The Mechanics of Microfinance

University of Pittsburgh School of Law

February 13, 2009

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Today’s Panel

• Microfinance, Law & Legal Counsel: The Basics

• Unitus

• Fonkoze

• Kiva

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Microfinance & Law

• Many ways in which microfinance and law overlap – Transactions

• Debt, Equity, Structured Finance, IPOs• Fund Formation, Partnerships, Joint Ventures• Foreign Investments, Foreign Exchange• Online Retail Opportunities (Kiva, Microplace, MyC4)

– Non-profit, For-profit and “hybrid” structures

– MFI “transformation” (thinking of MFIs as financial institutions)

– Corporate governance

– Tax

– IP

– Labor

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Microfinance & Law

• Microfinance laws and regulations vary widely among countries– Significant impact on how MF is conducted, what is permitted, by

whom and to what effect– Keep in mind different roles and responsibilities of international (U.S.)

and / versus local counsel (see below)

• The skills and type of advice provided to MFIs are in many ways the same as those found in traditional financings.

• What provides additional value to the microfinance sector is knowledge of what makes the sector unique (e.g., character collateral, interest rate issues).

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Microfinance & Legal Counsel

• Two-Step International MFI Financing– Step 1: International Investor MFI (governed by U.S. / European Law)– Step 2: MFI Micro-Borrower (governed by local law)

• International (U.S.) law firms can get involved in many ways– Transaction counsel for microfinance transactions– Limited (‘fractional’) in-house counsel to microfinance investment funds,

organizations and related vehicles– Business Development (Microfinance Clients)– Attorney Education– Today: Microfinance (Sub-)Practice Groups

• Having local counsel that is knowledgeable about the microfinance sector and relevant in-country laws is also key

– Investee Countries, FDI, Geographic Expansion, MFI and Investor Outreach, Policy-Making and Governmental Support

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About Unitus

• Our Mission: Advance innovative, market-based solutions in the fight to eradicate global poverty

• Our Strategy: Aggressively expand the availability of sustainable financial services to the poor– We select and partner with early-stage, high-potential microfinance institutions

(MFIs) around the globe

– We provide the strategic, technical and financial support that enables MFIs to grow faster, reaching more of the world’s poor

• Our Impact: Fastest growing network of poor clients– Since our first partnership in 2002, the Unitus network reaches more than 4

million of the world’s poor with affordable financial services through 22 MFI partners

• 14 MFI partners in India, 1 in each of Indonesia, Philippines, Cambodia, Kenya, Argentina, Brazil and 2 in Mexico.

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• Arranging• Structuring• Advisory

The Unitus Model

Relationship ManagementRelationship Management

MFI

MFIMFI MFI

Meet Key MFI Needs Through Advisory and Capital Market Services

Selection ProcessSelection Process

Provide “One Stop” Relationship Management and Support

Provide Peer-to-Peer Learning Through Best-In-Class Networking

Select High Caliber MFIs

• Operations• Technology• Strategy

Capital Markets

Advisory Services

Microfinance Institution

Networking and Contacts

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Partnership Results

• Unitus partners, on average, more than double their client base every year and significantly outperform industry peers

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Unitus MFI Selection Priorities

Goal: identify high-potential MFIs with good management teams in underserved markets.

Unitus employs proprietary tools to:• Identify favorable markets for microfinance

– Regulatory / legal environment– Economic and political stability– Accessible capital markets– Competition– Poverty density

• Select highest-potential MFIs– Potential for rapid, large-scale, profitable growth (> 100% yr/yr, reaching > 100,000 clients)– Strong, socially-minded management– Focus on serving poor clientele– Desire to transform into a regulated financial institution

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Unitus MFI Selection Process

• Two to five day on-site due diligence process preceded by extensive desk due diligence

• Based on industry contacts, research, conferences, etc.

A rigorous selection process, a volume of experience

• Razor sharp criteria applied systematically, based on experience

Assessed = 500+ MFIs

Desk due diligence = 173 MFIs

On-site due diligence = 36 MFIs

Closed deals with 22 MFIs

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Where We Work

Unitus has 22 partners, in 8 countries

Go Forward Target Geographies:East Africa, Southeast Asia, China

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(A Sampling of) Unitus’ Legal Needs

• Structure and launch new initiatives– Non-profit, for-profit and “hybrid” structures– International investment criteria– External counsel and specialized expertise (especially re: non-profit

and tax laws) are key

• Corporate governance and compliance– Board of Directors– Conflicts of Interest– Risk & Audit– HR and Employees / Labor Issues– Other Reporting Requirements

• Engage with MFIs and local counsel as needed– India– Kenya

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Resources

• The Microfinance Gateway– http://microfinancegateway.com/

• Consultative Group to Assist the Poor (CGAP)– www.cgap.org

• International Development Law Organization (IDLO)– www.idlo.int/microfinance

• A4ID (U.K.-based international legal community)– www.a4id.org

• WAM (Women Advancing Microfinance)– http://wam-international.org/