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Microfinance Concept – Investment vehicules and framework –

Microfinance in the field …

Xavier Heude xh@peersdirectinvestment.com

2nd update - March, 2015

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History

What is microfinance ?

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Pope Leo X authorises the Mont de Piété to charge interest to cover their costs

Ireland : small unsecured loans are developed for the very poor farmers

An Italian monk creates the first official European Mont de Piété in order to counteract “loan-sharks”

HISTORY of MICROCREDIT

Financial cooperative systems grow in Europe and North America

1472

1515

1700’s

1800’s

These models are extended to Latin America 1900’s

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70’s : several experimental programmes (Grameen Bank, Sewa, Accion)

grant loans to poverty-stricken women

from MICROCREDIT … to MICROFINANCE

In the 90’s

• spread of microcredit throughout Western countries

• development of savings schemes, followed by micro-insurance

• increase in the number of operators

• diversification of the target populations

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2005 : International Year of Microcredit

2006 : Nobel Peace Prize divided into : Muhammad Yunus / Grameen Bank

« … Lasting peace can not be achieved unless large population groups find ways in which to

break out of poverty. Microcredit is one such means … »

CONSECRATION of MICROFINANCE

Income generating

activity

Wedding

1st child

Activity improvement

2nd child

Children illness

3rd child

School expenses

Funerals

Children wedding

Accident

Health problems

Source : ADA

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Thousands of operators around the world with more and more diverse profiles, and diverging interests :

Money lenders

Traditional systems

Cooperatives

NGOs

Microfinance institutions

Networks of operators

Local governmental agencies

Specialised banks

Commercial banks

Private investors

TODAY …

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Developing Countries Western Countries

Eradicate poverty Tackle marginalization and social exclusion

Get out people from the survival spiral Give people fair business opportunities

Support new businesses that have long -term impact on

people's life

Support microbusinesses that are not served by

mainstream banks

Microfinance is global

- micro-loans < EUR 25,000 tailored to micro-enterprises (91% of all European businesses) - compared to the South, the European microfinance market is a young, highly heterogeneous with growing market segment

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Job hunting support for the youth

Savings to face unexpected hardships and to secure projects in the long-term

Individualised follow-up to ensure families get the most out of their loan

Training (management, skill and social) to help loan recipients gain independence

Loans to develop an income-generating activity

MICROFINANCE SERVICES AT LARGE

Microinsurance to cover many kind of incidents

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Improve areas of activities in : 1. Financial support for clients : Products, outreach, support and other services (manage client activities more actively and respond to needs)

2. Non-financial support : Manage client evolvement, advice and support of client activites (workshops/education in accounting, agriculture and animal farming, entrepreneurship … )

3. Social services : Advice and support health and community development (family planning, drug abuse, gender empowerment, literacy, electricity, insurance … )

RESPONSIBLE microfinance

Balancing financial sustainability with social impact

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• More than 200 million beneficiaries vs. 15 millions in 2000 Potential : 500 million

• 74% of all microfinance clients worldwide are women

• Existing offer in at least 134 countries (out of 194)

Key-figures …

2.5 billion people currently excluded from the traditional banking system across the globe

50 to 70 MFIs

250 to 500 MFIs

Non-bank regulated financial institutions

Downscalling or specialized banks

NGOs, Credit cooperatives, savings houses

1.000 to 5.000 MFIs

• 10.000 MFIs worldwide (estimate)

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• +/- 2.100 institutions reporting to MIX in 2014

The 100 largest institutions outreach 77% of the borrowers

• Average loan amount (NGOs) : USD 300

Median loan amount (Banks) : USD 2.000

• Average savings amount: USD 287

… but one universal observation : microfinance still just barely reaches out to the poorest families

(2010)

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Microfinance Market Outlook 2014 No “sudden stop”: demand for microfinance soars

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The deterioration in MFI portfolio quality is related to 3 trends

1) fast expansion led to an increase in the share of wealthier and more risky borrowers

2) MFIs lack adequate risk management capacities (no centralised data => multiple

borrowing)

3) microfinance initially introduced as a development tool in a largely non-competitive setting. With increasing commercialisation and competition, the instruments used to overcome moral hazard and adverse selection became less effective.

• Rehabilitate microfinance as a development tool (cannot simply return to its origin of subsidised group-lending)

• Learning how the clients live, what they need and demand

Local deposits remain the dominant source of funding for MFIs globally

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How investing into microfinance ?

Interests Dividends

Interests Microcredits

Microfinance Institution

Microbank

Debt Equity

Microfinance Investment

Vehicle (MIV)

Micro-entrepreneurs

Modèle ADA

SICAV, FCP Part II, SICAR, FIS Securitization Vehicles

Guarantees & guarantee funds

80 MIVs surveyed out of the 106 MIVs identified

Assets Under Management in USD Billion (2013)

Volume of private cross-border investments in microfinance

MIV Total Asset Growth

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In 2013, the 80 participating MIVs were managed by 44 asset managers (which are currently located in 15 different countries)

responsAbility (CH) KfW (D) Triodos IM (NL)

MIV Inception and Targeted Closing Dates

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2013 Symbiotics MIV Survey

(2010)

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MIV Growth Drivers Transparency - increased MFI & MIV data / oversight via

MIX-Market, CGAP, LuxFLAG … Investors seeking relatively uncorrelated assets

Survey conducted in January and February 2014 and is based on 306 responses from 70 countries

2013 Financial Performance – Leveraged Vehicles (Fixed Income Funds and Mixed Funds included) Sample size in brackets

2013 Financial Performance – Unleveraged Vehicles Sample size in brackets

Geographical Allocation 2013 vs. 2012

Geographical Allocation: % of Direct Investees (microfinance investees)

Calculation based on a constant sample of 47 MIVs over the period 2010-2013

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A microfinance programme in Vietnam

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Case study

Chi-Em (Dien Bien Phu), 20-27th June’09

- Field analysis

Methodology applied - Interviews with villagers (8 clients, 20 non-clients) - Participation in village workshop (introduction of Chi-Em and loan program) - Observation of operations in branch offices and field activity : > processing of client information > identification of potential clients > administrative tasks > analysis of client database / reporting tools - Discussions with Phan Thị Tuyết Thanh (Country Director), Hoang Thi Ven (Branch Manager) and field staff - Overview of village needs and surrounding areas

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Chi-Em (Dien Bien Phu), 20-27th June’09

- Field analysis

Portrait 1 / Mrs. Oanh Loan : 1.500.000 VND (60 €), 6 months maturity, 1% interest, 2nd loan cycle Usage : purchase of animal stock (fish, chicken) and rice cultivation Approx. income p/month from loan : 180.000 VND (7,20 €), plus additional gains No repayment difficulties so far, seems to be on a good way

Meet the clients….

Mrs. Oanh - Houi Le B village (commune of Noong Het, Dien Bien district) – June ‘09

Case study

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Capacity building : 8 workstreams 1. Client data collection (structure)

2. Client support – non-financial services (training & technical assistance)

3. Development of new products & services (financial)

4. Internal organisation of the program 5. Human resources policy 6. Internal control / MIS (management information system)

7. Business development (clients) & networking 8. External communication

Funding : Loan capital

Case study

Chi-Em (Dien Bien Phu), 20-27th June’09

- key findings

Chi-Em offices in Dien Bien district) – June ‘09

PAT – Poverty Assessment Tool

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Assessment of the poverty level

LOAN application form

Client Database

Credit database

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Promotion -

tuyên

truyền

Orientation -

tập huấn

Partnership

Registration-

đăng kí k.hàng

Loan Application-

đơn vay vốn

Home Visit-

thăm nhà k.h

Credit

Committee-Họp

ban tín dụng

Loan Approval and

Rejection- Đồng ý

cho vay hoặc từ chối

Bank withdrawal to

replenish the vault-

rút tiền bổ sung két

Loan Disbursement-

giải ngân vốn vay

Loan Repayment and Mandatory

Savings collection-hoàn trả vay nợ và

thu t.kiệm bắt buộc

Voluntary Savings deposit-

gửi tiết kiệm tự nguyện

Voluntary Savings Withdrawal-

rút tiết kiệm tự nguyện

Bank Remittance after

collection-gửi n.hàng

sau khi thu

Closing the Loan and

Mandatory Savings transfer-

k.thúc món vay và chuyển

tiết kiệm BB

Collection transferred to

the CCO-chuyển tiền thu

được tới CCO

LPF LPF

LPF LPF LPF LPF

LPF

LPF

LPF

LPF

Loan Utilization Check and

PAT- kiểm tra sử dụng vốn

vay+ PAT

LPF

LPF

Monthly Collection Meeting by

the Cluster Head-

thu tiền hàng tháng bởi cụm

trưởng

LPF

Credit request workflow

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REPORTING

LOAN PROCESS

IDENTIFICATION CLIENT

TRAINING

Promotion Identification /

objectif de la

formation

Sélection des

participants Organisation

Prospects

Ouverture du

prospect

Activation du

client

Analyse Décaissement Collecte

Collecte de

l’information par

district Réalisation Distribution

Pro

cess

us

Mé

tie

r P

roce

ssu

s Su

pp

ort

I - Workflows

Modifications des

données client

Clôture du

compte

Dépôt retrait Clôture

• Crédit

• Épargne

Training supports to credit beneficiaries

Training supports to beneficiaries

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Portfolio size reference table

Staff incentives

Amount to be taken into account for portfolio size (basic amount for bonus

calculation)

CH 3 000 VND

CCO 500 VND

Step 1 Step 2 Step 3 Step 4

Example If number of active clients at the end of the month = 80

If PAR 30 at the end of the month =1,5%

If Voluntary savings balance at the end of the month = 1,500,000 VND

Total bonus of the month

Cluster Head 80*3000 VND = 240,000 VND

20% increase = 240,000*1.2= 288,000 VND

1,500,000 * 2% = 30,000 VND

=80*3,000*1.2+30,000= 318,000 VND

Cluster Head •Cluster Head bonus = 3,000 VND * number of active borrowers * PAR 30 adjustment percentage (see PAR adjustement reference table) + 2% of voluntary savings balance. Example:

Portfolio quality

increase or decrease

PAR 30 = 0% 1.4

PAR 30 < 1% 1.3

PAR 30 < 2% 1.2

PAR 30 < 3% 1

PAR 30 < 5% 0.6

PAR 30 >= 5% 0.3

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Training bonus reference table

Number of trainees for TO

Bonus for TO Bonus for NFSM

From 80 50000 VND 30000 VND

From 100 75000 VND 50000 VND

From 120 100000 VND 75000 VND

From 130 125000 VND 100000 VND

From 140 150000 VND 120000 VND

Step 1 Step 2 Step 3

Example If number of active trainees at the end of the month = 130

If number of client visited= 80

Total bonus of the month

TO 125,000 VND (80-40)*2500=100,000

=125,000+100,000= 225,000 VND

•Training Officer = bonus based on number of trainees (see reference table) + bonus on the number of non compulsory visits (see reference table)

minimum number of non compulsory visits conducted

by TO

Amount to be received per additional client visit

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2 500 VND

Staff incentives

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Risks registar

Risk Rating: 1= Low, 2=Medium, 3= High Examples Example

RISK NO. Risk Rating Risk Description Type of PROCESS

Type of DEPARTMENT

R001 3 Wrong processing of data during Mbwin Conversion. System Conversion MIS

R002 3 Discrepancy in Loan and Saving ledger balances due of data processing in different system. System Conversion MIS

R003 2 Risk of failure of product in a new market. Launching new product Operation R004 3 Risk of non-recovery in a new branch area. Entering new market Operation

R005 2 Risk of non-availability of secure office place in new branch area. Opening new Branch Operation

R006 2 Risk of non-availability of qualified? staff in new market or branch area. Opening new Branch HR

R007 3 Failure of new loan or saving product Launching new product Operation R008 3 Risk of wrong selection of clients Loan Origination Operation R009 3 Risk of moving away from target client Loan Origination Operation

R010 3 Risk of moving away from organizational stated goals and mission

Loan Origination, Launching new product, Opening new branch offices Operation

R011 3 Risk of wrong appraisal of borrowers repayment capacity. Loan appraisal Operation

Internal Audit Category of risks

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