Managing MFI Political Risk: The Response and Potential of Political Risk Insurance

OVERSEAS PRIVATE INVESTMENT CORPORATIONRuth Ann Nicastri, Director

May 25, 2010

Photos: Microfinance Insight Photo Contest

Overseas Private Investment Corporation (OPIC)

OPIC Refresher:

• OPIC was established as an agency of the U.S. government in 1971

• Projects have the backing of the full faith & credit of the U.S. government

• OPIC has a developmental mandate• OPIC is open in over 150 countries• Priority markets identified based on US Foreign

Policy

OPIC PROGRAMS

OPIC Finance

OPIC Insurance

OPIC Investment

Funds

• Provides political risk to cover equity or debt investments in MFIs

• Provides medium and long-term financing to projects overseas

• Provides capital to managed investment funds that support economic development in emerging markets

OPIC supports over 100 microfinance institutions across 30 different developing countries

Key risks identified by investors, practitioners and regulators

1 Management Quality

2 Corporate Governance

3 Inappropriate Regulation

4 Cost Control

5 Staffing

6 Interest Rates

7 Competition

8 Managing Technology

9 Political Interference

10 Credit Risk

1 Credit Risk

2 Liquidity

3 Macro-economic trends

4 Management Quality

5 Refinancing

6 Too little funding

7 Corporate Governance

8 Foreign Currency

9 Competition

10 Political Interference

Oct./Nov. 2007“Managing Growth”

Industry concerns moved from managing rapid growth to managing risk

Source: Microfinance Banana Skins Report 2009, CSFI, 2009

April/May 2009“Managing Risk”

Key risks identified by investors, practitioners and regulators

• Nicaragua’s NO PAGO MOVEMENT– Political Violence

to MFI assets and staff;

– Change in Law- Debt moratoriums

– Governmental interference and competition

• India-– Competition

from Government

– Forced closing of MFI branch offices

– Threat of interest rate caps

Political Risks for MFIs

P[ Political Risk Products

• Currency Inconvertibility and Transfer Protects (U.S.) lenders against default on scheduled debt

repayment from MFIs due to host government action preventing currency conversion or transfer of funds.

Protects (U.S.) investors against the inability to convert or transfer local currency earnings from their MFI due to host government action.

• Expropriation Protects lenders against default on scheduled debt

repayment due from MFIS against unlawful host government acts against the MFI

Protects investors in MFIs against loss of investment due to unlawful host government acts against the MFI and blockage of remittance of funds or return of earnings.

• Political Violence Protects lenders against default on scheduled debt

repayment due from the MFI due to political violence in the host country against the MFI or its borrowers

Protects investors against damage to MFI assets due to political violence in the host country.

• OPIC conducted informal focus group discussions with various MIV’s to assess their risks;

• Based upon those conversations, OPIC added the following:– Coverage for change in law or regulations mandating

interest rate caps, or curtailing MFIs ability to lend to certain borrowers or excessive restrictions

– Coverage for Foreign Government actions that adversely affected the borrowers ability to operate their projects;

– Political violence that affects the MFIs or their borrowers/Temporary evacuation coverage

– Coverage for Foreign Government closings or takings of MFI branches;

Highlights of OPIC’s Microfinance Contract

• Total claims paid – 290 claims ($970 million)

Examples of Bank related claims• Inconvertibility: $2.6 million to

Caterpillar for inconvertibility of loan payments from Conferry, their Borrower, in Venezuela

• Expropriation: Discriminatory regulation; Taking of Bank Capital (Citibank Sudan)

• Expropriation: Denial of Justice- blocking intl. arbitration; obstruction of Lenders security (Bank of America – India – Dabhol)

OPIC’s Excellent Claims Record

MIV Manager, Financial

Intermediaries, etc.

(US eligible investors)

Loan

Interest & Principal Repayment

MFI

MFI

MFI

MFI

MFI

MFI

MFI

Senior / sub debt

Equity

Equity Investment

Returns to Equity

OPIC and other lenders are leveraging capital and staff by supporting investment vehicles that lend to MFIs

Leveraging Private Capital in Microfinance Transactions

OPIC PRI

OPIC

CONTACT:

Ruth Ann Nicastri, Director for Political Risk Insurance202 336-8590RNICA@OPIC.GOV

Richard Greenberg, Senior Manager for Micro and Small and Medium Enterprise Finance, 202 336-8616RGREE@OPIC.GOV

For more information, visit our website:

http://www.OPIC.gov