Funds deposited to our local bank account; available to fund a future MFI batch if sufficient sponsorship
•Internet lender receives final mini-repayment
Day 3:
•We post each borrower’s profile on our website1
Day 2:
•MFI emails us basic data on each borrower
Days 4 - 90:
• Internet users select individual borrowers to fund
•Funds aggregated in a U.S. PayPal account
About the qualified entrepreneurName: Puja PatelLoan Amount: $80Purpose: Fish net for income generation
About the NGO administering the loanLocation: Gujarat, IndiaAvg Repayment Rate: 97%Website: www.microfinance-ngo.org
Powered by
Fund a micro-business – help uplift the working poorCategory: India > Gujarat State > Fishing Industry
During 1 yr loan term:
•MFI emails us periodic repayment reports for the original batch of borrowers
•Based on repayment report, we regularly update website and remit mini-payments to lenders via PayPal3
Notes:1. Photos are often part of the MFI loan application. If needed, we can provide a digital camera or scanning equipment. If obtaining photos is an issue, a generic photo of the asset will work (e.g. sewing machine).2. At this point, the MFI has already disbursed loans to this batch of borrowers (and have likely started collections). Our bulk loan – which costs significantly less than the MFI’s average cost of capital -- can be used at the MFI’s discretion (e.g. pay down expensive debt, hire staff, lend to more borrowers, etc).3. The funds for the periodic mini-repayments will be sourced from incoming funds sent by internet users sponsoring the next batch of borrowers. These funds will be guaranteed by the repaid bulk loan from the previous batch.
“After 6 months, this borrower has already repaid >60% of the loan!”
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The potential to deliver significant low-cost capital is high
• Low financial commitment – A micro-loan typically requires $100 - $200 and is very likely (+90%) to be repaid in full. For most loans, the total cost will be <$10 in lost interest.
• High bang for the buck – Access to a relatively small amount of cash (especially given the dollar’s strength) can change someone’s life in the developing world.
• Personal connection – Lender learns about a borrower (akin to “Sponsor A Child” charities) and knows exactly who their money is helping. More difficult with larger charities.
• Philosophical appeal – Microcredit’s ‘market centered’ / ‘teach a man to fish’ approach is hard to find in other charities and is an important factor for many business-minded donors.
• Profile – Internet enabled, middle class individual interested in a smart, easy, low-cost way to participate in sustainable global poverty reduction.
• Large number of people – Since the required financial commitment is low and internet adoption is high, the pool of prospective lenders is huge.
• Can be reached with low cost – The uniqueness and simplicity of “Make a loan to a poor entrepreneur in the developing world” makes it ideal for word-of-mouth and email based marketing. Promotion in conjunction with eBay (TBD) could also drive lender interest.
• PayPal – Allows anyone with an email address to make or receive a payment with minimal transaction costs. Will be used to collect funds from internet donor/lenders and well as to disburse loan repayment.
• Email & Excel – All exchange of borrower information will be conducted via email and Microsoft Excel
• Digital Photography – Digital photos of the entreprenuer or the asset to be purchased will enable a more personal giving experience.
Unique value proposition (vs. typical charitable
opportunities)
Internet “micro-donor/lenders” are a
large, reachable segment
Popular technologies
can be leveraged to keep admin / transaction costs low
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Resource requirements for the MFI can be low
Task 1: Provide borrower data
Task 2: Provide borrower photo (optional)
Task 3: Provide borrower repayment updates
Description • Select a batch of recently funded borrowers
• Gather the following data– Name– Loan purpose– Loan amount
• Transmit data to us by– Email in Excel or– Post in paper form
• Obtain individual photos for the batch of borrowers
– If photo is already part of each loan application, this works best
• Transmit data to us by– Email (digitally) or– Post in paper form / will
be returned via DHL
• Gather repayment data for that batch of borrowers
– Name– Amount repaid to date
• Transmit data to us by– Email in Excel or– Post in paper form
Resources required • Info from loan application • Photo of borrower• Note: A digital camera or photo scanner can be provided free of cost
Repayment information per borrower
Required MFI bandwidth
Low; if info is captured as part of loan app and entered into MIS
Low; if digital photo exist
Low; if photos can be mailed (we will scan and return)
Low; if info is captured periodically and entered into MIS
Frequency Once (done at the beginning) Once (done at the beginning) Monthly or Quarterly
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Execution Plan
Stage 1: Brochureware• Incorporate• Build brochure-ware• Build coalition of supporters• Close first round of funding• Start SEC Compliance process
Stage 2: US Based Lending• Create templatized listing engine• Enable PayPal transaction engine• Complete SEC Compliance Process• Form partnership with “role-model” US based Funds• Run pilot• Launch consumer-facing loan service
Stage 3: International Lending• Sign up more US based MF Funds• Expand service to international MFIs• Private label with 1 brokerage
Stage 4: Securities trading• Create securities trading capability• Launch securities trading service• Sign up more International MFIs• Private label through many brokerages
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Team
Working Team
Premal Shah, Co-founder
Premal is a Senior Product Manager at PayPal, an eBay company, and has over 5 years of experience building the world's largest online payment service. He has architected a number of key products, including PayPal's ATM/Debit Card (with MasterCard) and credit program (with GE Capital), and has helped lead the company's thinking around reducing transaction costs and improving buyer conversion. Prior to PayPal, he was a strategy consultant at Mercer Management Consulting. Premal has had a long standing interest in development and microfinance. He was awarded a grant from Stanford University to research one of India's largest microfinance institutions, the Self Employed Women's Association. More recently, Premal took a sabbatical from PayPal to work full time at an Indian NGO, where he focused on how eBay and PayPal could be used to generate income for slum women artisans. Premal graduated with a B.A. in Economics from Stanford University.
Tracey Pettengill, Co-founder
As a social entrepreneur, Tracey was most recently the CFO and head of marketing for ApproTEC, a microenterprise organization that designs and sells tools enabling people to escape poverty. Tracey is the founder and former CEO of 4charity, an online marketplace for charitable giving. Previous to 4charity, she executed M&A transactions at Robertson Stephens Investment Bank. While at Stanford Business School, Tracey spent a summer working with Calvert Ventures, the first social venture capital fund, and served as a strategy consultant to the Grameen Bank, the world-renowned micro-lending institution. Early in her career, Tracey was a strategy consultant for Mercer, and before that she worked at the U.S. Committee for Refugees in Sudan, ten miles from the front lines of the civil war. Tracey graduated with a B.A. in Engineering/Economics from Dartmouth College and an MBA from Stanford University.
Advisors (formal board to be created)
Jerry Held Kleiner Perkins EIRElizabeth Funk Unitus Vice-ChairmanTim Oden Schwab Institutional Vice PresidentSarah Leshner Women’s World BankingNandini Pandhi Women’s World BankingDave McClure SimplyHired VP Marketing Aman Verjee PayPal StrategyRobert Chatwani eBay Internet Marketing
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Contents
• Exec Summary
• The Opportunity
• The Concept
• Information Requested from MFIs
• Appendix
16
See MFI Survey
17
Sample MFI Survey Output Cost of Providing Borrower Information
Task 1: Provide borrower dataTask 2: Provide borrower photo (optional)
Task 3: Provide borrower repayment updates
Legal / Accept-able?
Already Captured?
# of hrs req’d for batch of
100
# of hrs req’d for batch of
500
$ wage per hour of
staff member
Legal / Accept-able?
Already Captured?
# of hrs req’d for batch of
100
# of hrs req’d for batch of
500
$ wage per hour of
staff member
Legal / Accept-able?
Already Captured?
# of hrs req’d for batch of
100
# of hrs req’d for batch of
500
$ wage per hour of
staff memberMFI
Name
Sample 1 1 3 1 5 1 1
SEWA
SKS
18
Contents
• Exec Summary
• The Opportunity
• The Concept
• Information Requested from MFIs
• Appendix
APPENDIX
20
Example ‘Microcredit Loan Request’ on eBay.com
Digitial photo of MFI approved loan applicant (helps to establish personal connection)
Key info on the individual loan seeker, purpose, terms, etc*
Description of the MFI (helps to establish credibility)
*This info is already captured as part of the MFI loan application process (no new info is needed)
Note: While eBay may be ideal platform for the pilot phase, an independent website may be more suitable in the longer term unless an eBay category were created.
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MechanicsDetail on how our “Pay as you go” system works
Follow the Money: Funds flow for each batchProposed use of funds to mimimize currency exchange, repatriation and regulatory costs.
J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N
Internet lenders (1) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $U.S. PayPal Account (1) $ $ $Local Bank Account (1) £ £
MFI Reserves (1) £ £ £ £ £ £ £ £ £ £ £ £
Internet lenders (2) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $U.S. PayPal Account (2) $ $ $Local Bank Account (2) £ £
MFI Reserves (2) £ £ £ £ £ £ £ £ £ £ £ £
Internet lenders (3) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $U.S. PayPal Account (3) $ $ $Local Bank Account (3) £ £
MFI Reserves (3) £ £ £ £ £ £ £ £ £ £ £ £
Internet lenders (4) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $U.S. PayPal Account (4) $ $ $Local Bank Account (4) £
MFI Reserves (4) £ £ £ £ £
Key(X) =Batch Number (The process starts when an MFI gives us data on a group of borrowers for our website. That specific group of borrowers is given a 'Batch Number' for identification.)
=Month site launches with borrower profiles$ =Possesion of funds in U.S. dollars£ =Possesion of funds in local currency
Ways to shorten cycle times1) Establish separate fund that allows us to make a local currency loan for the next batch; even when loan from current batch is not repaid. 2) Require MFI to repay loan in installments (vs. bullet payment)3) Shorten period of time needed to allow internet lenders to sponsor all borrowers
Risk scenarios requiring mitigation strategy1) Local currency depreciation vs. dollar2) MFI Default on Bulk Loan3) Failure to attract sufficient internet lenders for next batch
20092005 2006 2007 2008
INTERNAL - DRAFT
22
Current Microfinance Landscape
Emerging MktBanks
Microfinance Institutions
(MFIs)
MFIs(Loan Administrators)
$15B
Borrowers
InternationalBanks
Sources of Capital
Capital
Repayments
Intermediaries $550mm
Loans
Repayments
Capital
Repayments
Capital
Repayments
Guarantee products
Challenge = distributionA secondary market is needed
Venture Funds (Unitus, FINCA)
Private Placements (MicroVest)
Governments $900mm
(80% direct)
Individual Investors
Poor People
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Representative MF Funds
Regional Multi-Regional Global
Legend:Circle size = Fund size Circle color = Debt rate (red = market, green = below market,yellow = equity only)
1
3
2
5
4
67
8
910 11
12
13
14
15
16
17
Debt/Equity
100%Debt
20/80%
80/20%
60/40%
40/60%
100%Equity
Name Size (MM)1 Alterfin 4.12 Accion Bridge Fund 6.33 Accion Gateway Fund 5.04 LA - CIF 15.05 Profund International 21.96 AfriCap 15.07 Accion AIM 18.08 FONIDI 10.79 CORDAID 20.0
10 Hivos - Triodos Fund 12.511 Triodos - Doen Foundation 16.812 Shorecap 15.513 Sorona Global 5.214 Dexia (Blue Orchard) 37.015 Oikocredit 39.016 Calvert 10.217 IMI (IPC) 30.1
Other Funds < $5 Mil. 15.3Total 297.6
Source: Unitus 2003
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Differentiation
Player:
Venture funds (Unitus, FINCA, Accion)
Private placements (MicroVest)
Insurance products (Grameen Foundation)
Rating agencies (MicroRate, MCRIL)
Information services (the MIX, Microfinance Gateway)
Mission:
Raise $ from high net worth indivduals and invest in a small group of high-potential MFIs
Raise debt fund and invest in a portfolio of low-risk, later stage MFIs
High Net Worth individuals can pledge a $ amount to guarantee loans, unlocking commercial capital
Credit ratings (e.g. Moody’s, S&P, Fitch)
Details/data about MFIs
MTF Relationship:
Listed on MTF
Listed on MTF
Listed on MTF
Partnership (TBD): Info provided on MTF
Partnership (TBD): Info provided on MTF
25
Supply of Capital
Individual Investors
Socially screened (SRI) funds = $610B1 - $2T7
1996 Emerging market mutual funds = $43.5B4
Emerging market debt Issuance >$140B/yr5
Donations = $240B/yr6
Current interest in Microfinance = $6B3-$24B2
Desired returns = 0%-15%
1 “Social Investors on the Sidelines” MicroEnterprise Americas 20022 Enterprising Solutions Global Consulting 3 Amy Domini, Domini Social Index Funds4 1996 Data; “US Emerging Market Funds: Hot Money or Stable Source of Investment Capital” John Rea, Investment Co Institute5 2003 S&P Global Fixed Income Research, Thompson Financial6 Association of Fundraising Professionals7 Social Investment Forum
26
From Philanthropic Capital to Commercial Capital
Citigroup/Banamex• $44 million bond issuance to local institutional investors• Peso-denominated proceeds to be used by Compartmentos, a Mexican MFI• IFC (private-sector arm of the World Bank) issued a 34% guarantee on the bonds• Received an AA rating from S&P and Fitch
MicroVest 1• $20 million equity fund raised from accredited investors only• Large direct investments and loans into financial institutions that provide
microfinance to low-income base enterprise• Expect returns of 8-10% ROIC
BlueOrchard Finance • first U.S. dollar-denominated microfinance bonds• seven-year $40 million subordinated debt issue• $30 million credit guarantee from OPIC• yield .55% over Treasuries; 3 junior tranches offer between 1-5% over Treasuries. • Proceeds will help 40,000 microentrepreneurs
Examples of Microfinance Securitizations
27
Value Proposition to Individual Investors
• Education/awareness– Interest is growing (Grameen Bank
success story, etc) – 2005 is the UN ‘Year of Microcredit’– Viewed as a dignified and sustainable
way to uplift the working poor
• Viable investments– MF is emerging as a viable asset class
with market rate returns– A way to diversify portfolio
• Access– currently no way to invest unless you
are affluent – Some MF investment funds are
available (e.g. Unitus, BlueOrchard) but typically require minimums of $10,000 – $50,000
• One-stop shop for information– User-friendly, searchable information (eg
eBay)– Credit ratings– Personal borrower stories (e.g. Sally
Struther’s $17/mo to sponsor a child)
• Easy, efficient way to invest in new asset class
– earn a market rate of return
• Low financial commitment– Typical microloan will be $100-200– Internet technologies (like PayPal),
enable cost effective smaller transactions
– Make available to non-accredited mom & pop investors
Investor Needs Microfinance Trading Floor Solution
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Marketing strategy: Contract with private banks
Investment listings
MicroFinance Trading Floor
Individual investors
Individual investors
Individual investors
Individual investors
MTF intends to contract with existing private banks, sharing the transaction fee, to distribute MF investment products to their mom and pop investors
29
Our Economics
ROI %
0-8%
Individual lender
MTF Funds Final borrower
interest rate
3%
0-30% 10-60%
10%1
MFI admin costs
Current Sources of Capital Private Funds
Venture Funds
Governments/ Bilateral Institutions
Commercial Banks
Cost to MFI
4-12%2
0-10%
15-30%
10-30%
2.5%3
MFI spread
1 Women’s World Banking2 MicroVest expects 8-10%, GrayGhost expects 4-5%3 MicroFinance Gateway FAQs
0-5%
Default rate
DRAFT
30
Listing criteria
Our listing criteria:
Phase 1:
• US based Funds only
Phase 3: Phase 2:
• All Funds • Tier 2/3 MFIs • <5% default rate• MicroRate and MCRIL credit
ratings (like S&P, Moody’s)• Listed on The Mix (MF
Information Exchange)• Ability to report required
metrics• 2 yrs operating history
31
Targeted MFI for Pilot
DRAFT - APPENDIX
SEWA Bank
&
Ahmedabad Self Help Group District Association
32
Background on Indian Microfinance and the example of SEWA Bank / Ahmedabad SHG District Association
• In India, most “microcredit” is done via a government sponsored Self-Help Group - Bank Linkage Program
– A Self Help Group (SHG) consists of 10 – 20 individuals (usually women) living in the same neighborhood. The normal pattern is for NGOs to build groups and then to introduce them to commercial banks.
• Note: These groups are different from the Bangladesh Grameen Bank type of groups, often known as solidarity groups, which facilitate the banking transactions between their members and the Bank but do not actually themselves, as groups, borrow or lend.
– Today, over 1,200,000 SHGs are linked to Indian commercial banks.1 • This is the largest microfinance program in the world in terms of sustainability and outreach
– However, this still accounts for less than 3% of the potential market needing credit. 2 Plenty of work remains to accelerate SHG formation and capacity building.
• SEWA Bank, one of India’s most successful banks in terms of reaching the poor, currently makes bulk loans (@ 18% interest) to the Ahmedabad SHG District Association, an NGO that provides centralized support for 700 SHGs around Ahmedabad (India’s 10 th largest city).
– These funds are then on-lent to SHG Leaders (@21% interest rate).• The 3% (21% - 18%) spread is kept for NGO operations (including building more SHGs)
– When a SHG member wants a loan, it is first discussed and approved at the group level. If the group approves, the SHG Leader disburses funds to the member (@ 24% interest rate)
• The 3% (24% - 21%) interest rate spread is kept to fund a collective savings account• The average loan amount is $150 USD, and is paid back in 12 installments over a year.
Repayment rates are 98%.
1. National Bank for Agricultural and Rural Development (NABARD) Annual Report 20042. V. Mahajan, BASIX, Adapting India’s Financial System in a Globalising World, November 2002
Background: Indian Micro-
finance market today
Example: SEWA Bank &
A’bad SHG District Assocs.
SEWA Pilot Case Study
33
0%
5%
10%
15%
20%
25%
30%
Cost of funds forSEWA Bank (i.e.
avg. interest ratepaid on member
deposits)
Interest ratespread SEWA
Bank captures onbulk loans toSHG DistrictAssociations
Interest ratespread SHGDistrict Assccaptures on
loans to SHGLeader
Interest ratespread SHG
Leader captureson loan to SHGend borrower
Final BorrowerInterest Rate
Breakdown of borrower interest rate: SEWA Bank / Ahmedabad Self Help Group District Association
8%
3%
10%
Spread captured by bank
Spread captured by SHG operations
3%
24%
18%
6%
Inte
rest
rat
eSEWA Pilot Case Study
34
SEWA Bank / Ahmedabad SHG District Association Pilot Status
• I approached SEWA Bank in January 2005 about piloting the eBay / PayPal p2p microcredit concept with 50 recently approved loan applicants
• Indian banking regulations prevent SEWA Bank from directly participating, but there is an opportunity to directly fund the Ahmedabad SHG District Association (an unregulated NGO which acts as an intermediary between commercial banks and the SHGs).
• The following slides outline the proposed process steps and timeline for a pilot. Discussions are still underway, with a final decision re: pilot expected in June 2005.
• In the meantime, I’m actively interested in finding other MFIs that would be interested in conducting a pilot.
SEWA Pilot Case Study
35
Proposed process: Lender to Borrower
eBay member(Internet surfing
‘do-gooder’ in U.S.)
Ashutosh(local project
coordinator)
Shrutibhen(SEWA Bank / SHG
Dist Assc Liason)
District Assc.(SHG staff who work
with SHG Leaders)
SHG Borrower(Self Employed Woman)
$ $ $ $
• Finds an approved SHG loan applicant on eBay.com website
• Sends requested amount via PayPal to Ashutosh
• Withdraws funds from PayPal account at a local ATM
• Keeps record of each eBay lender and intended loan applicant
• Note – All preceding steps can be audited anytime by viewing PayPal and eBay records online
• Receives from Ashutosh 100% of the requested loan amount (in cash) for each eBay sponsored loan applicant
• Keeps record of loan applicants that have an eBay sponsor (a list in Excel is sufficient)
• Disburses funds to Deposits cash in bank account
• Receives bulk loans from SEWA Bank at 18% (as normal)
• On lends funds to SHG leaders at 21% (as normal)
• Receives funds from SHG Leader at 24%
• All other processes as normal
• Optional –eBay sponsored loan applicants can be tracked separately for lower interest rates. Not necessary, however, as extra interest income could be used for SHG expansion.
SEWA Pilot Case Study
36
Proposed process: Borrower to Lender
eBay memberAshutoshShrutibhen
SHG Leader /
District Assc
Field Staff
SHG Borrower $ $ $ $
• Repays 10% of outstanding debt each month (as normal)
• Collects funds from field (as normal)
• Transfers funds to Shrutibhen (as normal)
• Periodically (e.g.
once every 3 months) calculates the total repaid principal for each eBay sponsored borrower (using existing SEWA loan performance records and eBay sponsored Excel tracking list)
• Once calculations are complete, total eBay sponsored repaid principal is given to Ashutosh in cash
• Ashutosh repays each eBay lender the appropriate amount via PayPal
• Note – This step can be audited at anytime by viewing PayPal payment records online.
• Receives principal repayment in installments
• Assumes risk of principal loss if default
• Receives thank you email; feels good about helping the poor help themselves; potentially makes another loan
SEWA Pilot Case Study
37
Day 55 (?): Borrower makes 1st repayment to District Assc (as normal)
Day 115: Borrower makes 3rd repayment to District Assc (as normal)
Day 121: Ashutosh remits partial principal to each eBay lender via PayPal
Days 15: Shrutibhen disburses loans to SHG District Association; eBay sponsored loan applicants receive lower interest rate
Proposed Timeline
Day 1: Loan applicant approved by SEWA Loan Committee
Day 14: Ashutosh delivers to Shrutibhen final list of eBay sponsored loan applicants and requested amount in cash
Day 2: Approved loan applicant info given to Ashutosh; loan request posted on eBay
Days 2 - 12: eBay members have 10 days to select and sponsor a loan request
Day 25 (?): District Assc on lends to SHG Leader; Leader on lends to SHG borrower
Day 85: Borrower makes 2nd repayment to District Assc (as normal)
Day 120: Shrutibhen calculates the total repaid principal for each eBay sponsored borrower so far; remits to Ashutosh in cash
Day 121 - 325: Borrower continues to repay 10% each month
Day 330: Final repaid principal calculation for each eBay sponsored borrower and funds transfer to Ashutosh
Day 331: Final repayment via PayPal to eBay lender
SEWA Pilot Case Study
38
Cost of Capital: Room for improvement
Source: Microcredit Interest Rates in Bangladesh: ‘Capping v Competition’ David L. Wright. Data above is author’s averages for all of South Asia.
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Average Cost ofFunds
AdministrativeExpenses
Loan Losses DesiredCapitalization
Rate
Final BorrowerInterest Rate
10%
Spread for operations
44%
14%
Inte
rest
rat
e
20%
2%
7%
If capital costs could be reduced from 14% to 4%, operating budget increases by 35%
MFI Borrower Interest Rate Composition -- average across South Asia
39
Viral Product Marketing
Target segment can be reached via email
Unique Value Proposition
