Managing MFI Political Risk: The Response and Potential of Political Risk Insurance OVERSEAS PRIVATE INVESTMENT CORPORATION Ruth Ann Nicastri, Director May 25, 2010 Photos: Microfinance Insight Photo Contest

Overseas Private Investment Corporation (OPIC) OPIC Refresher 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 1Management Quality 2Corporate Governance 3Inappropriate Regulation 4Cost Control 5Staffing 6Interest Rates 7Competition 8Managing Technology 9Political Interference 10Credit Risk 1 2Liquidity 3Macro-economic trends 4Management Quality 5Refinancing 6Too little funding 7Corporate Governance 8Foreign Currency 9Competition 10Political Interference Oct./Nov “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 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 Insurance Richard Greenberg, Senior Manager for Micro and Small and Medium Enterprise Finance, For more information, visit our website: