microfinance and subprime mortgages

13
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

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Presentation by Sanjay Sinha, Deputy CFO, MicroCredit Enterprises/California Bank & Trust, United States of America

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Page 1: Microfinance and Subprime Mortgages

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

Page 2: Microfinance and Subprime Mortgages

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

Page 3: Microfinance and Subprime Mortgages

Sub-prime mortgages – How did we get here?

Sub-prime mortgages – How did we get here?

Realizing the American dream

Home ownership

Page 4: Microfinance and Subprime Mortgages

Sub-prime mortgagesSub-prime mortgages

Evolution of the Market

Easing of regulations

Housing bubble

Low interest rates

Oversupply of capital

High returns

Innovative products

Page 5: Microfinance and Subprime Mortgages

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

Page 6: Microfinance and Subprime Mortgages

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

Page 7: Microfinance and Subprime Mortgages

Lessons learnedDon’t forget the basics

Stay close to clients

Avoid predatory lending

Transparency

Page 8: Microfinance and Subprime Mortgages

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?

Page 9: Microfinance and Subprime Mortgages

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?”

Page 10: Microfinance and Subprime Mortgages

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

Page 11: Microfinance and Subprime Mortgages

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

Page 12: Microfinance and Subprime Mortgages

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”

Page 13: Microfinance and Subprime Mortgages

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”