microfinance leaders* - responsability · headline inflation has peaked in latin america, as seen...

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MICROFINANCE LEADERS*

Summary

Market Review Some emerging market economies still facing a range of challenges – Asia-Pacific one of the most dynamic regions – deterioration of economic and political situation in Sub-Saharan Africa

Fund Activity USD 19 million invested during the reporting quarter – South America with highest investment volume, followed by Central America – 10 new microfinance institutions received financing

Fund Performance Favourable investment conditions in the Asia-Pacific region and Central and South America – provisions and mark-to-market valuations of currency hedges had a negative impact on the Fund’s return

Key Figures

Fund volume (USD) 278'399'262 Net performance 4Q (class I, USD, %) 0.86 Net performance 12 months (class I, USD, %) 2.11 Microentrepreneurs reached 162'470

Outlook Political and geopolitical risks potentially increasing – IMF sees emerging markets’ growth gap widening over developed countries – after a year of decreasing global demand for financing a potential return to normality is expected in 2018

Equity Porfolio Promising private equity investment pipeline – positive private equity contribution due to the listing of one investee and the revaluation of investments in South America and the Caucasus region – economic situation in the Caucasus region and Central Asia remains difficult

Focus ‘Micro and SME Finance Market Outlook 2017’ 10–15% growth for global micro and SME finance markets expected with significant regional differences

responsAbility Microfinance Leaders – Quarterly Report 2

Market Review Some emerging market economies still facing a range of chal-lenges – Asia-Pacific one of the most dynamic regions – deteri-oration of economic and political situation in Sub-Saharan Africa

Starting in November, US swap interest rates increased con-siderably over the fourth quarter of 2016, with three- to six-year maturities rising by more than 50 basis points. The Fed tightened rates at its December meeting and took a hawkish stance on the future direction of interest rates. In Europe, rates remained stable at a low level as the ECB continued its asset purchase programme. Tepid global demand and market volatility continued to weigh on economic activity in the emerging market (EM) region. Nevertheless, several EM equity markets outperformed developed country indices in 2016 by quite a margin in anticipation of a near-term shift towards higher growth rates. While heightened political and geopolitical uncertainty remain challenging, some concerns eased as Chi-nese demand stabilised and commodity prices (especially oil) started to recover. At the same time, new elements of uncer-tainty arose from Europe’s Brexit shock and Donald Trump’s US presidential election victory.

Due mostly to lower commodity prices (mainly oil and gas), headline inflation has peaked in Latin America, as seen in Bra-zil, Argentina and Peru. Economic growth has been impacted by lower commodity prices, political uncertainty and low US demand, which led to generally weak exchange rates and ele-vated inflation, prompting some regional central banks to tighten their monetary policy.

Despite the mixed economic environment for the Fund’s micro-finance investments in the region, Latin America remains one of the leading regions in terms of the amount of disburse-ments. In Ecuador, the economic downturn induced by weak oil prices and the effects of the earthquake continued to weigh on the country’s microfinance players and their portfolio qual-ity. This has also restricted the investment potential for the Fund in this country. Paraguay also received less funding as the economy deteriorated further in 2016. However, we con-tinued to increase investments in Costa Rica as the country boasts sounder economic fundamentals than some of its re-gional peers thanks to solid private investments and better fis-cal policies.

The economic situation in the Caucasus and Central Asia (CCA) region has stabilised to some extent and microfinance institutions have taken measures to adapt their business plans to lower economic growth and local currency funding. The op-erating environment in Azerbaijan remains challenging with in-creasing pressure on regulatory capital requirements for MFIs. The need for additional provisioning resulted in weak profita-bility and creditworthiness among MFIs. Balance-sheet re-structuring is still ongoing.

Demand for funding remained low in the region and most ma-turing deals in Tajikistan and Kyrgyzstan were not renewed. An exception is Georgia, which has a sturdy agricultural sector and was therefore more sheltered from the side effects of the Russian economic downturn.

In Asia, the Chinese government has tightened its control of cross-border flows and the pace of yuan depreciation. Worries about China’s financial stability due to its over-indebtedness persisted and in mid-December the Chinese central bank helped several financial institutions by injecting liquidity into the economy. In emerging Asia, several countries have reached a high debt-to-GDP ratio. This has reduced credit growth com-pared to previous years, although borrowing continues at a high level. India, however, has room to lever up in this respect as the ratio of household debt to GDP is still very low.

Asia-Pacific remains one of the most dynamic regions with high growth rates and satisfactory investment opportunities. Supported by a more favourable regulatory environment, In-dia’s microfinance industry has also seen a larger number of new players enter the market. This quarter’s disbursements were temporarily postponed by demonetisation. We consider the replacement of high-denomination bank notes with lower-value notes to tackle fiscal evasion as a medium-term positive for the economy as it will provide for better fiscal control. While Cambodia is experiencing strong credit growth, we have shifted our attention to risk indicators and refrain from in-creasing investments in the country for the moment. Due to Mongolia’s rising fiscal deficit and lower mortgage subsidies in the country, the portfolio quality of the Fund’s Mongolian in-vestees has suffered and we have decided not to renew most of our maturing deals.

The economic and political situation in Sub-Saharan Africa re-mains challenging and deteriorated further over the course of last year. Nigeria, Zimbabwe and Ghana have suffered from ongoing FX volatility and cash shortages. As a result, currency hedging costs have been volatile and high. There have also been some delays in repayments from investees in the above-mentioned countries. Furthermore, portfolio quality ratios dete-riorated in South Africa, Ghana and Kenya.

Political turmoil in Burkina Faso and DR Congo has limited in-vestments in the region. Higher country risk has led us to fo-cus on strong institutions that are well prepared to weather lo-cal uncertainties. Finally, Kenya’s risk-return profile has changed with Chase Bank in receivership and an interest rate cap set by the regulator. This has required us to ask for higher risk premia which do not always meet financial institutions’ pricing expectations. In contrast, as growth rates and portfolio quality have improved in the Middle East & North Africa we in-creased the Fund’s exposure to the region over the quarter.


Fund Activity USD 19 million invested during the reporting quarter – South America with highest investment volume, followed by Central America – 10 new microfinance institutions received financing With total disbursements of around USD 18.9 million during the fourth quarter of 2016, the investment volume decreased by USD 15.9 million compared to the previous quarter and by USD 5.0 million compared to the same quarter a year earlier. During the reporting period, the Fund invested in 20 different institutions in a total of 13 countries.

On a regional level, USD 7.5 million was invested in South America, USD 6.2 million in Central America, USD 2.2 million in Central Asia and USD 2.2 million in Middle East & North Africa. Allocation to Asia-Pacific decreased by USD 2.8 million as we repatriated cash reserved for Indian deals due to local events (demonetisation), which slowed down the investment pipeline in the fourth quarter. The biggest investment during the quarter was a USD 3.8 million transaction with a financial institution in Central America.

While the global economy remains on an uncertain recovery path, risk perception has decreased slightly. However, micro-finance institutions’ funding needs are generally still subdued. Regional differences remain pronounced, as reflected in the Fund’s placement capacity during the past quarter.

Over the quarter, the Fund provided financing to 10 new mi-crofinance institutions in Lebanon, Bolivia, Morocco, Panama, Costa Rica, Georgia and Colombia.

Local currency investments accounted for 25% of the Fund’s investment volume during the fourth quarter of 2016. One un-hedged position of USD 0.7 million was added during the quarter. The fund manager’s strategy of generally hedging po-sitions in local currencies against the fund currency remains unchanged. Total unhedged positions represent 1.6% of total fund volume.

Fund Performance Favourable investment conditions in the Asia-Pacific region and Central and South America – provisions and mark-to-mar-ket valuations of currency hedges had a negative impact on the Fund’s return

The Fund's cash position decreased to 11.7% at the end of the fourth quarter of 2016 compared to 14.6% at the end of the previous quarter. With about USD 9 million, the monthly investment pipeline was in line with the Fund’s average. The appreciation of the US dollar versus the euro and the Swiss franc during the reporting quarter contributed to the decrease of the cash position.

The Fund’s investment activities benefited from continued fa-vourable investment conditions in the Asia-Pacific region and Central and South America, as well as increased demand from SME lenders.

The overall fund volume decreased to about USD 278 million in the fourth quarter of 2016 from USD 282 million at the end of the previous quarter.

The US dollar return amounted to +0.86% for the quarter (compared to +0.27% in the previous quarter) and +2.11% for the year (compared to +2.94% in 2015). The returns of the S (CHF) and S (EUR) share classes were +0.32% and +0.49%, respectively.

Provisions and mark-to-market valuations of currency hedges had a negative impact on the Fund’s return of -0.54% for the quarter and -1.60% for the year. The provisions are primarily due to the challenging economic environment in Central Asia and the Caucasus region that affected some microfinance in-stitutions and their clients. Here, the financial sector contin-ues to struggle with currency depreciation, slower economic growth and lower remittances from migrant workers in Russia to their families. In Sub-Saharan Africa, higher country risk, interest rate caps and the removal of the US dollar peg in Ni-geria contributed to an increase in provisions. We continue to pursue a prudent investment and valuation approach in Central Asia, the Caucasus region and Sub-Saharan Africa due to the challenging economic environment and its negative impact on several microfinance institutions and their clients. The finan-cial sector continues to struggle with currency volatility and lower economic growth. At an average of 16.2% over the year, the Fund’s cash position also reduced its total income over the quarter. The high cash level was the result of the Fund’s lower placement capacity due to slower growth across CIS, Latin America and Sub-Saharan Africa as well as an active risk-off strategy as some regions’ risk-return patterns did not fulfil our investment criteria and were therefore closed for investments.

The performance contribution of the Fund’s private equity in-vestments was positive, with +0.61% for the quarter and +0.53% for the year, which is, however, below the target re-turn. For further information about the Fund’s private equity investments, see the “Equity Portfolio” section.


Key Figures Overall Portfolio as of 4Q 2016

Fund data/Net performance(1) Class I (USD)

Class S (CHF)

Class S (EUR)

Class I-II (USD)

Class I-II (EUR)

Class I-II (CHF)

Class I-II (NOK)

Class I-III (NOK)

Quarterly return (%) 0.86 0.32 0.49 n/a 0.41 n/a n/a n/a Return year to date 2016 (%) 2.11 0.35 0.92 n/a 0.31 n/a n/a n/a

Since inception (%)(2) 22.90 15.62 18.97 n/a 0.31 n/a n/a n/a

Return (p.a.) since inception (%) 3.31 2.32 2.86 n/a 0.37 n/a n/a n/a

1 year 2.11 0.35 0.92 n/a n/a n/a n/a n/a 3 years 9.33 5.55 7.30 n/a n/a n/a n/a n/a 5 years 18.33 12.81 15.35 n/a n/a n/a n/a n/a Strongest month since inception (%) 1.47 1.39 1.44 n/a 0.85 n/a n/a n/a Weakest month since inception (%) -0.82 -0.85 -0.77 n/a -0.54 n/a n/a n/a No. of months with positive performance 64 58 58 n/a 5 n/a n/a n/a No. of months with negative performance 12 17 13 n/a 5 n/a n/a n/a

Fund volume (USD) 278'399'262 Return volatility (USD, %)(3) 1.23 Sharpe Ratio (USD)(4) 2.22

(1) Past performance is not a guarantee or indicator of current or future performance. This performance data is calculated net of all fees and commissions but it does not take into account the commissions and costs incurred on the issue and redemption of units. (2) August 2010 (class I (USD) and class S (CHF); October 2010 (class S (EUR)); (3) annualized since inception; (4) calcu-lated by taking into account the annualized monthly return volatility since inception and the average 6mth LIBOR USD rate (risk free)

Track record of (closed) class Q(4) Class Q (USD) Selected assets correlation (2006–2016)

responsAbility Micro-finance Leaders (USD)

Net return since inception (%) 32.17 MSCI World Index 0.0217

Return (p.a.) since inception (%) 4.27 6mths US Libor -0.0184

No. of months with positive performance 71 MSCI FM Frontier Markets (USD) 0.0164 No. of months with negative performance 9

(4) Class Q was launched in November 2006 and closed in July 2013

Largest country exposure In % NAV Geographical allocation In % of investments

India 8.1 Asia Pacific 23.8 Cambodia 6.2 South America 18.1 Costa Rica 6.0 Central Asia 16.7 Georgia 5.7 Central America 13.8 Armenia 5.2 Sub-Saharan Africa 10.0 Ecuador 4.4 Eastern Europe 8.0 Peru 3.9 Middle East & North Africa 7.0 Kenya 3.3 Other 2.7 Sri Lanka 2.9 Bolivia 2.8 Total no. of countries 74

Currency allocation(5) In % of investments Asset allocation In % NAV

USD 72.7 Fixed Income 76.3 EUR 12.1 Equity 12.0 PEN 2.5 Cash 11.7 THB 1.8 ZAR 1.7 BOB 1.3 Other 7.8 (5) Generally positions hedged against fund currency

Social performance indicators 4Q 2016 4Q 2015

No. of MFI(6) 236 222 No. microentrepreneurs reached 162'470 195'989 Average loan size (USD) 1'637 1'595 Rural / urban clients (%) 56/44 66/34 Female / Male (%) 84/16 82/18

(6) MFI: Microfinance institutions


Development of Overall Portfolio Performance (net) (1) and fund volume

(1) Past performance is not a guarantee or indicator of current or future performance. This performance data is calculated net of all fees and com-missions but it does not take into account the commissions and costs incurred on the issue and redemption of units. Maturity breakdown as of 4Q 2016

Average time to maturity: 24.29 months

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(1) Cash: Cash current accounts and money market 10.1% Cash equivalent: Value of hedging contracts, collateral cash, accrued interest investments, other assets and liabilities 1.6%

Further portfolio data will be sent to interested investors on request. Please e-mail [email protected] with your name and the name of the fund you are interested in.

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mailto:[email protected]


Outlook Political and geopolitical risks potentially increasing – IMF sees emerging markets’ growth gap widening over developed countries – after a year of decreasing global demand for fi-nancing a potential return to normality is expected in 2018

Donald Trump’s election as the next president of the US could have significant implications for financial markets. Overall, we expect: 1) increased fiscal spending, 2) reduced regulation, 3) a stronger likelihood of Fed rate hikes and 4) increasing pro-tectionism. In addition, political risk issues should arise as overall geopolitical risk increases. This should support the US dollar and the US economy.

The European Central Bank (ECB) will continue its asset pur-chase programme until September 2017. The ECB has indi-cated that it will maintain its extremely accommodative policy. It has signalled that policy rates will be kept at very low levels through at least 2019 and that other programmes may be launched to promote bank lending. In addition, the risks are firmly tilted toward further easing as the Eurozone’s macroeco-nomic fundamentals remain fragile. However, the latest EU data suggest signs of recovery. 2017 will see the operational set-up of Brexit. In addition, questions remain around the sta-bility of Europe, in particular with respect to upcoming elec-tions in France, the Netherlands, Germany and possibly votes in Italy and Greece.

The strength of the US dollar should hamper returns for all EM currencies. Given the apparently protectionist nature of many of Trump’s foreign policy pronouncements, several emerging market currencies are expected to remain vulnerable, at least in the short term. The currencies of Mexico, India, Vietnam, Taiwan and Malaysia are likely to be particularly affected.

However, the ultimate impact of Trump’s election on EM FX returns will depend crucially on whether the US dollar strengthens on the back of a faster-growing US economy and the associated rally in commodity prices or on flight-to-safety inflows into USD-denominated assets due to heightened risk aversion.

We expect the first part of the year to be characterised, on the one hand, by rising confidence in a strong US economy that will also benefit other countries, and, on the other, stronger headwinds with US yields rising, the US dollar strengthening, heightened risks of protectionist policies in the US and a de-layed pick-up in economic growth across developing countries. US treasury yields have indeed started to increase versus higher-yielding currencies, mainly as a result of the risk-off mood towards the end of the year. However, there is uncer-tainty around the pace and size of rate increases in 2017.

According to the IMF, growth momentum should accelerate over the next few years, with the growth gap between EM and developed countries widening. Argentina and Brazil, which have been facing a recession, are expected to return to growth

in 2017 as both economies are slowly heading towards a re-covery. Also, oil prices have started to stabilise on the back of the OPEC agreement to cut production. This should help oil-producing and exporting countries such as Russia and Kazakh-stan as well as satellite countries in the Caucasus region. Macro vulnerability has been reduced further - current average inflation is expected to only gradually increase across the low-yielders, while it should fall further among the high-yielders. The derating seen in 2015 and early 2016 has opened up some interesting investment windows including significant up-ward potential for local currencies.

In Latin America, the market is quite mature and pricing pres-sure is strong. The Fund’s allocation to the traditionally strong market in Peru is still decreasing, while we are increasing our exposure to satellite markets. In general, the region also offers more potential for investments in SME lenders. Demand is highly dependent on the availability and cost of currency hedges as microfinance institutions increasingly demand fi-nancing in local currency. As we are observing a reduction in portfolio quality in Bolivia and Ecuador, we have decided not to renew all maturing deals and will instead focus only on in-vestments with the best risk/return profile.

Microfinance institutions in most countries across Central Asia have spent the last two years deleveraging and recapitalising to comply with central bank policy guidelines. Investees in the re-gion have also focused on financing in local currency and re-ducing their cost of funding as well as operating costs. As a re-sult, the financial institutions in this region should emerge with sounder operating profiles and growth should pick up, helped also by stabilising oil prices. We expect provisions for deals in Azerbaijan to have reached a plateau. Going forward, stricter regulation should pave the way for more solid growth in the local financial sector. Hedging costs have stabilised and/or decreased, providing for a more favourable environment for placements of much-needed local currency deals in the region. The Funds’ allocation to Central Asia could increase over the course of 2017.

Eastern European economies with less exposure to Russia gen-erally remained more dynamic and continued to register good growth and demand for funding over the fourth quarter of 2016. These economies are also more interlinked with Europe and should continue to benefit from a lower interest rate envi-ronment. The region’s microfinance market remains small and not well diversified due to the strong presence of a developed banking sector. This limits opportunities for the Fund. We are planning a new deal in subordinated debt and expect to renew most of the maturing deals with microfinance institutions. As a result, the Fund’s allocation to the region is expected to in-crease slightly with a focus on Romania, Kosovo and Bosnia & Herzegovina.


We continue to see the highest growth rates as well as gener-ally sound financial indicators in Asia. Regulation is also ac-commodative to the microfinance industry. We continue to in-crease exposure to this region, particularly to India, where the market is buoyed by strong funding needs in local currency. We expect to add new microfinance institutions to the Fund’s portfolio over the next year to further increase diversification in India. Sri Lanka is a dynamic market, but the local central bank’s market regulation continues to slow down the invest-ment process. We are planning local currency investments in Indonesia as the regulatory framework for financial institutions has improved, encouraging economic growth. Cambodia re-mains a well-diversified country with good investment poten-tial. For the moment, we have capped our exposure as we are monitoring institutions’ creditworthiness in an environment of high credit growth. China remains a slow-moving and competi-tive market. Also, banks must rein in their credit growth to comply with capital adequacy requirements, reducing funding in the financial system. Higher interest rates and a liquidity squeeze are likely to weigh on credit growth in the coming months. As a result, our current placement capacity in this country falls short of its economic potential.

To a great extent, the pipeline in Sub-Saharan Africa will de-pend on trends in commodity prices, growth in China, mone-tary management and the evolution of political regimes across the region. Because of the interest rate cap, Kenya may be a more challenging market as it may be difficult to realise our higher risk/return pricing demands. However, these much-needed regulatory changes also lay the ground for sound devel-opments in the financial sector. The investment pipeline for the region also remains uncertain due to the fact that we ob-serve increased risks in some countries.

In North Africa, market pricing has become very competitive as the banking sector is also quite developed. In general, the re-gion has very few MFIs and diversification potential remains low. The region’s rather sound economic and financial market fundamentals should enable us to increase our allocation and renew maturing deals. We expect to increase our overall alloca-tion in Jordan through investments in new institutions. We have an unhedged currency pocket that we can offer to inves-tee companies looking for local currency funding. Growth ex-pectations in Egypt could be lowered in light of an expected currency devaluation. Structural reforms are expected to im-prove the business environment and should help to fight cor-ruption. We intend to further diversify our investments in the country. In Morocco, demand for financing is picking up and we expect to add more financial institutions to diversify the portfolio. Palestine is quite dynamic and we continue to add funding to the country. Turkey has announced a focus on fiscal policy and the financial sector. This should ease general credit conditions for SMEs, support employment programmes and give more predictability to Turkey-EU relations. However, structural problems remain in the shape of the country’s ex-cessive reliance on external financing. We expect to increase our allocation to Turkey.

Following a year of low and decreasing global demand for fi-nancing, we are observing first signs of stabilisation. Neverthe-less, the investment pipeline for 2017 is expected to remain lower than in the past few years. A return to normality is likely to happen only over the course of 2018.


Equity PortfolioPromising private equity investment pipeline – positive private equity contribution due to the listing of one investee and the revaluation of investments in South America and the Caucasus region – economic situation in the Caucasus region and Cen-tral Asia remains difficult

Portfolio activity

During the fourth quarter of 2016, a follow-on investment in a holding company with a focus on SMEs in Eastern Europe and Latin America was completed at favourable terms. The total volume of deals in the pipeline for the coming year is increas-ing and we are confident that we will be able to move closer to the target allocation for private equity investments in 2017. Good progress has been made for potential investments in one of Sri Lanka’s leading non-bank microfinance and leasing in-stitutions as well as in a microfinance bank in Colombia, among others.

Portfolio performance

The private equity investments had a positive impact of +0.61% on the Fund’s performance during the fourth quarter of 2016. Overall, the full-year performance contribution of the private equity portfolio for 2016 was +0.53%. The main driver behind the positive performance over the past quarter was the surge in the market price of one investee following its listing in December 2016. In addition, the valuations of investments in microfinance institutions in South America and the Caucasus region have increased based on their good performance and positive outlook. On the other hand, a microfinance holding company suffered a further reduction in market value due to several subsidiaries’ underperformance and ongoing restructur-ing efforts. The other portfolio institutions developed as planned.

Key Figures

4Q 2016 Class I (USD)

Current fair value equity portfolio 31’800’455 Equity contribution 4Q (%) 0.61 Allocation equity portfolio in % of fonds volume 12.00 Equity contribution YTD (%) 0.53 No. of investments 11

Outlook Active work on a number of new investments for 2017 has progressed and we expect to close several deals over the coming months. We expect the economic situation in the Caucasus region and Central Asia to remain difficult over the coming quarters. However, the current valuations of our investee companies have already priced in this outlook. As a result, we do not expect any additional negative impact from these investments on portfolio performance in 2017.


Focus ‘Micro and SME Finance Market Outlook 2017’ 10–15% growth for global micro and SME finance markets ex-pected with significant regional differences Global micro and SME finance markets are expected to grow by 10-15% this year, according to responsAbility's “Micro and SME Finance Market Outlook 2017.” The Asia-Pacific region remains the principal driver of this trend. In addition to tradi-tional microfinance, SME financing is booming in developing countries. responsAbility’s “Micro and SME Finance Market Outlook,” which has been published every year since 2010, is one of the most-read publications on this investment topic. It explores global developments in the microfinance industry and pro-duces forecasts for the next 12-14 months. The publication contains the views of experts from all major markets and com-bines their assessments with key macroeconomic indicators and the comprehensive data collected through responsAbility’s business activities. For the 2017 edition of the publication, the universe covered in the analysis was expanded to include SME banks for the first time. Methodology The study is divided into three main parts (macroeconomic forecast, qualitative interviews, and quantitative extrapolation), which complement each other and together produce a compre-hensive qualitative and quantitative picture of the micro and SME finance market in 2017. Economic growth in the micro and SME finance market Looking at the macroeconomic environment first, we consider the International Monetary Fund’s latest gross domestic prod-uct forecast. While GDP growth diverged in recent years, the IMF expects global growth to accelerate in 2017, mainly driven by the developing world (see Figure 1). During 2016, it became apparent that global shocks are a phenomenon that goes beyond the developing world, with Brexit, weaker than expected growth in the United States, and populist movements shaking up the developed world. Mean-while, large, relatively established emerging markets – such as Brazil, Russia and South Africa – are undergoing their own pe-riods of economic volatility. In 2017, the global GDP growth rate is expected to increase by 0.3 percentage point to 3.4%, with 1.8% growth in the developed world and 4.6% in the de-veloping world, according to the IMF World Economic Outlook. However, the outlook for these economies is inconsistent and generally more subdued than in the past. On the one hand, growth in the Asia-Pacific region, especially India, continues to be resilient – out of the six markets represented by our survey interviewees, four (Bangladesh, Cambodia, China and India) are forecast to grow by more than 6% in 2017, while only one

(Mongolia) is predicted to expand less than 5%. Meanwhile, the largest economies in Sub-Saharan Africa (Nigeria, South Africa, Angola) are experiencing sharp slowdowns. Figure 1: Real GDP growth over time. GDP growth rates of ad-vanced and developing economies

Source: IMF, October 2016 Transformation is ongoing In an eventful year for micro and SME finance, one of the most striking moments of 2016 was the Reserve Bank of In-dia’s confirmation of three small finance bank licences. This marks a revolutionary step for the industry, with the regulator of one of the biggest economies in the world creating banking licences specifically for micro and SME finance. All three in-stitutions will thus transform from lending-only microfinance institutions into small banks. The topic of transformation within the micro and SME finance industry is far from new. Over the last 20 years, a large num-ber of microfinance institutions have undergone a transfor-mation in their structure and business model, shifting from NGOs to regulated lenders to banks. This change is a key ele-ment in financial sector development, enabling sophisticated, transformed institutions to attract more funding and offer a wider range of products, notably savings accounts. The result is an increase in both scale and depth of financial inclusion, with the provision of savings accounts alone having a proven impact on development overall. Global growth forecast for the micro and SME finance market On average, the global micro and SME (MSME) finance market is expected to grow by 10-15% in 2017. While the overall growth is in line with previous years, the composition is differ-ent. The Asia-Pacific region, with a forecast of 25-30%, is leading the global growth of this market. Growth expectations for the Middle East and North Africa are similar to last year (10-15%); here the key micro and SME finance markets are relatively unaffected by political factors, but high youth unem-ployment and a banking sector that is often indifferent to low-income households combine to create huge demand for loans to micro businesses and SMEs, many of which operate infor-mally. The MSME markets in Eastern Europe, the Caucasus and Central Asia are expected to grow at a rate of about 10% in 2017. Sentiment remains cautious, but Russia’s economic


recovery will improve remittance flows and export revenues, stabilising the region. The growth rate for Sub-Saharan Africa has fallen in comparison with last year’s forecasts (5-10% in 2017 versus 15-20% in 2016), even if it remains higher than the sharply reduced GDP growth outlook. The diversity of re-sponses underlines the range of market maturity and economic dynamics within Africa. While the outlook for Kenya was slightly more muted due to the introduction of an interest-rate cap, it was still more positive than Nigeria, where currency vol-atility and a sharp economic slowdown have made the operat-ing environment considerably more complicated. The maturing markets of Latin America are expected to grow by 5-10%, in line with what we saw last year. Lower interest rates Besides the focus on growth, our experts were asked about their expectations for a variety of other performance indicators for their markets. 50% of our experts expect the interest rates paid by clients of MSME financial institutions to decline in 2017. This figure increased from last year when only 42% ex-pected lower rates in 2016. The lower expected interest rates can be attributed to 1) an increasing efficiency of the micro and SME institutions: They are becoming more sophisticated, more robust and are driven by the greater formalisation/devel-opment of the financial sector as the cost of funding decreases for the institutions and 2) stronger competition in the sector. This global trend of lower interest rates is very beneficial to cli-ents and borrowers. It means they are receiving loans for a lower price. Hence falling interest rates are a key indicator of financial sector development. Financial sector developments – the pace quickens One of the most striking results from the survey is the theme of consolidation. About 65% of our experts expect moderate or strong sector consolidation this year, as smaller institutions merge, are bought or close down. However, this trend can vary according to region. In Asia, Mongolia’s market is dominated by fewer than 10 institutions, making further consolidation un-likely. In neighbouring China, a combination of the many small microcredit corporations, slower economic growth and strong government pressure to reform or merge is expected to cause a considerable decline in the number of these institutions. SMEs’ growing importance When looking at lending opportunities over the next five years, 90% of our experts expect an increase in demand for SME fi-nancing in their market. The International Finance Corporation (IFC) estimates a finance shortfall of USD 1 trillion for the for-mal SME market. No wonder that our experts cite “financing obstacles” as the biggest factor limiting the growth of SME business in their market. Our survey showed that even those SMEs that are able to access finance struggle to meet high refinancing costs and collateral requirements. Bureaucracy is a further restriction for

growth of the SME market, reflecting the sometimes difficult business environment in our investment markets. To summarise, given the huge unmet demand, the micro and SME market is expected to see continued growth of 10-15%. While the financial sector develops, SME financing should play a more important role in the future. Key findings of the Micro and SME Finance Market Outlook 2017: • In 2017, global micro and SME finance markets will

grow by an average of 10-15%. • 25-30%: The highest growth rate is expected in Asia-Pa-

cific, driven by developments in India and strong eco-nomic growth in the region.

• 10-15%: In North Africa and the Middle East, the micro and SME segments continue to be underserved – result-ing in significant growth in demand.

• 10%: In Eastern Europe and the Caucasus, experts ex-pect a gradual recovery of the Russian economy to pave the way for a return to growth.

• 5-10%: In Sub-Saharan Africa, certain markets are expe-riencing strong catch-up growth, while in other markets, this type of growth is being restricted by the difficult eco-nomic environment.

• 5-10%: With its very mature micro and SME finance markets, Latin America expects solid growth, due in part to the positive economic environment in the US.

• 50% of all those surveyed said the interest rates charged on loans in their markets will decrease in 2017.

• 43% indicated that they expect regulation to improve in 2017.

• 65% of the experts surveyed expect a consolidation of fi-nancial institutions in their markets.

• 90% of the micro and SME finance experts expect the proportion of SME financing in their markets to grow over the next five years; 30% expect it to increase by more than 20%.

The Micro and SME Finance Market Outlook 2017 is available in English and German at: www.responsAbility.com.

http://www.responsability.com/


Fund Facts

Fund name responsAbility SICAV (Lux) Microfinance Leaders

Fund domicile and type Luxembourg, SICAV (Société d’Investissement à Capital Variable)

Portfolio manager responsAbility Investments AG, Zurich

Management company responsAbility Management Company S.A., Luxembourg

Central administration Credit Suisse Fund Services (Luxembourg) S.A., Luxembourg

Custodian bank Credit Suisse (Luxembourg) S. A., Luxembourg

Inception date (fund) 15 November 2006

Fund currency USD, hedged EUR, CHF and NOK share classes available

Target net return in fund currency 4–7% p.a. over a horizon of five years. The target return is not a projection, prediction, or guar-antee of future performance, and there is no guarantee that the target return will be achieved.

Distribution No distribution, returns are reinvested

Valuation (NAV calculation) On the last Luxembourg banking day of each month

Subscription of shares Monthly, requests must be submitted three banking days before the respective value date

Redemption of shares Monthly, subject to 90 calendar days’ notice

Approved for distribution to professional, semiprofessional and qualified investors

Switzerland, Germany, France, Luxembourg, Netherlands, Norway, Sweden, Denmark, Finland

Minimum subscription I (USD) and S (EUR,CHF) 1’000’000 / I-II (USD,EUR,CHF) 250’000 I-II (NOK) 2’000’000 / I-III (NOK) 8’000’000

Sales restrictions The fund is open to qualified investors in the sense of the Swiss Federal Act on Collective Invest-ment Schemes

Retrocessions No retrocession fee is paid

Share classes Valor ISIN Total Expense Ratio (TER) Inception date (classes)

I (USD) 11475927 LU0520962514 Approx. 1.4% August 2010

S (CHF) 11475931 LU0520962605 Approx. 1.4% August 2010

S (EUR) 11475934 LU0520963082 Approx. 1.4% October 2010

I-II (USD) 29992186 LU1303876830 Approx. 1.7% n/a

I-II (EUR) 29992187 LU1303876913 Approx. 1.7% February 2016

I-II (CHF) 29992188 LU1303877051 Approx. 1.7% n/a

I-II (NOK) 29992189 LU1303877135 Approx. 1.7% December 2016

I-III (NOK) 29992190 LU1303877218 Approx. 1.4% n/a


Risks: The risk and return profile of the fund does not reflect the risk under future conditions that are different from the situation in the past. Detailed description of the fund risks can be found in the prospectus.

Legal disclaimer: This information material was produced by responsAbility Investments AG (hereinafter “responsAbility”). This information material relates to re-sponsAbility SICAV (Lux) Microfinance Leaders (further referred to as the “Product“). The information contained in this information material (hereinafter “information”) is based on sources considered to be reliable, but its accuracy and completeness are not guaranteed. The information is subject to change at any time and without obligation to notify the investors. Unless otherwise indicated, all figures are unaudited and are not guaranteed. Any action derived from this information is always at the investors’ own risk. This information material is for information purposes only, and is not an official confirmation of terms. The value of an investment and any income from it are not guaranteed. Changes in the assump-tions may have a substantial impact on the return. Past performance is no indication of current or future performance, and the performance data do not take account of the commissions and costs incurred on the issue and redemption of shares. An annual fee shall be charged for the admin-istration, asset management and distribution services provided as part of this financial product. The maximum amount of this management fee shall be based on the prospectus. Furthermore, responsAbility shall not receive or pay either one-time or recurring remuneration to other distribu-tors in connection with this financial product. This information is not intended as an offer or a recommendation or an invitation to purchase or sell financial instruments or financial services and does not release the recipient from making his/her own assessment. In particular, the recipient is advised to assess the information, with the assistance of an advisor if necessary, with regard to its compatibility with his/her own circumstances in view of any legal, regulatory, tax, investment-related, and other implications. Investments held by the financial product described in this infor-mation material are associated with a higher risk than investments in more developed markets or countries. Investors are expressly made aware of the risks described in the prospectus and the lower liquidity and greater difficulty in determining the value of the fund’s investments (which are generally unlisted and not traded), and must also be prepared to accept substantial price losses including the entire loss of their investment. responsAbility and/or the members of its board of directors and employees may hold shares in the financial product (or any related investments) mentioned in this information material and may add to or sell these positions from time to time. Additionally, the members of the board of direc-tors and employees of responsAbility may serve as members of boards of directors of the investments in which the financial product is invested. This information material is expressly not intended for persons who, due to their nationality or place of residence, are not permitted access to such information under applicable law. The financial product specified in this information material is not licensed for distribution in the United States of America. As a result, it may not be offered, sold, or delivered there. Neither the present information material nor copies thereof shall be sent or taken to the United States of America, or issued in the US or to a US person (in the terms of Regulation S of the United States Securities Act of 1933, in the respective current version). Subscriptions are only valid on the basis of the current sales prospectus and the most recent an-nual report (or semiannual report, if this is more recent). The prospectus, the management regulations, and the annual and semiannual reports may be obtained free of charge from responsAbility Management Company S.A., Luxembourg, from the Swiss representative, the paying agent and from any distribution partner.

This information material may not be reproduced, stored in a retrieval system, or transmitted, in part or in full, in any form or by any means, whether electronically, mechanically, photocopied, recorded, or otherwise, without the prior written consent of responsAbility.

Germany: The Product is registered for distribution to professional/semi-professional investors in Germany. France: The Product is an alternative investment fund (AIF) within the meaning of Directive 2011/61/EU (AIFMD), which is authorized to be marketed to professional investors in France in accordance with Articles L. 214-24-1 and D. 214-32 to 214-32-4-1 of the French Code monétaire et financier, Articles 421-1A to 421-37 of the General Regulation of the Autorité des marchés financiers and Instruction 2014-03 of the Autorité des marchés financiers. This marketing material constitutes promotional material as defined in Article 421-25 of the General Regulation of the Autorité des marchés financi-ers. It is provided for information purposes only and may not be relied upon to make an investment decision. No decision to invest in Product should be made without prior review of the complete investor information documents required by applicable laws and regulations, which are avail-able free of charge in the English language at www.responsability.com . This marketing material is intended exclusively for, and may only be dis-tributed to professional investors as defined in Articles L.533-16, D.533-11 and D.533-12 of the French Code monétaire et financier. Luxem-bourg: The product was approved by the Commission de Surveillance du Secteur Financier ("CSSF") in Luxembourg for distribution to the Profes-sional investors under the Chapter 1 Article 53 of the Law of 12 July 2013 on alternative investment fund managers. Custodian is Credit Suisse (Luxembourg) S.A. 5, rue Jean MonnetL-2180 Luxembourg and Distributor is Credit Suisse Fund Services (Luxembourg) S.A., 5, rue Jean Mon-net, L-2180 Luxembourg. The Netherlands: The Product described herein is registered for distribution in the Netherlands to professional inves-tors within the meaning of the Dutch Act on Financial Supervision and the interests in the Product described herein may therefore only be offered upon issue or thereafter, and whether directly or indirectly, to professional investor within the meaning of the Dutch Act on Financial Supervision. Norway: The Product is authorised for distribution to professional investors defined under the Section 10-2 of the Regulations to the Securities Trading Act in Norway and regulated by Finanstilsynet, the Financial Supervisory Authority of Norway. responsAbility Nordics AS is authorised in Norway and regulated by Finanstilsynet, the Financial Supervisory Authority of Norway. Switzerland: This Product is not authorized for distribution to the public in Switzerland. The present information material is therefore strictly limited to internal use and may not be passed on to any third party, unless (i) such third party has solicited so on its own initiative, or (ii) such third party is a qualified investor under the terms of the Swiss Federal Act on Collective Investment Schemes and related regulations. The representative of the Fund in Switzerland is Credit Suisse Funds AG, Zurich. The paying agent in Switzerland is Credit SuisseAG, Zurich. © responsAbility Investments AG, 2016. All rights reserved.

responsAbility Investments AG Josefstrasse 59 8005 Zürich

rresponsAbility Management Company S.A. 23, Avenue de la Liberté, L-1931 Luxemburg

http://www.responsability.com/

microfinance leaders* - responsability · headline inflation has peaked in latin america, as seen...

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