BRAC Microcredit Securitization Series I: Lessons from the World's First Microcredit Backed Security (MCBS)

This paper discusses lessons learned from the BRAC Microcredit Securitization Series, – the world's first securitization of microcredit receivables. The paper discusses:

• The transaction rationale that convinced BRAC to go forward with the securitization;
• Political economy considerations that went into arranging the transaction;
• The transaction structure, and the various data and logistical constraints that the final structure addressed;
• BRACs microcredit portfolio data risks;
• The performance of the bond;
• Credit enhancements that were built into the structure.

In conclusion, the authors relate the following lessons from the transaction, and also ideas for the future.

• There is a need to have exhaustive information on borrower characteristics to enable adequate analysis of risk;
• To collect information about its members and their households, BRAC needs to tap into the information already available from its healthcare and education programs;
• Investors need to be more flexible in the conditions they place on future securitizations, they should allow risk profiles of the borrowers to guide optimal structures;
• MFIs need to share information about borrowers with each other, so that they can better understand the risk profiles of their own borrowers;
• An increase in frequency of updates of information from the actual collections to the head office would reduce investor risk and help BRAC improve its cash-flow management.