Emerging Trends and Challenges

Edited by Suresh Sundaresan

This book takes a solid step toward a systematic analysis of the implications of microfinance for the role and regulation of capital markets. The authors address integration of capital markets with microfinance, technological innovations such as the use of mobile phone technology, the consequences of women’s access to micro-loan borrowings, and the regulatory challenges and opportunities emerging as the landscape of microfinance dramatically evolves.

Chapter 3: Securitization and Micro-credit Backed Securities (MCBS)

Ray Rahman and Saif Shah Mohammed

Subjects: development studies, development economics, economics and finance, development economics, financial economics and regulation


Ray Rahman and Saif Shah Mohammed INTRODUCTION BRAC Micro Credit Securitization Series I, closed in August 2006, was the world’s first securitization of micro-credit receivables and the first of a new type of investment called micro-credit backed security (MCBS). This securitization was also the first AAA-rated transaction within Bangladesh. A number of innovative transactions have taken place in the micro-credit industry in the last few years. In 2004, ICICI bank purchased 25 percent of SHARE Microfin Ltd’s micro-loans in a US$4.9 million transaction. The purchased microfinance receivables were valued at their net present value at an agreed-upon interest rate. A portion of the transaction was guaranteed by Grameen Foundation USA. Also in 2004, BlueOrchard issued its first collateralized debt obligation (CDO). In these, and subsequent transactions, BlueOrchard pooled collections of loans made out to a number of microfinance institutions around the world. Unlike the ICICI transaction, the BRAC securitization is scalable and allows for tranching. It is not a one-time sale of receivables at a discount. Unlike the BlueOrchard CDOs, the BRAC securitization involves the direct pooling of micro-credit receivables instead of the pooling of loans disbursed to microfinance institutions. The investments are thus directly linked to the performance of the underlying portfolio of micro-credit receivables instead of the risk of the originating institution. The transaction is entirely in local currency—thus removing any currency risk from the originating institution. As such, the BRAC securitization represents a step in the evolution of the linking of...

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