11.2010 0528 tbli_lip

Disclaimer : Living in Peace, a Japan-based NPO does NOT solicit investments or sell financial products.

Key Messages

About Living in Peace •Mission •Organization •History

How to minimize due diligence costs •Economics of predatory lending •Initiatives of LIP to minimize DD costs •Challenges

About Living in Peace

一番大切なのは本人の意志

2009.11.15

Mantra : Opportunity for everyone

Organization Representative Director Taejun Shin

Project Manager (Microfinance) Akiko Sugiyama

Project Manager (Education) Noriko Matsuda

Number of full-time employee 0

Number of directors 7

Number of part-time workers +50

Number of supporters +800

Email transaction / day (incl. weekend) +100

Range of working hours /day (incl. weekend) 0 – 20

Main office location Cloud

Cup of coffee I had since the establishment +5,000

History

Established

Hosted microfinance forum together with World Bank

Closed collaboration agreement with Music Securities

Closed collaboration agreement with CARD MRI

Launched “Microfinance Fund for MDGs”

Fund closed; JPY 40+ million from 400+ investors sent to MFI in Cambodia

LIP Microfinance for MDGs

LIP (Japan)

Music Securities

(Japan)

CARD MRI

(Philippines)

Samic Limited

(Cambodia)

Investors (Japan)

Partnership

TK Agreement Intermediary

Planning / MFI selection / Monitoring

Investment & Operational

Support

Investment

How to Minimize DD Costs

“Now a second line of attack has been launched, in which for-profit microfinance firms are accused of lending recklessly to people too poor to repay the loans.”

The Economist (UK)

“Froth at the bottom of the pyramid”

Predatory lending under way

Increase in investments should not be accused

Less than 10% of market’s cash needs

USD Bn

Source : CGAP

Investments could be skewed

Ticket to Cambodia : $ 1,000

5 days payroll : $1,000

Hotels, meals, etc : $5,000

DD trip by two analysts : + $ 5,000

How the math works in $ 100K investment

How the math works in $ 1M investment

Tend to be high-cost / high-performance

High Performance

Low Performance

High Cost Low Cost

Normal Research

We seek “Alpha”

High Performance

Low Performance

High Cost Low Cost

Normal Research

LIP

α

System spec LIP MFI Evaluation System (LMES)

Evaluation target Small-to-mid size MFI

Evaluation cost Less than $100

Lead-time One week

Evaluation contents Credit risk and social performance

Evaluation methodology Scoring based on logit analysis

Data source 1 Information provided by MFI

Data source 2 Answers to the questionnaire

System completion target year 2013

Accessibility High (web-base system)

Strength of part-time organization

0%

2%

4%

6%

8%

10%

12%

Gross Return Ticket Hotels etc Payroll Net Return

Purpose of the system

0%

2%

4%

6%

8%

10%

12%

Gross Return Ticket Hotels etc Payroll Net Return

Components of the research

Management Quality •Strategy •Management Capability •Information Management System •HR / Governance

Financial Performance •Portfolio Quality •Operation Sustainability •Balance-sheet Quality •Cash Flow Stability

Country Performance •Macro-economic Performance •Political Stability •Quality of MFI Regulation •MFI Competitive Situation

Social Performance •Operating Area •Borrower Type •Contents of Service •Social Responsibility

The biggest challenge – information risk

Contents of Risk Mitigation

Fraud •Require several source of information that should tie out •Come up with the questions-mix to detect fraud

System Capability •Evaluate quality of the system given its output and then impose stress test

Input Quality (Human-error)

•Evaluate the quality given the several information resource and impose stress test

Two Remarks on LMES

“The arguments often heard that because of the human

element, of the psychological factors etc., or because there is –allegedly- no measurement of important factors,

mathematics will find no application, can all be dismissed as utterly mistaken. Almost all these objections have been

made, or might have been made, many centuries ago in fields where mathematics is now the chief instrument of

analysis.”

Von Neumann and Morgenstern “Theory of Games and Economic Behavior”

We believe in modeling

2009.11.15

We welcome those who do it better

Thank you!

taejun.shin@gmail.com