microfinance and subprime mortgages
DESCRIPTION
Presentation by Sanjay Sinha, Deputy CFO, MicroCredit Enterprises/California Bank & Trust, United States of AmericaTRANSCRIPT
Sanjay Sinha, Deputy CFO — Microcredit Enterprises
November 13, 2008
Micro-finance&
Sub-prime Mortgages
Is There Another Crisis on the Horizon?
TBLI CONFERENCE EUROPE 2008
Topics coveredTopics covered
Evolution of the sub-prime market
How are the two similar?
How do they differ?
Lessons learned from sub-prime debacle
Challenges for micro-finance
Self-regulation
Summary
Sub-prime mortgages – How did we get here?
Sub-prime mortgages – How did we get here?
Realizing the American dream
Home ownership
Sub-prime mortgagesSub-prime mortgages
Evolution of the Market
Easing of regulations
Housing bubble
Low interest rates
Oversupply of capital
High returns
Innovative products
What do they two have in common?
Subprime Microfinance
Offer credit to more borrowers
Offer credit to borrowers in under-
served sectorsRisk of higher
defaults Higher administration costs
Higher Interest Rates
PURPOSE
COST
COMPENSATION
How do they differ?
Subprime Microfinance
LT, high value loans to high risk borrowers
ST, low value loans to no-credit history
borrowers
Real property Personal character
Real property vs. Personal character
LOAN STRUCTURE
UNDERLYING ASSET/COLLATERAL
VALUE OF UNDERLYING ASSET
Lessons learnedDon’t forget the basics
Stay close to clients
Avoid predatory lending
Transparency
Challenges for Microfinance
• Liquidity – Larger (MFIs) attracting bulk of the funding
• Higher Inflation – Eroding Purchasing Power
• Exchange Rate Fluctuations – Currency Mismatch
• Transparency – What Interest Rates Do MFIs Charge?
Self regulationSelf regulation
Establish & follow financial discipline
Stay close to customer
Diversify Funding sources
Identify /implement best practices
“What can we do to deal with challenges?”
Self regulation – What have we done?
• 4/08 – Pocantico Declaration
• 25 Industry leaders adopted code of conduct:
• Avoid reckless lending
• Transparent pricing/non-abusive collection methods
• Restructure non-payment loans
Self Regulation – What have we done?
• 9/08 – Campaign for client protection in microfinance (Clinton Global Initiative)
• In 3 Years engage 50% of world’s 500 largest MFIs
• Develop & implement best practices and engage investors
Summary
Although purpose & high interest rates are common features; the two differ markedly
Technological advances & funding sources are limited; size much smaller
Remote chance of layered products
Socially driven mission should keep returns lower & most speculators away
“Character not collateral”
Summary
Attempts at self regulation & transparency
Should minimize predatory lending
Provide more funding for smaller MFIs
Note: Conceptual frame work for this presentation was based upon articles by Cecelia Beirne at Microvest Capital Management.
“Character not collateral”