gc03 microfinance
TRANSCRIPT
3
Half Of The Developing World Lives On Less Than $2 A Day
• 1.2 billion people live on less than $1 a day
• 2.8 billion people live on less than $2 a day
4
A Typical Microenterprise…
• Has fewer than 10 employees
• Has less than $1,000 in capital
• Is located in the home
6
Characteristics of Microfinance
• 13 million borrowers around the world
• $7 billion in outstanding loans• 30% annual growth• 98% repayment rate• Estimated market size = 500
million microentrepreneursworldwide
7
The Necessary Scale of Microfinance
• To reach 100 million of the world’s poorest families by 2005, the microfinance industry will require $21 billion in capital
8
Grameen Bank Model Of Microfinance
• Group lending model
• Groups of 5 borrowers are formed; at first only 2 of them receive loans
• Only if these 2 repay the loans do other members become eligible for loans
10
Loans Made By Grameen Bank
01009998979695949392919089888786858483
300
250
200
150
100
50
0
US$ Millions
12
75%Bangladesh
10%World Average
Households Reached
Bangladeshi Microfinance Reaches 75% Of Poor Households
13
Microfinance in Asia
12 million2.5 million
Bank Rakyat(Indonesia)
1 million
No. of Borrowers
3.6 million
Bank of Agriculture (Thailand)
No. of Savers
14
Bolivia’s Banco Sol First Microfinance Commercial Bank
$75 million
$82 million
$78 million
$81 million
$81 million
Loan Portfolio
$1,5002001
$1,9002002
$1,3002000
$1,1001999
$916
Average Loan Size
1998
15
Microfinance Outperforms Commercial Banks in Peru
ROE: Microfinance InstitutionsROE: Commercial Banks
2001200019991998
30
25
20
15
10
5
0
%
16
Microfinance Outperforms Commercial Banks in Bolivia
ROE: Microfinance InstitutionsROE: Commercial Banks
2001200019991998
30
20
10
0
-10
-20
-30
%
17
Microfinance Less Sensitive to CrisisBRI’s Loan Portfolio During the Asia Crisis
Corporate Portfolio100% Loss
Retail Portfolio50% Loss
Microfinance Portfolio2.5% Loss
18
Credit Unions Around The World
• 37,000 Credit Unions
• 112 million members
• $530 billion in savings
• $606 billion in assets
19
Microfinancial Institutions Around The World
$3.9 millionOutstanding Loans$5.7 millionTotal Assets
5.5%ROA
14.1%ROE
2.3%Non-performing Loans
World Average
20
UN Capital Development Fund’s $40 Million Microfinance Portfolio
10%20%
70%
Asia$4 million
Latin America $8 million
Africa$28 million
21
Models of Microfinance• Individual lending
– Micro loans are given directly to individual borrowers
– Loans often part of broader assistance package
• Group lending– Groups of five borrowers– Relies on social networks to increase likelihood of
repayment
• Village banking– The entire community is treated as one borrower– Village-based institutions to dispense loans
22
The Value of Microfinance Networks
• Lower costs as a result of centralizing the financing unit
• Sufficient asset size to attract private capital• Transparency to external actors• Monitoring and evaluation of member MFIs• Accountability of member MFIs
23
Microfinance Lending Networks – A Potential Model
MFI
MFI
MFIMFI
Donors
Micro-financeFunds
Investors
Borrower
$
$
$
$
$$
Center
24
Top 10 Microfinance Funds
$20 AMINA African Development Fund
$22 Pofund
$40 UN Capital Dev. Fund
$50 Calvert Foundation
$85 Khula Enterprise Finance
$170 Oikocredit
$14 CORDAID
$17 Dexia Blue Orchard Microcredit
$20 Triodos-Doen
$12 Internationale Micro Investitionen
2002 Assets (millions)
25
Challenges
• Attract private capital• Reach scale • Achieve positive return on assets• Balance financial and social objectives• Balance cooperation and competition
26
An Initial Observation
• 3 billion people in the world live on less than 2USD per day
• To survive, these people create their own job through the establishment of micro-enterprises
27
The Microenterprises• Active in very different sectors• Closely linked to family economics• Need diversified financial services
28
An Important Potential Market
• 500 million micro-enterprises in the world
• Annual average funding need per micro-enterprise: USD 500
• New products will generate new opportunities: savings, insurance, credit cards, payments, etc
29
The Offer of Financial Services to Microenterprises
• Friends and family or loan sharks (10% interest rate per day); traditional banks are absent from this market
• 10,000 micro-finance institutions (MFI) all over the world, of which about 250 are profitable and fast growing
• Those MFI only cover about 5% of potential demand
30
Microfinance Institutions
• Specialized financial intermediaries• Methodology adapted to target segment
(example : solidarity group lending)• Diverse legal structures : NGO, NBFI,
Co-op, Banks• Excellent results : average
reimbursement rates close to 97%
31
Examples of MFIBlueOrchard Clients: 12/2002
109,21236,6705,622Number of clients
64.6%33.5%29.7%Portfolio growth 2001
56.0%17.6%91.6%Portfolio growth 2002
$8.7$12.9$8.8Outstanding portfolio (million)
0%2.7%0%Portfolio At Risk (> 30 days)
$351
AdopemDom. Rep.
$79
Share India
$1,510Average loan to clients
MikrofinBosnia
32
Examples of MFIBlueOrchard Clients: 12/2002
6.7%32,2%22.2%ROE 2002
1.1%12,7%7.8%ROA 2002
1.8%15.0%9.9%ROA 2001
35.8%
AdopemDom. Rep.
9.1%
Share India
44.9%ROE 2001
MikrofinBosnia
33
The Microfinance Industry is Structuring Itself
• Standardization of financial information and ratios
• Regular external audits• Specialized rating agencies• International networks with technical
assistance• Specific legislation and supervision from
Superintendents• Access to private commercial funding
34
Microfinance Impacts go Beyond the Purely Economic Sphere
Microenterprise
Financial and economic impact
Family welfare
Self esteem and “empowerment”
Micro-financeFinancial services to micro-enterprises
35
The Philosophy of Sustainable Development
• No contradiction between profitability and social impact
• Sustainability of impact is made possible by profitability
• From a logic of assistance to a logic of partnership
36
The Trend in Socially Responsible Investments
• We observe a growth in demand for products :– Combining financial return and social
impact– With low correlation to other asset classes– Targeting growth areas
ØA micro-finance investment fund meets those expectations
37
BlueOrchard Finance
• A link between Capital markets and MFI• A specialized advisor for Microfinance
investments
38
Dexia Micro-Credit Fund The First Private Commercial Fund for Microfinance
• $30 million Luxembourg-based investment fund• Specialized lending to best MFIs in the world• Current clients include top 30 MFIs in 20 countries• 4.5 years excellent track record• Cumulated net return in USD of 24% since inception• Over 85 disbursed loans, not a single default
• Cumulated portfolio of our 30 clients approximate 1 million micro-enterprises
39
Dexia Micro-Credit FundThe Fund Flows
IMFIMF
IMFIMF
IMF
IMFIMF
IMFIMF
IMFIMF
investor
DexiaBlueOrchard
Fund
IMFIMF
IMFIMF
IMFMFI
IMFIMF
IMFIMF
IMFmicro-
entrepreneur
Libor USD +2-3%
Libor USD +4.5-6%
1-6% per monthlocal currency
837’330 micro-enterprises;USD 501’657’359
micro-credits
29 institutions18 countries
USD 17.5 millions of current loans
Buy shares from the SICAV Issues direct
loans
Issues direct loans
IMFIMF
IMFIMF
IMF
IMFIMF
IMFIMF
IMFIMF
investor
DexiaBlueOrchard
Fund
IMFIMF
IMFIMF
IMFMFI
IMFIMF
IMFIMF
IMFmicro-
entrepreneur
Libor USD +2-3%
Libor USD +4.5-6%
1-6% per monthlocal currency
837’330 micro-enterprises;USD 501’657’359
micro-credits
29 institutions18 countries
USD 17.5 millions of current loans
Buy shares from the SICAV Issues direct
loans
Issues direct loans
40
Dexia Micro-Credit FundBlueOrchard Debt USD 5/2003
•DMCF USD 26 MFIs in 17 Countries•Net Asset Value $18.4 million•2000 ROI 7.77%•MFI Loans $13.4 million•2001 ROI 6.78%•Average loan $432,700 •2002 ROI 4.10%•Average maturity 19.1 Months
41
Dexia Micro-Credit FundBlueOrchard Debt USD 5/2003
Guatemala1.9%
India7.5%
Nicaragua14.9%
Uruguay0.1%
Morocco2.6%
Albania1.5%
Bolivia12.7%
Ecuador7.5%
Indonesia7.5%
Mongolia1.5%
Peru18.1%
Philippines2.2%
Bosnia1.5%
Cambodia2.5%
Colombia1.9%
Dominican Republic
8.9%
Mexico7.5%
-
2.5
5.0
7.5
10.0
12.5
15.0
09/98 03/99 09/99 03/00 09/00 03/01 09/01 03/02 09/0210'000
10'500
11'000
11'500
12'000
12'500
Loan Volume USD millions Share Price USD
42
Dexia Micro-Credit FundBlueOrchard Debt CHF 5/2003
•DMCF USD 18 MFIs in 11 Countries•Net Asset Value CHF 8.8 million•2002 ROI 1.6%•MFI Loans CHF 6.9 million•Average loan CHF 384,000 •Average maturity 16 Months
43
Dexia Micro-Credit FundBlueOrchard Debt CHF 5/2003
Nicaragua16.9%
Peru16.9%
Bolivia7.8%
Cambodia4.5%
Morocco9.0%
Uganda3.4%
Colombia16.9%
Dominican Republic
9.0%Ecuador
6.7%Mongolia
6.7%
Kazakhstan2.2%
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
12/01 03/02 06/02 09/02 12/029'950
10'000
10'050
10'100
10'150
10'200
Loan Volume USD millions Share Price USD
44
DEXIA Micro-Credit Fund The Technical Details
• Luxembourg SICAV Part 2
• Minimum investment : CHF 15,000 , USD 10,000; EUR 10,000
• Entry fees : 0-4% (decision of distributor)
• No exit fees
• Public / open-ended / Monthly NAV and liquidity
• Microfinance portfolio : Max 80% of total assets
• Net expected return : USD Libor +2%
• No FX risk taken
45
DEXIA Micro-Credit FundBenchmark against reinvested 6M Libor USD
95
100
105
110
115
120
05/00 08/00 11/00 02/01 05/01 08/01 11/01 02/02 05/02 08/02 11/02
DMCF Share Value
Libor USD 6 Months Reinvested
46
DEXIA Micro-Credit FundBenchmark against World Global Bond Index
95
100
105
110
115
120
05/00 08/00 11/00 02/01 05/01 08/01 11/01 02/02 05/02 08/02 11/02
DMCF Share Value
IO SB WGBI 1+ $ - USD
47
DEXIA Micro-Credit FundBenchmark against Emerging Market Bond Index
95
100
105
110
115
120
125
05/00 08/00 11/00 02/01 05/01 08/01 11/01 02/02 05/02 08/02 11/02
DMCF Share Value
IO JPM EMBI+ COMPOSITE - USD
48
DEXIA Micro-Credit FundThe Risk-Return Profile of A New Asset Class
Steady returns Microfinance brings a newLow credit risk social impact dimension toStrong resistance to external shocks the money investedFX risk hedgedLow correlation with other assets
49
Meeting Microfinance Institutions’ Needs
International Capital Markets
Short Term Debt
Hard Currency
Private Equity
Local Currency
Long Term Debt
Hard Currency
Short Term Debt
Local Currency
Guarantee
Local Currency
Dexia Micro-Credit Fund
Fund zFund w Fund x Fund y
BlueOrchard Finance s.a.
Microfinance Institutions
50
BlueOrchard MFLO
Loans
Interest Rate
Senior Note (70%)
Investment Community
Equity (30%)
Leading MFILeading MFILeading MFILeading MFILeading MFI
Leading MFI
Interest Rate
Buy Bonds
Portfolio of Loans backs issue of bonds
Issue of Bonds
Leading MFI
Leading MFILeading MFILeading MFI
Special Purpose Vehicle
Project ManagerInvestment BankRating AgencyLegal Advisor
Back-office bank
51
MFLO Value Added• To put microfinance on the capital markets
map and to bring in mainstream actors
• To become a new opportunity for efficient private-public partnership
• To create an attractive solution for MFI funding– Large amounts – Longer maturity
• Additional fine tuning will make participation to other rounds of securitization attractive to many MFIs all over the world
52
The MFLO - One Major Bottleneck
• To find equity investors willing to earn 6% returns for a 7-year USD investment in a cutting edge sustainable development product
53
Potential Models for Commercial Bank Involvement in Microfinance
• Separate MFI subsidiaries
• Acquisition of existing MFIs and operation of them as separate businesses
• Microfinance integrated into regular bank operations
54
Potential Microfinance Development Goals
• Establish linkages between MFIs and the formal financial sector and capital markets
• Support banks moving into the microfinance market – demonstration effect
• Identify and develop financial technologies that improve risk management and profitability and increase efficiency
55
History of Microfinance Commercialization
• 1980s - demonstrated microfinance could provide large scale outreach profitably
• 1990s - microfinance began to develop as an industry
• 2000s - objective - to satisfy unmet demand on a much larger scale, which will play a role in reducing poverty
56
Challenges to Microfinance Commercialization
• Inappropriate donor subsidies• Poor regulation and supervision• Few MFIs mobilize savings• Limited management capacity in MFIs• Institutional inefficiencies• Need for rural and agricultural
methodologies
57
Microfinance Dependency on Subsidy
• Donors helped create industry, but unclear how to support commercialization without distorting market mechanisms.
• Availability of grants and soft-loans for on-lending discourages MFIs from pursuing commercial sources of capital
58
Challenges to MFIs
MFIs need to develop expertise in:• Risk management• Management information and internal
control• Marketing and customer responsiveness• Human resource development
59
Potential Rural Finance Methodologies
• Microfinance has been most successful in densely populated rural areas
• New approaches include:– building on local knowledge – developing rural loan officers
knowledge of agricultural markets
60
Myths and Facts of Microfinance
Mid-90’s – Top MFIs began to attract significant commercial funding
“MFIs must depend on donor funding rather than commercial sources”
Early 90’s – a few MFIsbegan covering all their costs
“The poor can’t pay the full cost of microfinance”
Early 80’s – Many MFIs have better repayment than banks
“Poor people don’t repay loans”
Today – MFIs are striving to reach these twin objectives
“MFIs cannot be profitable and reach the poorest.”
FactMyth
61
Evolution of Microfinance
Flexible, financial services for poor
families
Donor-dependent microenterprise credit programs
Microfinance Institutions
62
State of Global Microfinance: 2001
• 10,000 MFIs reach only 4% of the potential market.
• Top 5 institutions reach almost half of that market
• 1% of MFIs are financially sustainable.
Unserved: 526 million
Clients: 24 million
63
Increasing the Scale of Microfinance• Donor money is limited and
unpredictable• Massive scale will require commercial
fund– Commercial Funds are only available to
viable institutions– Reaching large numbers of poor
depends on institutional sustainability
64
Potential Future of Microfinance
• Microfinance integrated into financial system
• Most MFIs regulated• Increased emphasis on savings• Diverse institutional models
65
What the Industry Needs to Grow in the Future
• Put clients at the center• Build institutional
capacity• Increase scale of
microfinance• Increase efficiency• Extend the poverty-
sustainability frontier
66
Extending the Frontier: Greater Sustainability and Poorer Clients
MFI Depth of Outreach
MFISustainability
Most MFIs
Regular banks
Pure Charity