Daniel Rozas, a microfinance consultant based in Brussels, and Vinod Kothari, a microfinance practitioner based in Kolkata, India, recently wrote an article published on the Microfinance Focus website [1] describing the risks and proposing solutions to the risks behind microfinance securitization, a process that involves aggregating assets in a pool and issuing securities backed by the pool’s assets and cash flows [2].
The authors focus on the credit risk of securitization, which is the risk of a default on microfinance securities by their microlender originators. The authors propose structural solutions which include backing the microfinance securities with credit default swaps to protect investors and the use of super-securitization, which involves creating collateralized debt obligations from the assets of multiple microfinance institutions (MFIs) to diversify the exposure beyond dependence on just one MFI. In addition, the authors propose a number of systemic changes to protect investors which include the creation of a credit bureau to maintain a record of borrowers’ repayment histories to better estimate their credit worthiness and the creation of a MFI liquidation facility that can take a failing MFI into receivership and sell its assets to increase the likelihood of repayment to investors. Such a facility might function similarly to the Federal Deposit Insurance Corporation in the United States.
By Trevor Kwong, Research Assistant
Additional Resources and Sources:
[1] Source Article: Microfinance Focus: Hidden Risks of Securitization -Part II: Establishing a Sounder Basis for Microfinance
http://www.microfinancefocus.com/news/2010/08/19/hidden-risks-of-securitization-part-ii-establishing-a-sounder-basis-for-microfinance/
[2] Wikipedia: Securitization:
http://en.wikipedia.org/wiki/Securitization
[3] Microcapital: MICROCAPITAL BRIEF: Vineet Sukumar of the Institute for Financial Management and Research (IFMR) Capital Defends Microfinance Securitization
https://www.microcapital.org/microcapital-brief-vineet-sukumar-of-the-institute-for-financial-management-and-research-ifmr-capital-defends-microfinance-securitization/
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