Emerging Trends and Challenges
Edited by Suresh Sundaresan
Chapter 3: Securitization and Micro-credit Backed Securities (MCBS)
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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