Transcript NewBank Microfinance: Microcredit in the Ukraine Fuqua School of Business Duke University Holly Dice, Andrew Khoo, Sara Kirchoff, Robert M.

NewBank Microfinance:
Microcredit in the Ukraine
Fuqua School of Business
Duke University
Holly Dice, Andrew Khoo, Sara
Kirchoff, Robert M. Little
& Hartaj SIngh
1
November 6, 2015
Emerging Markets Corporate Finance
Agenda







2
Scenario
What is Microfinance?
Characteristics of Microfinance Loans
Overview of Ukraine
Business Plan
Key Takeaways
Conclusion
Emerging Markets Corporate
Finance
November 6, 2015
Scenario



3
Ukrainian-American entrepreneur wants to give back to his native
country by fostering small and family owned businesses
Willing to provide $2.5MM in interest free loans
Wants to verify feasibility and sustainability of a for-profit
microfinance lending institution in the Ukraine
Emerging Markets Corporate
Finance
November 6, 2015
What is Microfinance?





4
Providing financial services to the poor and micro enterprises
Currently 7,000 microfinance Institutions worldwide ($2.5 billion).
Individual and group-based lending
Small size of loans makes it inefficient for commercial banks to
target these markets
Successfully pioneered by Grameen Bank in 1976
Emerging Markets Corporate
Finance
November 6, 2015
Characteristics of Microfinance
Loans








5
Size: $25 to $100,000
Term: 6 months to 2 years
Collateral: typically none
High interest rates: 25% to 51% in Asia
Low default rates: <5%
Labor and resource intensive to administer and monitor
Dependent upon social pressures for loan repayment
Aggressive penalty structures
Emerging Markets Corporate
Finance
November 6, 2015
Overview of Ukraine








6
Declared independence from Soviet Union in August 1991
Population: 49.8 million
GDP: $30.4 billion ($610/capita)
Inflation: 28.5%
Currency: Hryvnia (5.6 hryvnia/US$1)
Prime lending rate: 42%
Major industries: coal, electric power, metals, machinery &
equipment, agriculture
Moody’s Credit Rating: Caa1
Emerging Markets Corporate
Finance
November 6, 2015
Overview of Ukraine (cont.)
Economy

Post-independence GDP contraction
–
–



7
Approximately 40% of pre-independence size
First year of GDP growth (5.6%) in 2000
Shadow economy accounts for 60% of total economy
Periods of hyperinflation in the early 1990s
Economy expected to grow in 2001-2002
Emerging Markets Corporate
Finance
November 6, 2015
Ukrainian Banking Sector







8
Primarily finance state-run enterprises
Suffers from problem loan rate of 20%
Loans of short maturities, usually 6 months
Nominal interest rate is currently around 50%
Inadequate development of financial services
Banks are information source for tax collectors
Viewed as inefficient and lacking in small loans expertise
Emerging Markets Corporate
Finance
November 6, 2015
Business Plan


Utilize microcredit lending models to construct a sustainable forprofit microcredit bank in Ukraine
Target business opportunities:
–
–
–
9
Below the ‘high-end’ lending activities of the World Bank, EBRD and
various for-profit multinational banks
Above the ‘low-end’ lending activities of Grameen Bank model in
Bangladesh
Loan sizes to range from $10,000 to $100,000
Emerging Markets Corporate
Finance
November 6, 2015
Business Plan






Initially set up 1 branch growing to 8 in year 5
Loan advisors will handle 15-25 accounts
Require groups of 5 or more to cross guarantee loans (assumed
default rate of 10%)
Collateral: depending on size of loan (10-20% in savings account)
Interest rates: 50%
Source of funding:
–
–
–
10
interest-free loan of $2.5MM for first 3 years
staged equity financing totaling $6.5MM in years 2-5
approach capital markets or commercial sources
Emerging Markets Corporate
Finance
November 6, 2015
Results of Model





11
5000+ loans issued by 2010
Total loan portfolio value in 2010 of approx. $25MM
Interest-free loan repaid by Year 5
NPV $1.9MM
CAGR 34%
Emerging Markets Corporate
Finance
November 6, 2015
Real Options




12
Opportunity to expand into other financial services
Ability to scale-back operations during periods of economic turmoil
Option to provide larger loans ($100K+) to proven borrowers
Value associated with proving the financial-viability of model to
encourage establishment of other banks as conditions improve
Emerging Markets Corporate
Finance
November 6, 2015
Risks - Firm Specific








13
Funding
Market demand for microfinance loans
Competition
Default rate and late payment of loans
Lack of collateral
Financial sustainability
Improper management
Recruitment of loan advisors
Emerging Markets Corporate
Finance
November 6, 2015
Risks - Ukraine





14
Political instability
Economic environment
Currency exposure
Regulatory environment
Expropriation
Emerging Markets Corporate
Finance
November 6, 2015
Cost of Equity Calculations
Risk Factors
ICCRC Cost of Equity - Ukraine
US Cost of Equity
Ukraine Risk Premium
Components
Inflation/Currency
Expropriation
Political/Economic Stability
New Ukraine Cost of Equity
15
% of Risk
% Mitigation
Cost of Equity
40.6%
12.0%
28.6%
10%
4%
14.6%
80%
80%
0%
-8%
-3.2%
-0%
29.4%
Emerging Markets Corporate
Finance
November 6, 2015
Interest Rate Calculations



16
Ukraine Commercial (lower bound) – 50%
Ukraine Informal Moneylenders (upper bound) – unknown?
Microcredit Summit recommended rate: 35% to 51% for Asia
Emerging Markets Corporate
Finance
November 6, 2015
Conclusion



Feasible at 29.4% Cost of Capital
Anticipated financial return of $1.9MM
Investment in this bank would be attractive to:
–
–
17
Development banks
Companies with a long-term development stake
Emerging Markets Corporate
Finance
November 6, 2015
Key Takeaways

Risk assessment
–
–


18
Microfinance
Ukraine
Calculation of cost of capital and interest rates
Trade-offs between financial and socio-economic returns
Emerging Markets Corporate
Finance
November 6, 2015
Potential Development Bank Funds
INTERNATIONAL
ENTERPRISE FUNDS
Export-Import Bank of the U.S.
Overseas Private Investment
Corporation
U.S. Agency for International
Development (USAID)
INTERNATIONAL
FINANCIAL INSTITUTIONS
European Bank for
Reconstruction and Development
The World Bank Group
- International Bank for
Reconstruction and Development
(IBRD)
- Multilateral Investment
Guarantee Agency (MIGA)
- International Finance
Corporation
19
PRIVATE INVESTMENT
FUNDS
Agribusiness Partners
International
Allied Capital International Small
Business Fund
Bancroft&ndash;Trefoil Eastern
Europe Fund
Calvert Emerging Europe Fund
First NIS Regional Fund
Western NIS and Baltic States
Fund
New Europe East Investment
Fund (NEEIF)
Small Enterprise Equity Fund
FOUNDATIONS, NONPROFIT ORGANIZATIONS
The German Marshall Fund of
the United States
John D. and Catherine T.
MacArthur Foundation
Fogarty International Center
Archer-Daniel-Midland
Foundation
General Electric Foundations
Pew Charitable Trusts
Research Council of Norway
Emerging Markets Corporate
Finance
MISCELLANEOUS
REGIONAL PRIVATE
INVESTMENT FUNDS
Brunswick Fund7
Firebird Fund
Fleming Investment Voucher
Fund
Junction Investors Ltd.
New Europe East Investment
Fund
Newstar
Pioneer Fund
Russia and The Republics Equity
Partners L.P. (RARE)
Russia Value Fund, L.P.
Trust Company of The West
Templeton Russia Fund
Ukraine Fund
November 6, 2015
Profile of Similar Banks
Established
Source of funds
Size of market
Number of outstanding loans
Outstanding loan value
Annual interest rates
Average loan term
Inflation rate
Loan basis
Penalties
Loan per credit officer
Type of businesses
Urban loans, typical range
Average loan size
Maximum loan size
% in arrears
% default rate
20
1992
Primarily the World Bank
350,000 microentrepreneurs
1994
Polish American Enterprise Fund
1997
EBRD
1200
$1,800,000
32%
10,272
$71,000,000
3,888
$10,300,000
16 – 26%
10.5 months
10%
Business plan and cash flow analysis
1% interest per day
2% of total loan if arrears > 30 days
38 (1996) 110 (projected)
8.5 months
1 year (6 mo. – 2 yrs)
Roughly 7 – 10%
<10%
Personal interview, no business plan Accounting data and cash flow analysis
Collateral seized
103
Trade 55%
Services 35%
Production 10%
$2,000 - $10,000
26
$2,000 - $100,000
$2,447
$100,000
$1,500
$6,500
$150,000
No current information – 3.4% (1996)
5.35%
2%
0.7%
Emerging Markets Corporate
Finance
November 6, 2015
Cost of Debt
Debt Markets


II Credit Rating – 17.7
Opacity – use Russia as proxy (O-Factor 84, Tax Equiv 43%, Op
Risk Prem – 1,225)
Development Banks


Worldbank – 12% to 15% for Asian economies
European Bank of Reconstruction and Development – LIBOR +
3% =
21
Emerging Markets Corporate
Finance
November 6, 2015