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  • 2 ALFIMicrofinanceConferenceReport2011

    3rd ALFI microfinance conference

    17 March 2011

    Conference Report

    Executive Summary

    The Association of the Luxembourg Fund Industry (ALFI), in association with LuxFLAG, organised a Microfinance conference in Luxembourg on 17 March 2011. Considering that it was just the second year of this event, the response received from the participants was extremely positive. More than 150 delegates from 12 countries participated. The event was attended by the HRH Prince Guillaume of Luxembourg and H. E. Minister Marie-Jose Jacobs, Minister for Development Cooperation and Humanitarian Affairs, delivered the Keynote speech at the opening session. Panels consisting of 24 industry experts representing Development Finance Institutions (DFIs), Rating Agencies, Investment Funds and Microfinance practitioners discussed a wide range of topics ranging from the current state of the sector to the possible ways of securing a better future for the industry.

    It was noted that Microfinance is growing around the world. Even though the trend is slowing down from the exponential growth of a few years ago, it is still resolutely positive. However, whereas the size of the industry has reached a high point, we must also face the fact that its reputation, particularly in the popular media, has reached a low point.

    Recent events in India, Bangladesh, Bosnia, Morocco, and Nicaragua have had a negative impact on the reputation of the industry. That controversy should arise is not surprising when one looks at the historical context: providing credit to the poor is one of the most sensitive issues in both Judeo-Christian and Islamic culture and has been debated throughout modern civilization. On top of this, as the microfinance industry is very fragmented, located across several continents without a single institutional defender, it is difficult to manage its global reputation effectively.

    However, despite the negative image of the industry in todays press and a series of unfortunate - we hope isolated - events, the industry maintains that microfinance is good for the planet. Speakers underlined that concrete steps need to be taken by the stakeholders to rectify industry shortcomings and get back on a more positive trend. By being more transparent and giving the first priority to the end client, the industry should overcome the current crisis.

    The initiative of International Financial Institutions to provide technical assistance to microfinance institutions is contributing to the fostering of a healthy and professional sector. While tier 1 MFIs might not need the technical assistance any more as they are self-sufficient, other MFIs need further help. Moreover, additional detailed academic research on regulatory matters, competition, social performance and the impact of microfinance loans would certainly benefit the industry. Large financial institutions, investment funds and industry associations should play a leading role, along with the Universities, in organising and financing such research.

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    Luxembourg has played an important role in the development of the sector by providing a suitable environment for microfinance investment funds. Impact finance and Islamic microfinance are two further areas where Luxembourg should explore opportunities in the near future. Moreover, upcoming changes in the fund industry such as AIFMD will certainly have an impact on MIVs and the industry needs to be prepared for it.

    Excellent speeches during the day and an appreciative response from the participants have certainly motivated us. I have no doubt that this will be an annual event in Luxembourg. I take this opportunity to thank the speakers, moderators, panelists and participants for their contribution and look forward to welcoming all of you at next years ALFI & LuxFLAG Microfinance conference.

    Thomas Seale Chairman

    Luxembourg, 15 June 2011

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    Proceedings

    09:00 Chairmans introduction

    Thomas Seale, Vice Chairman, ALFI and CEO, European Fund

    Administration, Luxembourg

    Microfinance (MF) is an industry that continues to expand rapidly. Due to its decentralised and often semi-regulated nature it is difficult to obtain accurate figures.

    According to Mix Market database shows:

    -1929 microfinance institutions

    -62 billion USD in MF loans

    -92 million borrowers

    Microfinance has reached a low point as regards its reputation.

    Why is the industry, so heralded just 5 years ago, suffering so much today?

    Thomas Seale suggested three factors that contribute to microfinances negative image today:

    1) providing credit to the poor is one of societys most sensitive issues: as a philosophical problem it has been around for several thousand years;

    2) the decentralised nature of the MF industry makes it susceptible to criticism. With no strong unifying institutional defender, MF suffers in the media because of a lack of voice;

    3) the debate ishighly politicised and mediatised.

    MF needs to :

    become more transparent; become more focused on putting client needs first; focus on entrepreneurial activity, avoid consumer loans and over-indebting individuals; manage expectations: state more clearly what MF can and cannot do.

    The purpose of this conference is to shine a light on these issues and craft solutions and actions for improvement.

    09:15 Microfinance as a development tool?

    Mme Marie-Jose Jacobs, Minister for Development Cooperation and Humanitarian Affairs, Luxembourg

    Luxembourg has been a pioneer in the field of microfinance.

    With international recognition comes the need for a heightened sense of responsibility.

    Hence the importance of close coaching and follow up of clients by MFIs. These clients are often illiterate and we cannot expect financial literacy.

    There is no one size fits allin microfinance. Different communities require different products.

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    MFIs must set themselves high quality standards with regard to their structure, accounting, the transparency of their management, the interest rates charged to their clients and the behavior of their staff.

    Microfinance, like traditional finance, is a money business. Financial transactions are based on trust. When this trust is betrayed the mutually expected benefits evaporate, which immediately hits the poor client in a harsher manner than the MFI.

    The precondition for microfinance to be considered as a development tool is that MFIs should know their clients, and know to what extend they are able to invest a loan in a revenue generating activity.

    An MFI must believe and act on the principle that responsible management is to its own advantage, as is responsible growth.

    Adequate financial regulation in general and more specifically for microfinance is another prerequisite for microfinance to be a useful development tool.

    The damage that can result at a social level from inconsiderate microfinance activities warrants a serious and well adapted legal, regulatory and supervisory framework.

    Overly strict regulation might prevent cases of malpractice, but it may also block honest microfinance schemes from developing in the informal sector.

    MFIs need and deserve regulation that is adapted to the real risk of financial transactions with the poor.

    In contrast to Andhra Pradesh, India, the Western African Economic and Monetary Union is one step ahead. A law adopted at the level of the regional organisation aims to create a homogenous legal framework in all eight member states; for instance, the subject of saving deposits with MFIs has been addressed.

    Q&A session:

    Q: Is microfinance a development tool?

    A:Yes MF may be considered as a toolbox for development, if:

    1) the different microfinance tools are designed and put to use with the real needs of the client population in mind. There is no one size fits all;

    2) MF, like other development tools, cannot be practiced in a vacuum. One has to take into account the social and cultural, as well as legal and regulatory environment if MF is to be effective in the fight against poverty;

    3) only financially sustainable MF can be of service to sustainable development. Saving deposits with MFIs can work wonders in that respect, but are not always available or even authorised.

    9.30 Microfinance: view from the European Investment Bank

    Plutarchos Sakellaris, Vice president, EIB, Luxembourg

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    The EIB remains committed to making long term loans. It contributes more than USD 5m to Namibia, Tanzania and Tchad.

    The EIB has direct investments in Africa, the Caribbean, and Asia. The EIB provides loans in the national currency. Plutarchos Sakellaris stressed the importance of transparency and a balanced approach. Responsible microfinance should be transparent with respect to the interest rate to be applied. The EIB has signed a set of Client Protection Principles and is working on a set of Social

    Performance Standards. The EIB encourages MIVs to obtain labels such as LuxFLAGs microfinance label. A Banana Skin Survey in 2011 shows that threats to the reputation of the microfinance

    industry are now considered a very important risk (it ranks in second place, up from 17th place a couple of years ago).

    Reputational concerns need to be addressed. Microcredit should also be granted within the EU such as in Greece and Ireland.

    9.45 Current trends, threats and opportunities

    Damian von Stauffenberg, Founder, MicroRate, Washington

    Where are we now? Damian von Stauffenberg opened his presentation by suggesting that the time of innocence was over. The microfinance industry has been precipitated into adolescence by the global financial crisis. In fact, the microfinance sector came through the crisis with pretty colours: growth contracted, but the industry continued to grow. The slow-down was a good thing, because growth rates prior to the financial crisis were unsustainable and would have led to a much larger crisis than we are facing now.Even so, portfolio at risk statistics did deteriorate during the period:

    MFI PORTFOLIO GROWTH AND QUALITY

    Y/E June 2007 2008 2009 2010

    Loan portfolio 49% 47% 17% 23%

    P@R and write offs 5.1% 4.7% 6.9% 7.7% est

    Microfinance continued to grow throughout the financial crisis.

    In 2008, MIVs started to hold back loans to MFIs but investors did not lose confidence and suddenly MIVs could not place the cash they received, resulting in large sums of cash on deposit.

    MFI asset growth

    MIV asset growth 2007 2008 2009 2010

    AUM 97% 28% 22% -

    MF assets 107% 25% 11% 10% est

    Today, the main obstacle to investing is not foreign exchange issues, as it was 5 years ago. The limiting factor is the lack of demand by MFIs.

    MFI growth vs MIV growth

    2007 2008 2009 2010

    MFIs (loan portfolio) 49% 47% 17% 23%

    MIVs (MF portfolio) 107% 25% 11% 10% est

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    Efforts by some MFIs to place money at any cost, regardless of the needs of the end clients, have led to scandals. Other scandals occurred in countries where governments intervened with a badly thought-through plan to rescue debtors. For instance, in Nicaragua, the Government capped interest rates and encouraged borrowers not to pay back their loans. The result is the collapse of microfinance in that country. We are now running a high risk of alienating investors. People invest in microfinance because they wish to alleviate poverty; now they find that in some cases MF is increasing poverty. It is imperative that the industry not let go of the principle that MF is about commercially productive loans. This requires proper supervision and credit bureaus to check for indebtedness.

    In India, for instance, much of MF lending is not real microfinance because the MFIs do not look at what the microloan is to be used for. There is no control. As a result, 50% of loans are used for consumption.

    10:15 A critical view of microfinance: a multi-dimension approach

    Moderator: Marc Elvinger, Partner, Elvinger, Hoss & Prussen,Luxembourg

    Panel:

    Axel de Ville, ExecutiveDirector, ADA, Luxembourg,

    Runa Khan, Founder and Executive Director, Friendship, Dhaka

    Sara Vermeir, Private Equity Manager, Incofin Investment Management, Antwerp.

    Sara Vermeir What is the driving force behind microfinance? It is to combine financial return with social impact. In recent years some parts of the industry lost sight of the social objective as everybody and anybody piled into the market

    Runa Khan spoke of the responsibilities that fall to MFIs.

    The same microfinance model cannot be replicated in every sector of the same market, let alone from country to country. We must ask: what are the right products for this community? What are their real needs?

    There are too many layers between the investor and the end client, resulting in mission drift. It is wrong to take out a huge profit: the investors profit should not be linked to the profit of the

    MFI. Profits generated by the end customer should be left in the system and used to make more loans or improve interest rates.

    We should not use profits generated by end clients to build donor facilities, such as schools. The community should be allowed to develop its own projects and decide how it wishes to spend its money.

    As an MFI, we have a duty to check out donors: what are their real goals and objectives?

    Axel de Ville stressed the importance of putting the client first at all levels: social performance reporting is for the benefit of the client, not the investor.

    We need to do market research, to segment the market: one size does not fit all. We need to study the failures and learn from them.

    Investors should know their risk appetite and take risks that match this profile. We should do what we say and say what we do. Above all, we should not oversell the industry by using buzzwords; these have damaged the credibility of the sector.

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    If the industry does not react now, we risk very bad damage. All the actors in the chain have an important role to play.

    Q&A Session

    Luis Viada of Microrate commented that people everywhere are motivated by the factors that affect their pay or their bonus. Until recently, the industry was focused entirely on loan volume: outreach, access and depth were the targets. It is not a good performance target for a loan officer to seek a 98% repayment rate in his loans. This will lead to abuse. Axel de Ville agreed, adding that the only way to create a virtuous circle and was to apply social impact measurements.

    11:30 Social performance of MIVs: what are the lessons learned from the SRI experience?

    Marc Labie, professor, CERMi, University of Mons

    Ludovic Urgeghe, Research Fellow, CERMi, University of Mons

    The financial crisis was a chance to slow down and put the microfinance house in order.

    Ludovic Urgeghe of the University of Mons presented the results of an academic study commissioned by ALFI and undertaken during Q1 2011.

    MIVs and social performance

    MIVs have experienced rapid growth in the last few years: there are now over 100 of them, with 8 billion USD under management.

    The market is too narrow: most of these 100 funds only invest in first and second tier MFIs, creating a flood of money into some institutions that do not need it while others miss out.

    Investment by MIVs into lower tier MFIs relies on the presence of donor money (directly or indirectly) and on socially motivated investors.

    It is still not totally clear how MIVs are positioned within the broader sphere of SRI. Until recently, there was no explicit need to justify the social side of investments but the situation has changed: the reputation of microfinance has been degenerating and there are over-indebtedness issues. It has therefore become important to push towards more transparency on social commitment.

    What is social performance by MIVs and how do we achieve it ? What can we learn from the SRI experience?

    Theoretical framework: impediments to SRI

    SRI is an investment process that integrates social, environmental and ethical considerations into investment decision making (Renneboog el al., 2008).

    Juravle and Lewis (2008) present the types of impediments/biases that deter economic agents (investors, fund managers, advisers) from adopting true SRI behaviour. There are three levels of analysis

    I. Individual level (e.g. positive illusions, risk aversion) II. Organisational level (e.g. the decision-making process, incentives) III. Institutional level (e.g. fiduciary duty, diversification rules, mimetism)

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    The survey : insights from microfinance fund managers Objective and methodology. Why did we target the fund managers? Because they are the key players in SRI investment decisions. Twofold objective :

    Understanding how they perceive and use social performance criteria in their decision-making; Identifying the main impediments to the use of social criteria for investments.

    9 microfinance managers accepted to take part of the study. The 9 microfinance managers represented 19 MIVs and 26 % of MIV assets under management (according to CGAP, 2010). Results

    1. Individual level

    Most respondents consider microfinance to be a social investment per se (there is a tendency to simplify the complex reality which is a major impediment to a formal integration of social performance). The respondents are concerned with social performance (SP), but provide very different definitions. It is not clear to MFIs to what standard they should respond.

    Risk and uncertainty aversion dont play a major role: risks are high but usually well understood and diversified. Risks are therefore not an impediment.

    They have no particular short-term vision of the market (this is not an impediment either).

    2. Organisational level

    Absence of a clear and formal integration of social aspects in the investment approach. Eligibility criteria are exclusively financial; no clear weighting for social performance in the final decision.

    Relationship of financial versus social performance. This has a negative impact for small MFIs because SP is costly. It is however positive for well-established MFIs.

    Social tools: mostly in-house tools and use of ratings completed by own due diligence. Performance review and incentives: very few mention social aspects.

    3. Institutional level

    Regulation does not cover social reporting and is not adapted to the specificities of

    microfinance. Herd behaviour: focus on a small number of MFIs is a strong selection bias. Diversification rules are restrictive, mainly due to country risks. Reporting to investors and MFI follow up are still mainly focused on output indicators, but

    investors are said by fund managers to be satisfied and not asking for more information on social performance.

    Investors profit requirements usually remain limited. Q&A session Q. What type of SRI is an MIV? A. MIVs tend to use the negative screening approach: aiming at a good financial performance under a social constraint. Q. What is Role of social performance in investment decisions? A. Social performance is more seen as a bonus but is not a critical decision factor.

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    Having both social and financial performance is rather a belief than an actual practice. Q. What suggestions can we adopt from the SRI world? A. Regulation is important. It is the main factor behind SRI development in Europe, but is totally absent in the microfinance area. The standardisation of practices is essential. It is important to collaborate and share information among players.

    12:00 Transparency within the MF sector

    Moderator: Kenneth Hay, Chairman, LuxFLAG, Luxembourg Panel

    Xavier Reille, Lead microfinance specialist, CGAP, Paris

    KimanthiMutua, President AMTF Nairobi

    Luis Viada, Luminis/MicroRate, Washington

    Ken Hay introduced the theme of transparency in microfinance, pointing out that it was a huge subject that related to aspects as diverse as financial information, risk and reward and social performance.

    Xavier Reille provided some historical background. He has been tackling this area for the last 15 years within CGAP, progressing in 3 stages or building blocks.

    Reporting: 400 MFI had their financial figures combed for compliance with IFRS, while a social performance task force checked the MFI for performance against 30 criteria.

    Validation: cross-checking these results against reports issued by the specialised rating agencies (of which there are now 4).

    Information platform: consolidation of the information and making it accessible to the public via CGAP internet platform.

    He pointed out that there is no other part of the non-quoted investment industry that provides so much economic data on several hundred institutions in over 100 countries.

    Luis Viada commented that many media stories are inaccurate, but there is no mechanism for countering these stories in a timely manner. There are three principal areas underattack:

    Pricing: predatory pricing: we dont explain why different conditions justify different interest rates. Academic study would be useful in this area.

    Risk: it was foolish to encourage the early mantra that the poor always pay. They will, under certain conditions. Governments can interfere badly, creating unintended consequences (eg in Nicaragua). Regulators need to understand the conditions.

    Impact: There is no proof that microfinance lifts people out of poverty. You can only counter this generalised accusation by fighting back with hard facts. Do not try to defend the industry as a whole: quote individual MFI success stories.

    Kimanthi Mutua spoke of the inevitable tension between financial and social goals, and the need to keep this tension. The question of mission drift first arose when the industry was moving from a donor model to commercial money, but at that time the question was purely philosophical; now the question is only too real. The challenge is that the industry is evolving very fast, but our standards of transparency have remained where they were. We missed the opportunity to define what MF was,

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    when the industry was much smaller, and now our reputation is being damaged by activities that are NOT microfinance.

    The key issue is: what actually shapes the behavior of MFIs?

    Customers: they focus on financial performance Regulators: they focus on financial objectives. MIVs: claim to have dual goals but do not apply these criteria to their investment decisions.

    In order to counteract bad press, transparency must be established at both ends of the argument

    we need to demonstrate that MF is doing no harm, and we need to conduct social impact studies to show that it is doing good.

    and investment funds must react to what they learn. For instance, information was publicly available of an impending disaster in India, but investors ignored this.

    Q&A session

    Q. How can we make the end customers be heard so that they have the same voice as the financial reporting voice?

    A. We need to maintain that tension between financial and social objectives. Unfortunately, both rewards and sanctions are skewed to financial indicators.

    Q. How can we tell which MIVs are really taking social performance criteria into consideration?

    A. There is a new MIV rating service being launched: Luminis (a MicroRate initiative, in association with LuxFLAG). Luminis will analyse MIV from four angles: financial performance, risk, social performance and management. Investors will be able to give different weightings to these criteria in their investment choices.

    Q. How can we check that the reports coming from the MFIs reflect reality?

    A. Where financial reporting is concerned, most MFIs are regulated in some way which controls the data. However, where social reporting is concerned, both MFIs and their clients tend to become expert responders. They will tell you what you want to hear, its a form filling exercise.

    It should be noted that social responsibility at the MIV level includes behaving correctly towards MFIs.

    Is it socially responsible to make a 30% return on a MF venture capital fund? Does this sort of performance pressure lead to malpractice?

    14:15 What is the right mix of investments and technical assistance?

    Moderator: Kaspar Wansleben, Executive Director, Luxembourg Microfinance and Development Fund, Luxembourg

    Panel

    Edvardas Bumsteinas, Investment Officer, African, Carribean and Pacific, EIB;

    Monica Beck, Division Chief Financial and Private Sector Development KfW/EFSE, Frankfurt;

    Steven Duchatelle, Head of Investment Unit, Advans SA Sicar, Paris

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    Geert Peetermans, CIO, Incofin/Rural Impulse fund, Antwerp.

    Kaspar Wansleben set his panelists the question: Do MF and Technical Assistance (TA) always go hand in hand?

    Edvardas Bumsteinas said that the EIB developed its microfinance strategy in 2004 following a European Commission review on development finance. The decision was to use intermediaries for microfinance. Today, only 19% of EIB MF money goes directly to MFIs. They discovered that capacity was creating a bottleneck in Sub-Saharan Africa (SSA) and this led the EIB into the technical assistance field. Today, the bank has EUR 200m invested in MF compared with EUR 20m in TA with an additional EUR 5m in TA donated by the Luxembourg government. At first this money was used to support greenfield projects, where there was no expertise. But later they realised that the more sophisticated hybrid funds (funds with different classes of shareholders, not necessarily invested in greenfield sites) also needed TA support.

    Bumsteinas commented that TA funding had become more scarce since the financial crisis. New models are needed that do not rely on donor money. MIVs should fund their own TA programmes. The European Fund for South East Europe (EFSE) is an example of this.

    Monica Beck of KfW& director of EFSE, explained that KfW always combines financing with TA. This money comes from the government, from bilateral sources and from the EU and targets four areas:

    macro level: regulation and supervision, deposit insurance schemes, credit bureaus, etc.; greenfielding; professionalisation of MFIs as they upscale to become banks; working with commercial banks that wish to downscale into the MF area.

    She added that MF needed the private sector, which was why they packaged their products as SPVs (eg EFSE). EFSE is doing TA with private money and this contributed to a recent award won by the fund for being the best public/private venture. EFSE has 40 investors. 17bp of the dividend are siphoned off into a TA pot. Of the 70 MFIs supported by the fund, 50 have received TA. These are small, focused grants, managed on a cost sharing basis (the MFI has to produce a minimum 30% up front in cash) and typically run for 4-5 weeks. This TA system is flexible and efficient which could not be the case with public money.

    Q. Do you report back on TA to the EFSE shareholders?

    A. Yes. There is assessment (feedback) from the MFIs and impact studies that are paid for by the shareholders. So far EFSE has conducted 20 such studies and the results are published on the EFSE website.

    Q. Is TA usually requested by the MFI itself, or offered by EFSE?

    A. Usually it is the fund manager that identifies a deficiency.

    Steven Duchatelle of Advans (a MF venture capital vehicle) explained how TA was crucial to the sort of greenfield projects they are doing in Sub-Saharan Africa. Sites are selected because there is a serious shortage of access to financial services; the market is uneducated and unprepared. Their TA mission is the transfer of knowledge, eg., in the Congo. They send a management training team to the market and this team identifies high potential local talent. This obviously has a cost. Advans needs grants to start a project because investors wont wait that long to get results. So they use donor money for TA work: this effectively subsidises the investors and reduces their risk. Advans uses a 3rd party TA provider, Horus, and measures the efficiency of the TA provided for feedback to the donors.

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    Geert Peetermans has been managing MIVs for 10 years and came into the TA business quite late. He became involved because clients were interested in the development angle. So they stopped focusing solely on scale, as a target, and moved towards a rural MF model combined with TA. They, too, take basis points from profits and put this into a TA pot, which is further funded by grants from investors and non-investors. TA is used to encourage innovation and customer focus by MFIs and is not just management/capacity oriented.

    A positive side effect of TA is that it provides investors with more information about the MFIs they are invested in.

    Q&A session

    Q. Doesnt the TA question create bias in the Market? An MFI might accept a particular investor because it needed TA, not because it was the best provider.

    A. This should not be the case. Any MIV can do TA if it needs to. You can start on a very small scale (for instance, Eur 20,000/project) and this is easy to arrange if clients are development minded. In some areas, like SSA, a fund would not want to invest without providing TA. Also, TA is not a free ride for the MFI: it requires resources and effort from both sides.

    EFSEs TA facility is completely independent of the investment management function, with a separate board. EFSE hires external TA consultants and, wherever it can, uses local consultants.

    Incofin allows the MFI to propose the consultant it wants, though it uses guidelines.

    Q. What sort of TA should be financed by shareholders and what by external grants?

    A. Typically, a fund will pay for the transfer of knowledge.

    There was no conclusion on the right mix of investment and TA.

    15:00 Strengthening the MF regulatory framework in West Africa: a case study

    Marc Bichler, Director for Development Cooperation, Ministry of Foreign Affairs,

    Luxembourg

    Marc Bichler presented the case of a major Luxembourg development project in West Africa and the dilemma of local versus international execution. The scope of the project is the WAEMU (West African Economic and Monetary Union) region, comprising Burkina Faso, Ivory Coast, Guinea-Bissau, Mali, Niger, Senegal and Togo. Worth a total EUR 21.4m (including 2.58m from the project partner, BCEAO) it is one of the largest cooperation projects of the Grand Duchy.

    The objective of the five-year project, which was launched in May 2008, is to consolidate the microfinance sector and control the risk of promoting MF activities in the region.

    The project was designed taking into consideration the UN recommendations on Inclusive Finance:

    Key recommendation for Governments: Governments have critical roles in creating helpful policy environments that can broaden access. When the Government itself becomes a lender, politics almost always negatively affect performance

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    Key recommendation for development partners: The key bottleneck for development partners supporting inclusive finance is the shortage of strong institutions and managers. Building the capacity of institutions should be an urgent goal in supporting microfinance

    The two project partners are:

    WAEMU, with BCEAO (the regional central bank) as implementing agent; the Luxembourg Government, with Lux-Development as implementing agent.

    There are two sets of objectives:

    at the macro level: to adapt and strengthen supervision of microfinance activities in the WAEMU region within the new regulatory framework (BCEAO in the lead);

    At the micro level: to strengthen the decentralised financial systems (MFIs) in producing and reinforcing financial information (Lux-Development in the lead).

    Marc Bichler explained the dilemma between locally and internationally driven implementation. Execution by a regional organisation has the advantage of ownership; however, the disadvantage is institutional weaknesses leading to delays in implementation. Execution through international technical assistance has the advantage of providing control that implementation is on schedule and that the expected results are achieved; however, it has the disadvantage of weaker buy-in from institutional beneficiaries, possibly leading to less sustainable results.

    The project has just undergone its mid-term review. The report confirmed the continued pertinence of both objectives, that is, the improvement of systems and supervision at a macro level and the technical strengthening of MFIs at a micro level. The findings are that the macro objectives (institutional change) are behind schedule, with just 6% of objectives achieved. By contrast, the micro objectives are on target (47% achieved).

    15:20 Legal update

    Anne Contreras, Partner, Arendt & Medernach, Luxembourg

    Christian Hertz, Managing Associate, Linklaters LLP, Luxembourg

    Luxembourg is highly implicated in the MIV market. There are some 100 MIVs in the world, of which 38 are domiciled in Luxembourg. Worldwide assets under management are USD 7bn, of which USD 3.2bn is in Luxembourg. Therefore, legislation that affects Luxembourg will affect the MIV market.

    Luxembourg MIVs have been set up in a variety of legal structures. As at March 2011, there are 12 created under Part II of the law on UCI, 13 SIFs (specialised investment funds for informed investors), 5 SICARS (venture capital funds) and 8 securitisation vehicles. Eligible investment rules prevent MIVs from being set up as a UCITS, and therefore prohibits them from having an EU retail passport.

    2010 Law (UCITS IV)

    For the funds created under Part II, the 2002 law no longer applies. These funds are now regulated by the law of 17 December 2010 which implemented the UCITS IV Directive. The new law allows cross compartment investment and delegation of investment management and contains a number of efficiency measures. An alignment of the SIF law is expected soon. The SIF has attracted the bulk of new MIV business in the last 12 months, rising from 5 to 13 vehicles.

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    AIFMD

    Both MIVs and their managers will be affected by the AIFM Directive. This comes into force in 2011, from which date there is an EU passport for non-UCITS funds domiciled and managed in the EU. However full implementation, concerning foreign domiciled and/or managed funds, will take place over a number of years. The termination of national placement regimes comes into force in 2018.

    Looking ahead, further legislation that will affect MIVs includes the PRIP (Packaged Retail Investment Products) Directive, which contains specific reference to SRI disclosure standards, and EMIR (European Market Infrastructure Regulation), which will effect clearing obligations for MIVs entering into OTC derivatives (including foreign exchange deals). Lobbying on both these Directives is still possible but the MF industry must move fast.

    16:15 Marketing Microfinance investment vehicles to retail and private investors

    Erna Karrer-Rudi, Credit Suisse PS ISP Microfinance, Zurich

    Credit Suisse offers 5 MIVs to its clients. These are all managed by responsAbility.

    Erna Karrer-Rudi developed her theme via a set of questions and answers based on the experience of Credit Suisse (CS).

    Q. Do customers invest in a particular MIV or in the concept of MF?

    A. They invest in the concept. There is not much choice as regards MIV, particularly for retail investors.

    Q. Why are investors interested in MF?

    A. Customers seek a social return. They are also attracted by the fact that they do not have to give their capital away permanently, knowing that they may need it later. This is attested to by the fact that there were virtually no redemptions during the financial crisis (just a few institutions that needed to raise cash). Capital continued to flow in throughout the crisis.

    However, CS is now experiencing redemptions on account of the Indra Pradesh scandal, Grameen bank and other stories in the news.

    CS conducted a survey on what customers were seeking from an MIV investment. The results were:

    social return: 63% portfolio diversification: 26% financial return: 11%.

    The CS client sales pitch was MF is a driver for social change + low volatility and non-correlation to other assets, makes it good for your portfolio.

    Q. What return do clients expect?

    A.The majority of CS clients said they would be happy with 2-4%, with the next largest group accepting 4-6%. CS did not ask whether they would accept a negative performance.

    Q. Who invests in MF?

    A. At CS, it is mainly the retail affluent group. This is the lowest of 5 customer segmentations and refers to people with less than CHF 1m to invest. Most of these are domestic investors. As a result, the majority are invested in the one house MIV that is registered for retail distribution. The other 4 MIVs can only be offered to Qualified Investors.

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    Challenges for the future:

    Reputational damage: clients have been redeeming. The marketing pitch must change. Fewer pretty pictures, more evidence for the

    social/economic impact on end customers and on sustainability.

    Q&A session

    Q. How do you report on social impact?

    A. the fund manager, responsAbility, provides an annual social report which is passed on to customers. Seminars are also organised by CS. These are not specific to a particular MIV.

    Q. Does CS do TA?

    A. CS spends CHF 2.5m per annum on capacity building. However, they are not allowed to offer TA to MFIs in which they are invested, to avoid a conflict of interest.

    16:40 Impact financing

    Tim Radjy, AlphaMundi group, Zurich

    Corinne Feypel-Molitor, Banque de Luxembourg, Luxembourg

    AlphaMundi is a Swiss advisory company set up in 2008. It offers Impact Finance (IF) funds to Qualified Investors. Their focus is on Latin America.

    One definition of impact finance is: profitable investments with measurable benefits. It excludes charitable donations and most SRI.

    According to AlphaMundi, IF represented 0.27% of global financial assets in 2010 (USD 297bn, vs USD 81.7 trillion). This compares with USD 6.9 trillion in SRI.

    There are around 200 IF funds in the world, with USD 22bn under management. These include Fair Trade, MF, US Community, Carbon FDI and Carbon Trade funds.

    IF is not one asset class. A traditional portfolio can be almost completely converted to IF whilst maintaining the spread of asset classes and investment sectors. Tim Radjy briefly presented a range of different IF funds. Asset classes include PE, equity, fixed income and cash. These funds are invested in a wide range of sectors, including health and education, housing, community investing, fair trade, real estate, agriculture and energy as well as microfinance. It is a specialist industry: most fund managers involved with the sector are exclusively dedicated to IF.

    The sector is growing fast, especially in the areas of agriculture and energy, microfinance and health.

    The cost structure is not a typical one. 50% of management fees are over 2%. Of the 50% of funds that disclosed an IRR in 2009, debt funds had an IRR of 5%+ and PE funds 10%+. There is no liquidity in IF funds. The typical investment is 2-4 years for a debt fund and 7-10 years for a PE fund. The methods and frequency of impact reporting vary widely.

    When setting up a new project of its own, AlphaMundi takes a macro approach: what does the community need for the population to develop properly? They specialise in Latin America, which is very socially uneven even more so than Africa.

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    AlphaMundi is setting up a foundation, European Impact Finance Luxembourg.

    This is an initiative with 5 partners: ADA, Arendt & Medernach, Banque de Luxembourg, Ernst & Young and the EIF. The aim of the foundation is to promote IF in Luxembourg and to position Luxembourg as an international hub in this field. Specific objectives are to:

    establish a chair in Applied Research, the results of which would be immediately usable; encourage double tax treaties with countries with high relevance to impact financing; create a vehicle providing seed capital and/or a structure for small projects; create a database platform; set up a European Social Bank for impact investing projects; build up a European Think Tank on IF.

    Q&A session

    Q. Is there a definition of Impact Finance?

    A. We are working on a tighter definition that could be used for legislative purposes.