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Microfinance: What Can We Learn From Mexico and Central America

Microfinance: What Can We Learn From Mexico and Central America. Jaime Carreño Director - Financial Services Ratings Standard & Poor’s February 7, 2006 New York, NY. Characteristics.

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Microfinance: What Can We Learn From Mexico and Central America

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  1. Microfinance: What Can We Learn From Mexico and Central America Jaime Carreño Director - Financial Services Ratings Standard & Poor’s February 7, 2006 New York, NY

  2. Characteristics • Lending activities focus in low income individuals, especially women, most of them with an informal commercial activity (the average of women borrowers is 60.6%, in Latin America 66%). • In most cases, borrowers are gathered by groups. In Latin America, groups represent 36.4% (solidarity groups and village banking). • Small average loan amount and short term loans (the average lending in Latin America is US$400). • Depends more on the borrower desire to pay than on guarantees • In most cases Microfinance companies have capital contributions from international funds or institutions as donations.

  3. Characteristics (cont’d) • High operating costs (the average cost per borrower is US$1001). 1 average for self-sufficient Microfinance companies Source: The MicroBanking Bulletin

  4. Basic Operating Requirements • Clear credit policies • Effective controls to manage the loan portfolio • Efficient information systems • Enough capital to support intrinsic risks

  5. Competition Shareholding Structure Legal Structure Market Position Concentration Credit Risk Liquidity and Funding Main Aspects to Analyze

  6. Competition • Low entry barriers • Know how Pricing Payment Culture Payment Incentives Motivation

  7. Shareholding Structure Profesionalism increase control and supervision Lower Risk Diversified with participation of international institutions Flexibility to attract additional shareholders or funds Growth

  8. Legal Structure • Limits by type or number of shareholders • Limits on funding sources • Limits on leverage Limits growth

  9. Concentration • Loan size • Industry • Related Parties • Geographical concentration is relevant due to possible negative effects of low economic activity or natural disasters. Not relevant

  10. Market Position • SupplyDemandNot relevant • The importance stems from the possibility of an institution to reach break-even and economies of scale

  11. Credit Risk • Sustain good payment culture • Agents: Manage growth, good training, good acceptance, motivated and responsible. Group’s joint responsibility Build good credit history with the company Prosecute delinquencies

  12. Credit Risk (cont’d) • Close monitoring of the loan portfolio: past dues, geographic diversification, growth, products. • Reserve and charge-off policies.

  13. Funding and Liquidity • Funding legal restrictions • Money market sophistication in the country of operation • Market knowledge of the industry • Liquidity

  14. Capital • Loan portfolio default history • Reserve and charge-off policy • Internal capital generation • Access to additional capital • Regulatory capital

  15. Financiera Compartamos Current ratings: Counterparty Credit Rating mxA+/Positive/mxA-1 Structured Notes Program MxP500 million mxAA

  16. Financiera Compartamos Counterparty Credit Rating (mxA+/Positive/mxA-1): • Good financial performance based in strong margins • Sound asset quality indicators in terms of credit loss experience and diversificiation • Strong operating controls • Agressive growth rates which could increase operating and credit risks • High risk inherent to microfinance operations where individual defaults could multiply because of slowdowns in the economy

  17. Financiera Compartamos Structured Notes Ratings (mxAA): • Risk in its debt servicing capacity rests over its counterparty credit rating of ‘mxA+’ • The structure of the notes incorporates mechanisms that provide a certain level of credit and liquidity protection to noteholders that results in an enhanced rating of the notes of two notches above the CCR

  18. Financiera Compartamos Structured Notes Ratings (mxAA): • Partial guarantee granted by IFC (at least 34% of outstanding at the time of the first disposition) • Standby loan granted by IFC equivalent to the available amount of the partial guarantee • IFC’s ‘AAA’ counterparty credit rating in Standard & Poor’s Global Scale • Inexistent direct macroeconomic correlation between Compartamos and IFC • The structure of the transaction is according to the parameters established by the Standard & Poor’s Partial Guarantee Model

  19. Future Developments • As the informal economy sector grows in the economies of the region we expect microfinance to become a fast growing segment with a strong potential for development • Increasing number of new participants • Not all will be able to develop a viable project • Different types of organizations • Figures similar to those of Sofoles (Sociedades Financieras de Objeto Limitado) • Trusts with federal or state participation, e.g., Fondo Jalisco de Fomento Economico (FOJAL, rated ‘mxA-/Stable/mxA-2’) • Evolution in their legal structure toward banks

  20. References Suggest reading The MicroBanking Bulletins References www.standardandpoors.com.mx www.mixmbb.org www.themix.org www.cigap.org www.accion.org

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