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2

Panel Sponsored by

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

5

What Is Microfinance?

• Small loans extended to very poor people for self-employment enterprises.

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

9

Grameen Bank Members

01009998979695949392919089888786858483

2.5

2.0

1.5

1.0

0.5

0.0

Millions

10

Loans Made By Grameen Bank

01009998979695949392919089888786858483

300

250

200

150

100

50

0

US$ Millions

11

Non-Performing Loans

Grameen BankU.S. Commercial Banks

0100999897

8

6

4

2

0

%

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