Securitization and the Challenges Faced in Micro Finance
Apr 2005, Basu, S.

Can the high costs and risks involved in microfinance securitization be mitigated?

This paper discusses the challenges faced by microfinance in the area of securitization, particularly focusing on the experiences of the Indian bank, ICICI Bank.

The paper discusses:

• The evolution of financing models ââ?¬â?? from traditional lending to asset backed securitization, credit derivatives and mezzanine financing;
  
• Key concepts related to securitization;
  
• Participants involved in a securitization transaction;
  
• Asset classes in securitization;
  
• Cash flow and contract analysis;
  
• Risk identification, allocation and mitigation;
  
• Credit protection mechanisms;
  
• Legal, taxation and regulatory considerations.

It lists the challenges faced by microfinance as follows:

• High cost of service associated with the low value, high volume and cash intensive nature of the business;
  
• High fixed and variable costs associated with creating the physical infrastructure required to broaden outreach;
  
• Risk management challenges associated with the high levels of information asymmetry, the tenuous nature of the viability of the economic activity for which funding is sought, and the high degree of exposure to exogenous shocks;
  
• Inability of a large section of the population to pay for the ease of access to such financial service offerings.

The author discusses the challenges faced by the ICICI Bank in this area and the solutions it has adopted to face these challenges. He concludes by describing a couple of microfinance securitization deals executed by the Bank.

Download this Document

Publisher(s):
Center for Micro Finance Research (CMFR)

About Us  |  Contact Us  |  Partners  |  Help  |  Site Map  |  Terms and Conditions  |  Privacy Policy  |  Manage Subscriptions

© CGAP 2010 ALL RIGHTS RESERVED