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Managing MFI Political Risk: The Response and Potential of Political Risk Insurance OVERSEAS PRIVATE INVESTMENT CORPORA

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 :

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Managing MFI Political Risk: The Response and Potential of Political Risk Insurance OVERSEAS PRIVATE INVESTMENT CORPORA

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  1. 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

  2. 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

  3. OPIC PROGRAMS OPIC Finance OPIC Investment Funds OPIC Insurance • Provides capital to managed investment funds that support economic development in emerging markets • Provides political risk to cover equity or debt investments in MFIs • Provides medium and long-term financing to projects overseas

  4. OPIC supports over 100 microfinance institutions across 30 different developing countries

  5. Key risks identified by investors, practitioners • and regulators Key risks identified by investors, practitioners and regulators Oct./Nov. 2007 “Managing Growth” April/May 2009 “Managing Risk” Industry concerns moved from managing rapid growth to managing risk Source: Microfinance Banana Skins Report 2009, CSFI, 2009

  6. Political Risks for MFIs • India- • Competition from Government • Forced closing of MFI branch offices • Threat of interest rate caps • Nicaragua’s NO PAGO MOVEMENT • Political Violence to MFI assets and staff; • Change in Law- Debt moratoriums • Governmental interference and competition

  7. 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 investorsin 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.

  8. Highlights of OPIC’s Microfinance Contract • 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;

  9. OPIC’s Excellent Claims Record • 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)

  10. Leveraging Private Capital in Microfinance Transactions OPIC and other lenders are leveraging capital and staff by supporting investment vehicles that lend to MFIs OPIC PRI MFI Senior / sub debt MIV Manager, Financial Intermediaries, etc. (US eligible investors) MFI Loan MFI MFI Equity Investment MFI Interest & Principal Repayment MFI Equity Returns to Equity MFI

  11. OPIC For more information, visit our website: http://www.OPIC.gov CONTACT: Ruth Ann Nicastri, Director for Political Risk Insurance 202 336-8590 RNICA@OPIC.GOV Richard Greenberg, Senior Manager for Micro and Small and Medium Enterprise Finance, 202 336-8616 RGREE@OPIC.GOV

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