the new horizon of microfinance

The New Horizon of Microfinance

27th, May 2009

Taejun Shin(Representative of LIP, NGO)

- Established on Oct 28th, 2007

- Named from Japanese Constitution

- Mission is to alleviate poverty by utilizing knowledge and social networks of members

- Web site : http://www.living-in-peace.org/

About Living in Peace

http://www.living-in-peace.org/

- The first private microfinance fund in Japan’s investment history

- First target country : Cambodia

- Collaboration with Music Securities

- Collaboration with a major MFI - To be launched in June

LIP Microfinance Fund for MDGs

×

Congratulations on this wonderful initiative!I will be very honored to add my support to the website.It is heartening and inspiring to hear of your leadership.

With warmest regards,

Jeff Sachs

http://www.living-in-peace.org/supportmessage/

Message from Jeffrey Sachs

http://www.living-in-peace.org/supportmessage/

Agenda

I. Microfinance as an Investment Opportunity　　　 Microfinance has high return by itself and low

correlation with other traditional investments.

II. Recent Microfinance Data　　　 While the market is expanding by 45% annually since

2001, we find little microfinance investment from Japan.

III. Economic Theory of Microfinance　　　 Group Lending can alleviate information asymmetry to

promote social capital and enhance efficiency.

I. Microfinance as an investment opportunity

Agenda







Table of Contents

1. Summary

2. Comparison to common asset classes

3. Correlation of Microfinance with conventional assets

4. Correlation with economic indicators / indexes

5. Comparison of Portfolios 1



8. Influence of the Financial Crisis

9. Trend of Return on Microfinance Index

10. Appendix: A List of MIVs

Why is microfinance an attractive investment?

• Provides an average Sharpe Ratio more than 20 times that of foreign and domestic stocks and bonds.

• Improves portfolio diversification due to weak correlation with other asset classes

• Has continued providing consistent returns and risks after the Financial Crisis

1. Summary

－ Microfinance presents a Sharpe Ratio more than 20 times that of foreign and domestic stocks and bonds

Source ： Government Pension Investment Fund “Testing Basic Portfolio.” June 2008.

（ Note: Calculation of SMX is based on the data of SMX USD - Symbiotics Microfinance Index - U.S. Dollars 　 2004.1~2008.10 ）

Domestic Stocks ： TOPIX （ including dividend ） annual return 　 (1973~2007)

Foreign Stocks ： Morgan Stanley Capital Index, KOKUSAI Index （ including dividend, based on JPY 　） (1973~2007)

Domestic Bonds ： NOMURA-BPI Annual Return of Composite Index (1973~207)

Foreign Bonds ： Citygroup World （ except Japan ） National Bonds Index （ Based on JPY ） annual return

Microfinacne(SMX) 　　： SMX USD - Symbiotics Microfinance Index - U.S. Dollars (2004.1~2008.10)

（％ per annum ） Total Return Volatility Sharpe Ratio

Domestic Stocks 5.30% 22.15% 0.22

Foreign Stocks 6.00% 19.59% 0.28

Domestic Bonds 2.80% 5.40% 0.44

Foreign Stocks 3.40% 13.25% 0.22

Microfinance (SMX)

4.49% 0.36% 11.22

Suppose that the risk-free rate=0.45% , a 6-month short-term national bond ）

2. Comparison to common asset classes

　Domestic Bonds

Domestic Stocks

Foreign Bonds

Foreign Stocks

Microfinance

(SMX)

Domestic Bonds 1

Domestic Stocks

0.16***(p=0.00) 1

Foreign Bonds-0.06(p=0.22)

-0.25***(p=0.00) 1

Foreign Stocks-0.05(p=0.31)

0.27***(p=000)

0.56 ***(p=0.00) 1

Microfinance (SMX)

0.30**(p=0.03)

-0.26(p=0.07)

-0.02(p=0.89)

-0.30**(p=0.03) 1

Source ： Computation is based on the data from 1973~2007,

　　　　 Number of Samples ： 420 monthly-based data for Domestic Bonds, Domestic Stocks, Foreign Bonds, Foreign Bonds, 51 monthly-based samples for ＳＭＳ .

Independent Administrative Agency for the Management of Pension Financial Reserve 「 Verification of Basic Portfolio 」 June, 2008

Note: Original Computation of Correlation Coefficient between Microfinance and Other Assets is based on SMX USD - Symbiotics Microfinance Index - U.S. Dollars, whose object is the data from 2004.3 to 2008.6.

　　　　 *** :p<0.01 **:p<0.05 （ Null Hypothesis ： Correlation=0 ）

3. Correlation of Microfinance with conventional assets

－ Correlation between Microfinance and conventional assets

－ Weakly correlated to domestic/foreign capital markets and economic climates, as shown in empirical studies from 1998 to 2006

Source ： Nicolas Krauss, Ingo Walter “Can Microfinance Reduce Portfolio Volatility?” ,

　　　　 Economic Development and Cultural Change, (forthcoming)

Morgan Stanley “Flash Report”, August 2008

Correlation　to　GDP　Growth

Stock　Market

S&P500MSCI

Global　IndexMSCI

Emerging　Market　Index

MFIOperating　Income

0.01 0.02 0.06 0.07 0.03

MFIDelinquency（ >　30days ）

0.20 0.00 0.05 0.03 0.00

4. Correlation with economic indicators / indexes

0.00%

5.00%

10.00%

15.00%

0.00% 5.00% 10.00% 15.00% 20.00% 25.00%

Foreign BondsDomestic

Bonds

Foreign StocksMicrofinance

－ Increase of Investment Efficiency, indicated by shift to upper left region of Efficient Frontier


Exp

ected R

ate of R

eturn

Risk （ Standard Deviation ）

Portfolio of 4 assets

Portfolio of 5 assets

%

Reference:Merton, R.C., 1972, “An Analytic Derivation of the Efficient Portfolio Frontier”, Journal of Financial and Quantitative Analysis

Domestic Bonds

－ Mitigation of Risks by Incorporating Microfinance(assuming no short-selling regulation)


Performance of Portfolio Share of Each Asset in Portfolio

Target Return=3.0% VolatilityDomestic

BondsDomestic

StocksForeign Bonds

Foreign Stocks

MF

4 assets 4.81% 78.35% 4.66% 17.70% -0.71% -

5 assets 4.19% 67.75% 0.86% 17.99% -10.33% 23.73%

MF ratio≦30% 4.19% 67.75% 0.86% 17.99% -10.33% 23.73%


BondsDomestic

StocksForeign Bonds

Foreign Stocks

MF

4 assets 12.40% 32.75% 20.16% -7.28% 54.37% -

5 assets 1.30% -22.95% 0.21% -5.75% 3.83% 124.66%

MF ratio≦30% 9.48% 19.35% 15.36% -6.91% 42.20% 30.00%


BondsDomestic

StocksForeign Bonds

Foreign Stocks

MF

4 assets 23.36% -12.84% 35.66% -32.25% 109.44% -

5 assets 6.72% -113.65% -0.45% -29.49% 17.99% 225.59%

MF ratio≦30% 20.53% -26.25% 30.86% -31.89% 97.28% 30.00%

－ Increase of Return by incorporating Microfinance(assuming no short-selling regulation)


Performance of Portfolio Share of Each Asset in Portfolio

Target Risk=5.0% VolatilityDomestic

BondsDomestic

StocksForeign Bonds

Foreign Stocks

MF

4 assets 3.23% 73.11% 6.44% 14.83% 5.62% -

5 assets 6.37% -84.96% -0.24% -21.98% 13.51% 193.67%

MF ratio≦30% 3.93% 55.87% -5.72% -5.00% 24.85% 30.00%


BondsDomestic

StocksForeign Bonds

Foreign Stocks

MF

4 assets 4.53% 43.55% 16.49% -1.36% 41.33% -

5 assets 8.21% -168.33% -0.84% -43.80% 26.52% 286.45%

MF ratio≦30% 5.10% 17.12% 16.15% -8.13% 44.85% 30.00%


BondsDomestic

StocksForeign Bonds

Foreign Stocks

MF

4 assets 5.48% 21.78% 23.89% -13.29% 67.62% -

5 assets 10.04% -251.65% -1.44% 65.60% 39.53% 379.17%

MF ratio≦30% 6.01% -3.69% 23.19% -19.53% 70.04% 30.00%

－ Stable risks and returns on Microfinance, even after the Financial Crisis－ SMX USD - Symbiotics Microfinance Index - U.S. Dollars 　 From 2004.2 - 2008.9

Source ： symbiotics http://www.symbiotics.ch/en/smx/smx_usd.asp

Year Yield Volatility

2008 5.04% 0.52%

2007 6.33% 0.44%

2006 5.09% 0.33%

2005 4.30% 0.31%

2004 2.61% 0.18%

Average 4.49% 0.36%

8. Influence of the Financial Crisis

－ Figure: Trend of Return on Microfinance Index－ SMX USD - Symbiotics Microfinance Index - U.S. Dollars 2004.2 - 2008.9


9. Trend of Return on Microfinance IndexM

on

thly

Pe

rfo

rma

nc

e

Ind

ex

Va

lue

－ Still robust


9. Trend of Return on Microfinance Index (Updated)M

on

thly

Pe

rfo

rma

nc

e

Ind

ex

Va

lue

－ MIV: Microfinance Investment Vehicle － SMX USD - Symbiotics Microfinance Index - U.S.

Dollars


10. Appendix: A List of MIVs

MIV Redemption Main Investors

Dual Return Fund Vision MicrofinanceUSD Cap

PossibleInstitutional andPrivate investors

ResponsAbility Global MicrofinanceFund B Cap

Possible Private investors

Dexia Micro-Credit Fd SicavBlueOrchard Debt USD Cap

Possible Private investors

ResponsAbility MicrofinanceLeaders Fund

Possible Institutional investors

Finethic Microfinance SCA SICAR USD Possible Institutional investors

II. Recent Microfinance Data

Agenda







Table of Contents

1. Summary

2. References

3. Trend of microfinance loan portfolio

4. Number of MFIs by region

5. Data on Top 50 MFIs “ Correlation between borrower and the average of personal loan size ”

6. Total amount of loans by region

7. Total number of borrowers by region

8. Average personal loan size by region

9. Top 5 MFIs + Representative MFIs by region (based on number of borrowers)

10. Top 20 countries (based on number of borrowers)

11. Actual condition of SRI market in Japan(1/2)


13. Country by country comparison of SRI market size （ in Feb 2005 ）14. Problems of SRI market in Japan

Slide 22

• Market size of Micro-Finance is expanding by an average of 45% per year since the beginning of 21st century.

• MFI’s market share of South Asia, Africa and South America dominate two-thirds of the world.

• The SRI market of Western is large. In contrast, that of Japan is smaller than 1 % of the western world.

1. Summery

Slide 23

• Microfinance Information Exchange (the MIX)　 Which has more than 1,300 MFIs and 73.5 million Borrowers

(in Oct 2008) ※ MFIs ： Micro Finance Institutions （ which provide Micro-Finance services. Their legal style has variety from

small nonprofit organizations to large commercial banks. ）

※ the other databases are:　 Micro Banking Bulletin, Microcredit Summit, and CGAP

• Annual Report of SRI in Japan 2007 ※ SRI ： Socially Responsible Investment

2. References

－ This section is prepared by references as follows.

Slide 24

Based on a sample of 1,333MFIs , 2008

Reference: By 2006, Deutsche Bank “Microfinance: An emerging investment opportunity” and at 2007 estimates by authors based on the MIX.

4

17

25

37

0

5

10

15

20

25

30

35

40

2001 2005 2006 2007

Unit of credit ： $1 billion

3. Trend of microfinance loan portfolio

－ Market size of Micro-Finance is expanding by an average of 45% per year since 2001.

Slide 25

Latin America and TheCaribbean, 329

Sub-Saharan Africa,296South Asia, 261

Eastern Europe andCentral Asia, 253

East Asia and thePacific, 152

Middle East and NorthAfrica, 42 North America, 1

Source ： The MIX 2008

－ The region with the most number of MFIs Latin America and The Caribbean, followed by Sub-Saharan Africa and South Asia.

4. Number of MFIs by region

Based on a sample of 1,334MFI , 2008

Slide 26

5. Data on Top 50 MFIs “ Correlation between borrower and the average of personal loan size ”

－ Latin America’s MFI has a smaller number of borrowers, but loan sizes are larger.－ South Asia’s MFI has a larger number of borrowers, but loan sizes are smaller. － MFIs are considered most correlated with geopolitics and per capita income.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000

Ave

rage

siz

e of

loan

（USD）

The number of borrowers（thousands）


※ Bubble size represents total loan amount.

South Asia

Latin America

Slide 27

1,033

2,583

3,815

6,748

8,580

14,473

6,205

0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000

Total amounts of loans（million$）

.

6. Total amount of loans by region


－ Total region with the most amount of loans are (arranged according size) Latin America and The Caribbean, followed by Eastern Europe and Central Asia and East Asia and the Pacific. Based on a sample of 1,333MFIs , 2008

Eastern Europe and Central Asia

Latin America and the Caribbean

Middle East and North Africa

Africa

East Asia and the Pacific

South Asia

Average

※ Except North America

Slide 28

2,181

2,598

6,702

11,749

12,436

37,963

12,272

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000

The number of borrowers by region（thousand）

7. Total number of borrowers by region


－ The region with the most number of borrowers is South Asia, followed by East Asia and the Pacific, and Latin America and The Caribbean.

Based on a sample of 1,333MFIs , 2008




Africa


South Asia

Average


Slide 29

100

385

474

543

1,232

3,302

1,006

0 500 1,000 1,500 2,000 2,500 3,000 3,500 Average of personal loan’ s size by region

(USD)





Africa


South Asia

Average

Based on a sample of 1,333 MFIs , 2008

8. Average of personal loan size by region

－ MFI loan size varies by region, from USD 100 in South Asia to USD 3,300 in Eastern Europe and Central Asia.


Slide 30

9. Top 5 MFIs + Representative MFIs by region (based on the number of borrowers)

Source ： The MIX, “How Many MFIs Clients exists?”

Rank MFI's name CountryBorrowers(tousand)

Total amountof loans

(thousand $)

Average ofloan amount

($)

ROE(Average of past 3

years)

Average of baddebt

(Average of past 3years)

interest and otherincome

(Average of past3 years)

Ave. 3,211 845,604 333.8 27.67% 3.44% 46.34%1 Grameen Bank Bangladesh 6,707 532,025 79.3 12.61% 3.14% 28.50%2 BRAC Bangladesh 6,398 528,788 82.7 15.82% 1.23% 28.14%3 VBSP Vietnam 5,648 2,181,693 386.3 -13.08% 0.01% 5.77%4 ASA Bangladesh 5,423 361,698 66.7 24.41% 0.24% 28.10%5 BRI Indonesia 3,516 3,472,626 987.7 118.67% 1.13% 39.45%6 SKS India 1,629 261,719 160.6 14.38% 0.64% 25.76%11 CompartamosBanco Mexico 839 377,831 450.5 52.73% 0.53% 84.92%14 BANTRA Peru 768 345,187 449.3 6.70% 9.76% 44.32%17 ACSI Ethiopia 598 110,607 185.0 24.42% 0.06% 17.50%18 Capitec Bank South Africa 580 283,862 489.6 20.06% 17.72% 160.93%

Note: other income includes other charges and fees

－ MFI’s Top 1 and 2 are Grameen Bank (Top 1), and BRAC(Top 2) of Bangladesh.

Slide 31

－ The country with the most number of borrowers is Bangladesh, followed by India and Vietnam.

※ Penetration rate = number of the borrowers in the country / number of destitute people in the country

10. Top 20 countries (based on number of borrowers)

Source: The Mix 2008 and "How Many MFIs and Clients Exists?"

Rank Country Total borrowers MFIsAverage number of

borrowersPenetration

rate1 Bangladesh 24,127,571 70 349,675 35%2 India 10,738,307 106 101,305 3%3 Vietnam 5,787,074 12 482,256 11%4 Indonesia 3,758,336 42 89,484 25%5 Mexico 3,320,453 40 85,140 14%6 Peru 2,457,656 55 44,685 14%7 Philippines 2,025,402 70 28,934 6%8 Ethiopia 1,770,275 16 110,642 5%9 Colombia 1,630,208 16 101,888 29%

10 Morocco 1,336,762 10 133,676 5%11 Pakistan 1,283,317 21 61,110 3%12 Sri Lanka 943,982 15 62,932 18%13 Kenya 891,307 19 46,911 2%14 South Africa 812,340 14 58,024 2%15 Cambodia 802,329 15 53,489 8%16 Bolivia 771,839 26 29,686 4%17 Brazil 628,164 10 62,816 10%18 Ecuador 598,551 48 12,470 11%19 Egypt 574,418 11 52,220 12%20 Nigeria 565,012 13 47,084 5%

Slide 32

Source ： Annual report of SRI in Japan 2007

－ MFI is being provided money by SRI, and the reality of SRI market in Japan is as indicated below.


• Japan's public offering of SRI mutual fund performance is generally above average.

• SRI Fund in Japan began in Aug 1999.

　　　※ Definition of SRI by Social Investment Forum-Japan Investors’ will to SRI can be confirmed.

Considering more than one of the following themes: environment, sociality, and corporate governance in investing process.

Slide 33

Source: Annual report of SRI in Japan 2007

－ Public offering of SRI mutual fund’s net asset balance and changes in the number of funds

－ Net asset balance is approximately 500 billion yen and the number of funds is 60.


(number) (million yen)

0100,000200,000300,000400,000500,000600,000700,000800,000900,000

0

10

20

30

40

50

60

70

numbernet asset …

Slide 34

－ Market size of SRI in the U.S. is approximately 270 trillion yen and in Europe is about 150 trillion yen.

－ Market size of broad SRI in Japan is just 0.8 trillion yen.

－ SRI in Japan is 1% of U.S based on GDP

Source: Annual report of SRI in Japan 2007

0.8

150

270

0 50 100 150 200 250 300

J apan

Europe

U.S.A

Market size of SRI (trillion yen)

13. Country by country comparison of the market size of SRI （ in Feb 2005 ）

Slide 35

• In western countries universities, utility firms, and labor unions are the core institutions of SRI; in Japan there is little interest in SRI.

• Market size of SRI in Japan is expanding, but the size is still much smaller compared to western countries.

• Micro-Finance is not well recognized as an investment choice in Japan.

14. Problems of SRI market in Japan

Slide 36

Looking for a Japanese Microfinance Fund?

Slide 37

III. Economic Theory of Microfinance

Slide 38

Agenda







Table of Contents

1. Summary2. Asymmetric information and Solution 3. When does the Borrower “behave”?4. Benefit of Group lending : Social capital①5. Benefit of Group lending : Monitoring②6. Conclusion　　　　 Appendix

Slide 40

1. Summary

Social capital and Monitoring make Borrowers can better “behave” Borrowers can receive larger loans

given smaller assets

Slide 41

Reference ：

Slide 42

※Refer to the following for contract theory.Jean-Jacques Laffont & David Martimort, “The Theory of Incentives: The Principal-Agent Model”, Princeton University Press, 2002

Jean Tirole, “The Theory of Corporate Finance”,Princeton University Press, 2005

2. Asymmetric information and Solution

Slide 43

Difficulty in Disciplinary control & Monitoring (Asymmetric information)

⇒ Solution :Strong Incentive to “behave”

Strong Incentive to “behave” with profit ratio

Feature of lending in developing countries

Borrower Lender

LenderBorrower

Profit of the project

“behave”“behave”

“misbehave”“misbehave”

Small loanSmall loan

Large loanLarge loan

Borrower Lender

1:

2:

“behave” : exert effort, taking no private benefit“misbehave” : shirk, taking a private benefit

LenderBorrower “behave”“behave” Large loanLarge loan

Presence of Group lending

3. When does the Borrower “behave”?

Slide 44

Income when behaving ＞ Income when misbehaving ⇒ the borrower “behaves”

R600 R

400B

200

“behave” “misbehave”

R750

R500 B

200

600600 600600

750750 700700

Equilibrium state

Incentive to “behave”

R 　： The borrower’s Profit from the projectB 　： The borrower’s private benefit

“R” gets bigger

R600 R

400B

200

150R

300B

200

R450

other borrower’s profit

Absence of

Social C

apital

600600 600600

Social capital ・・・ relationship of trust, connections within social networks

600600 600600

150

100

4. Benefit of Group lending ① : Social capital

Slide 45

Presence of

Social C

apital


R 　： The borrower’s profit from the projectB 　： The borrower’s private benefit

Equilibrium state

Equilibrium stateWith smaller profit (R)

R600 R

400B

200

150R

300

R450

lower private benefit by monitoring

600600 600600

　① Before receiving loan, the borrowers chose members to “behave”　② After receiving loan, the borrowers monitor respectively to restrain private benefit

450450 450450

B150

5. Benefit of Group lending ② :Monitoring

Slide 46

Absence of

Monitoring

Presence of

Monitoring


R 　： The borrower’s Profit from the projectB 　： The borrower’s private benefit

Equilibrium state

Equilibrium stateWith smaller profit (R)

Absence of Group

Lending

Presence of Group Lending

+Social capital +Monitoring

Borrower’s Minimum Profit for “Behaving” 600 462 360

Borrower’s Minimum Asset needed for project 400 262 160

Rate of return 1.5 1.8 2.3

Simulation Result

Conclusion

By Group Lending （ Social capital effect and Monitoring effect ） , The borrowers can better “behave” The borrowers can receive larger loans given smaller assets

Conclusion

By Group Lending （ Social capital effect and Monitoring effect ） , The borrowers can better “behave” The borrowers can receive larger loans given smaller assets

【 Assumption of Project 】 Investment ： 1,000 　⇒　 Profit of the project ： 1,200 （ See Appendix ）

6. Conclusion

Slide 47

＜ Appendix ＞

Tirole, “The Theory of Corporate Finance” Chapter 3,4

Slide 48

Assumptions

:

:

:

:

:

:

:

:

:

H

L

b

l

H L

A

I

p

p

R

R

R

B

p p p

Setup

Notations

AlR

I

bR

I A A

B L Hp p

bRlR

１．” behave”

２．” misbehave”

R Slide 49

Fixed Investment

The borrower’s Asset

Probability of success with behaving

Probability of success with misbehaving


The borrower’s Profit of the project

The lender’s Profit of the project

The borrower’s private benefit

Investment

1. The borrower starts the project with loan 2. The borrower’s Asset ( ), Fixed Investment( ), ⇒ loan( ) 3. Only if the project succeeds, the profit of the project ( ) is received

⇒ Profits are distributed to the borrower( ) and the lender( ) 4. The borrower “behaves” or “misbehaves”

⇒ Probability of success : (“behave”), (“misbehave” )5. If the borrower “misbehaves”, the borrower gains private benefit from the loan

* “behave” : exert effort, taking no private benefit , “misbehave”: shirk, taking a private benefit

A

Hp

I I A

R

bR lR

Lp

With Probability , is received

With Probability , is received

Hp R

R

( )H b L b bp R p R B or p R B

H

BP P R I A

p

b

BR

P

l b

BR R R R

p

H l H

BP p R p R

p

“Behaving” constraint & Lender’s breakeven constraint (1)

・・・ Lender’s breakeven constraint

Slide 50

The borrower “behaves” if income when behaving exceeds income when misbehaving

By the condition, the borrower’s minimum profit of the project for “behave” is

Then, the lender’s profit of the project in the case of success is

Then, the lender’s expected profit of the project is

This lender’s expected profit must exceed his initial outlay for lending

・・・” Behaving” constraint

H

H H

Bp R I A

p

BA p p R I

p

b

BR

p

bR

H H

BA p p R I

p

The borrower “behaves” The lender reaches breakeven

Slide 51

If the lender demands no interest,

Therefore, if the borrower’s profit of the project ( ) and Asset ( ) satisfy the following conditions,

“Behaving” constraint & Lender’s breakeven constraint (2)

A

(1 )H

Bp R I A

a p

1

1bH

BR

p a p

(1 )H l H H b H

BP p R p R p R p R

a p

Group lending ： Social capital effect (1)

2 ( ) ( ) ( )H b b H L b b H b b

Bp R aR p p R aR B or p R aR

p

The other borrower’s probability of success

Slide 52

Social capital effect : A portion of other borrower’s profit is added to the borrower’s own profit.

Assumption : - Group lending for two borrowers



By this condition, the borrower’s minimum profit of the project for “Behaving”


The lender’s expected profit must exceed his initial outlay for lending

The condition that the borrower “behaves” is

- The other borrower “behaves”

(1 )H H

BA p p R I

a p

(1 )

(1 )

H

H H

BP R I A

a p

BA p p R I

a p

1

1bH

BR

p a p

Slide 53


Therefore, If the borrower’s Profit of the project ( ) and Asset ( ) meet following conditions,

bR A

The borrower “behaves” The lender reaches breakeven

Group lending ： Social capital effect (2)

Group lending ： Monitoring effect (1)

Presence of Monitoring Absence Monitoring

“Behave”

“Misbehave”

,H Hp pC

,H Lp p0

,L Lp pB

,L Hp p0B C

B

Upper: OutcomesLower: （ the borrower’s probability of success , the other borrower’s probability of success ）

１２

３２

“Outcomes” & ” Probability of Success”

１＞３２ or

Slide 54

Assumptions : - Group lending for two borrowers

CThe borrower can make the other borrower “behave”( ) with monitoring cost ( ).

If the borrower gains private benefit ( ) , Probability of success goes down( ).

- The other borrower “misbehaves”

H Lp p

L Hp p

Suppose that the monitoring cost is equivalent to private benefit: B C

The borrower “behaves” if his profit meets


１＞２2

H b H L b H L b

H b

p R C p p R p p R B C

Bp R

P

2 2H b L b

H L b

p R C p R B

B Cp p R

p

H L b

B Cp p R

p

１＞３

2 2bH L H L

B C B CR

p p p p p

Slide 55

The borrower’s profit :

The borrower’s profit :


2H L Hp p p In the above, the second condition is hold since

Then, the condition that the borrower “behaves” is

The borrower’s minimum profit of the project for “Behaving”

2

2 2H

HH L

pp R B C I A

p P


2

2 2H

H l H H b HH L

pP p R p R p R p R B C

p P

2

2 2

2

2 2

HH

H L

HH

H L

pp R B C I A

p P

pA B C p R I

p P

2 2bH L H L

B C B CR

p p p p p

2

2 2H

HH L

pA B C p R I

p P

Slide 56

The borrower “behave” The lender reaches breakeven


This lender’s expected profit must exceed his initial outlay for lending


Therefore, if the borrower’s profit of the project ( ) and Asset ( ) meet following conditions,

bR A


Setting up the Parameters

: 1000

: 2000

: 60%

: 40%

: 200

: 0.3

: 100 :100

H

L

I

R

p

p

B

a

C B

⇒

Parameters

Slide 57

Fixed Investment

Social capital weight


Monitoring cost

The borrower’s private benefit

Probability of success with “Behaving”

Probability of success with “misbehaving”

The borrower “behave” The lender reaches breakeven

bR<Simulation> The borrower’s profit of the project ( ) and Asset ( ) which meet following conditions

A

LiP MembersYuma Kinoshita

Souichiro Kojiya

Takashi Sugawara

Akiko Sugiyama

Kyongil Chu

Fumi Tsukamoto

Chinatsu Tobita

Ayako Hatano

Takayuki Fukuda

Koji Honda

Muneaki Iwadate

Kensuke Saneshima

Wataru Kamiya

Dean Kirkness

Samuel Levin

Tsubasa Umezaki

Slide 58

Financial Engineering Group, Inc.

Tokyo Financial Advisers

Financial Engineering Group, Inc.

Music Securities, Inc.

Seikei University Law School

PricewaterhouseCoopersHRS Co., Ltd.

Morgan Stanley Japan Holdings Co., Ltd.

Ministry of Foreign Affairs of Japan

KPMG FAS

Mizuho Securities Co., Ltd.

Keio University

Keio University

PRAP Japan, Inc.

PRAP Japan, Inc.

Waseda University

Waseda University

Views expressed in this report are those of the authors and do not necessarily reflect the official views of their organizations.

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