powerpoint slides

April 18, 2023 Emerging Markets Corporate Finance1

NewBank Microfinance:Microcredit in the Ukraine

Fuqua School of Business

Duke UniversityHolly Dice, Andrew Khoo, Sara

Kirchoff, Robert M. Little & Hartaj SIngh

April 18, 2023Emerging Markets Corporate Finance

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Agenda

Scenario What is Microfinance? Characteristics of Microfinance Loans Overview of Ukraine Business Plan Key Takeaways Conclusion


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Scenario

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


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What is Microfinance?

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


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Characteristics of Microfinance Loans

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


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Overview of Ukraine

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


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Overview of Ukraine (cont.)

Economy Post-independence GDP contraction

– 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


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Ukrainian Banking Sector

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


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Business Plan

Utilize microcredit lending models to construct a sustainable for-profit microcredit bank in Ukraine

Target business opportunities:– 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


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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:

– 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


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Results of Model

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%


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Real Options

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


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Risks - Firm Specific

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


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Risks - Ukraine

Political instability Economic environment Currency exposure Regulatory environment Expropriation


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Cost of Equity Calculations

Risk Factors % of Risk % Mitigation Cost of Equity ICCRC Cost of Equity - Ukraine 40.6% US Cost of Equity 12.0% Ukraine Risk Premium 28.6% Components Inflation/Currency 10% 80% -8% Expropriation 4% 80% -3.2% Political/Economic Stability 14.6% 0% -0% New Ukraine Cost of Equity 29.4%


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Interest Rate Calculations

Ukraine Commercial (lower bound) – 50% Ukraine Informal Moneylenders (upper bound) – unknown? Microcredit Summit recommended rate: 35% to 51% for Asia


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Conclusion

Feasible at 29.4% Cost of Capital Anticipated financial return of $1.9MM Investment in this bank would be attractive to:

– Development banks– Companies with a long-term development stake


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Key Takeaways

Risk assessment– Microfinance– Ukraine

Calculation of cost of capital and interest rates Trade-offs between financial and socio-economic returns


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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

PRIVATE INVESTMENT FUNDS Agribusiness Partners International Allied Capital International Small Business Fund Bancroft–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, NON-PROFIT 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

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


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Profile of Similar Banks

Established 1992 1994 1997Source of funds Primarily the World Bank Polish American Enterprise Fund EBRDSize of market 350,000 microentrepreneurs

Number of outstanding loans 1200 10,272 3,888Outstanding loan value $1,800,000 $71,000,000 $10,300,000Annual interest rates 32% 16 – 26%

Average loan term 10.5 months 8.5 months 1 year (6 mo. – 2 yrs)Inflation rate 10% Roughly 7 – 10% <10%Loan basis Business plan and cash flow analysis Personal interview, no business plan Accounting data and cash flow analysis

1% interest per day2% of total loan if arrears > 30 days

Loan per credit officer 38 (1996) 110 (projected) 103 26Trade 55%

Services 35%Production 10%

Urban loans, typical range $2,000 - $10,000 $2,000 - $100,000

Average loan size $2,447 $1,500 $6,500Maximum loan size $100,000 $150,000

% in arrears No current information – 3.4% (1996) 5.35% 0.7%% default rate 2%

Penalties Collateral seized

Type of businesses


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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% =

powerpoint slides

Documents

microfinance institutions

newbank microfinance

free loans

agenda scenario

asia low default rates

andrew khoo

sara kirchoff

micro enterprises