Philip Brown

Global Risk Director

Citi Microfinance Group

October 6th 2009

Strictly Private and Confidential

Beyond Institutional Performance

Strictly Private and Confidential

Macroeconomic trends and shocks, e.g. - Too little funding

- Political / external interference

- Regulatory - Competition

MFI Individual performance,

e.g. - Portfolio risk- Management quality- Refinancing- Corporate Governance

Client credit risk

e.g. - Capacity- Stability- Behaviour and willingness- Over-indebtedness

Individual classification of important Risks

Most Important Risks identified

1. Credit Risk

2. Competition

3. Management Quality

4. Inappropriate Regulation

5. Liquidity / Macroeconomic Trends

Strictly Private and Confidential

Comments

Individual Identification of Most important Five Risks

Please rate the most Important 5 Risks out of the 25 Risks identified in the Microfinance Banana Skins survey 2009, in relation to Expected Performance over the next 12 months.

Please for each risk, state the name of the risk and its current ranking (number) in the Banana Skins report 2009

Introduction

From managing risk in a booming Industry …

in 2008

…to confronting crisis and change

in 2009

Philip Brown

Global Risk Director

Citi Microfinance Group

October 6th 2009

Strictly Private and Confidential

Looking for 2010 Banana Skins

1.

2.

3.

4.

5.

How it compares with the Top Risks identified in the Banana Skins Survey 2009

Most Important Risks – Round-Table Groups

1. Credit Risk

2. Liquidity

3. Macro-economic Trends

4. Management Quality

5. Refinancing

World

1 Credit risk

2 Liquidity

3 Macro-economic trends

4 Management quality

5 Refinancing

6 Too little funding

7 Corporate governance

8 Foreign currency

9 Competition

10 Political interference

Looking for 2010 Banana Skins in India

India

1 Competition

2 Liquidity

3 Management quality

4 Corporate governance

5 Managing technology

6 Staffing

7 Political interference

8 Inappropriate regulation

9 Transparency

10 Too little funding

Microfinance Risk Barometer - Increased Risk Profile

Low pressure – increased risk profile

Directionally – Where will we be in 2010?

What current and anticipated risk events will impact performance in 2010?

2008

2009

Microfinance Risk Barometer

MENA (Morocco)

2%

Asia13%

ECA27%

Africa6%

South Asia9%

LAC43%

MENA (Morocco)

3%LAC21%

South Asia48%

Africa7%

ECA4%

Asia17%

Composition of Loan Portfolio for the Top 100 biggest MFIs by GLP

Mix Market 2008

Composition of Borrowers for the Top 100 biggest MFIs by GLP

Mix Market 2008

Continued growth

Source: Symbiotics SYM50 Index

Strong decrease in GLP growth rate in 2008 and during 1st half of 2009 across all regions

Citi's internal Microfinance portfolio growth from 2008 to 2Q09 is in line with data reported by MIX and Symbiotics

Source: Mix Market 2007-2008Representing a sample of the top 100 biggest MFIs

per GLP in 2008

GLP Growth (%) 2007 2008

Africa 82.9% 30.1%

Asia 90.9% 44.8%

ECA 68.1% 25.4%

MENA (Morocco) 72.5% -3.5%

SA 42.3% 12.1%

South Asia 55.8% 46.4%

Total 56.6% 22.2%

Portfolio-at-Risk rising across all regions

Representing a sample of the top 100 biggest MFIs per GLP in 2008Source: 2007 and 2008 Mix Market

The highest increases are situated in Africa (1.6% increase in 2008), South America (1.3%) and ECA (0.9%) (excluding the Moroccan Market, 3.3% increase in PAR > 30d).

Citi Microfinance portfolio PAR >30 days also showed an increasing trend from 2008 to 2Q09. However most MFI's have provisioned in excess of 100% of PAR>90 days

1.5% 3.1%5.7%1.5%

6.5%

0.1%

3.5%

7.0%

4.9%

2.4%

8.1%

0.4%

0%

4%

8%

12%

Africa Asia ECA MENA(Morocco)

SA South Asia

2007 2008PAR > 30 days (%)

Institutional performance – Managing Structural Funding

Ability to absorb losses due to unexpected events - The high level of Stuctural Funding has helped manage refinancing risk and absorb operating losses over 2008-09

Management of Structural Funding expected to be a vital Financial risk management consideration for MFI’s over 2010

Structural Funding (%)((Long Term Debt + Equity)/Total Liabilities)

Representing a sample of MFI’s from Citi’s Microfinance Portfolio

91% 88%

93%

86%

64%

-5%

10%

25%

40%

55%

70%

85%

100%

Africa LAC ECA MENA INDIA

43%

27%

16% 22%17% 18%

35%39%

17%21%17%

27%

0%

15%

30%

45%

60%

Africa Asia ECA MENA (Morocco) SA South Asia

2007 2008

Institutional performance – Maintaining adequate capitalisation

Divergence in capitalisation across regions

Financial flexibility has been tested

Representing a sample of the top 100 biggest MFIs per GLP in 2008Source: 2007 and 2008 Mix Market

Capitalisation (%)Equity / GLP

CGAP Global Opinion Survey – May 2009

Based on answers of over 400 MFIs Managers

MFIs CLIENTS

60% of respondents say clients are somewhat affected, more in ECA and LAC

Repayment is down in all regions

Greater % of income spent on food

60% of respondents say clients are somewhat affected, more in ECA and LAC

Repayment is down in all regions

Greater % of income spent on food

Where is the bottom? - First quarter feedback 1Q09

64% of MFIs interviewed say Loan portfolio is stable or decreasing

Credit risk is up according to 69% of managers interviewed. More severe in ECA and LAC

Increasing liquidity constraints

especially for smaller Tier 3 MFIs

64% of MFIs interviewed say Loan portfolio is stable or decreasing

Credit risk is up according to 69% of managers interviewed. More severe in ECA and LAC

Increasing liquidity constraints

especially for smaller Tier 3 MFIs

Client Credit Risk – Can it be effectively managed?

– Commercial Strategy Clear Target Segment Lending model – Group vs. Individual, % of consumer and SME segment

– Borrower Screening Process – The Client Willingness and Ability to repay Stability of Income Level of indebtedness

– Loan Product Structuring (Purpose, Tailored to Ability of the Client to Repay)

– Close Monitoring (Delinquency Policy and Process) Early Warning Signs Trends - Rising PAR>30 days Learning lessons: drivers of delinquency

– Collections Active Oversight by Senior Management Portfolio Management Risk Concentration Adequacy of Reserves – Loan Provisioning Credit Culture

Quality of Management

Macroeconomic risk – Competition as a revelator

Competition - Competitive pressures in microfinance are mounting with the proliferation of MFIs, new entrants and unregulated institutions. Will these push MFIs to take greater risks in areas such as pricing, product innovation and credit quality?

Example - Maturity crisis for the Moroccan Microfinance Sector

Morocco was a micro-credit champion in MENA : Loan portfolio multiplied by 11x between 2003 and 2007

As of Dec. 2008, 12 licensed MFIs, 1.3 million clients, USD 705 million of assets, 45% of client outreach in the Arab world

2007 : First signs of stress, fierce competition between MFIs in urban areas, over-indebtedness and loan delinquency

2009 : PAR > 30d passed from 5% in Dec. 2008 to 10% in June + Collapse of MFI “Zakoura” in May

Responses: Merger of Zakoura with the Fondation des Banques Populaires

(Government backed) Management changes and freezing of new disbursement / loan

recovery plans Coordination among MFIs: MFIs will be integrated in new credit

bureaus

Macroeconomic risk – Local politics and performance

Examples

India

– Social /Communal tensions in some areas leading to rapid portfolio deterioration (e.g; Mysore, Kolar , Ramnagaram)

Pakistan

– Local Politicians issuing loan pardon slips to MFI borrowers in Kamoki and Ravi Rayon with the objective of gaining political mileage. Worst affected areas have been Lahore, Faisalabad, Sheikhupura and Gujranwala

Venezuela

– Direct competition from the government encouraging government backed social cooperatives and community production centres rather than private MFIs

– Interest rate caps and no recognition of special status for microfinance institutions

Nicaragua

– Government supporting the “Movement of no pay” initiated in July 2008 and which claims a 10-yr moratorium law and cap on interest rates on microfinance portfolio

– Loan disbursement were suspended by most MFIs in Northern Nicaragua in Sept. 2009

Political interference -MFIs may face political pressures, for example in the areas of interest rates, lending terms and subsidised government programmes. How big a risk do these pose to the business?

Source: Micro enterprise Americas 2003

Institutional performance – Learning Lessons

Strictly Private and Confidential

Corposol Case Study – What went wrong?

Failure to track multiple loans to a single client

High delinquency rate and loan losses

Accounting errors

Poor self-governance

Looking for 2010 Banana Skins

Microfinance Risk barometer

Directionally – Where will we be in 2010?

• Growth • Competition • Liquidity / refinancing • Management Quality• Regulatory

• In terms of identifying 2010 Banana Skins : What are the three success / failure factors to look in microfinance risks today?

* Unsustainable growth ?* Competition ?* Credit culture / discipline ?

2010

Winners and losers / Cornerstones of success

Winners and Losers

Emmanuelle Javoy, Managing Director of Planet Rating in France

“overall, one third of MFIs have systems, procedures and performance that should really allow them to manage the above stated risks without major problems, while another half have decent systems or procedures or performance, but that might take a little time to adapt to changing situations”.

Risk Management, a differentiator

Philip Brown, Risk Director at Citi Microfinance

“Effective risk management (strategy, process and culture), has become a differentiator of performance… Greater instability and uncertainty exists across the spectrum of macro and micro business risks. These risks have stressed some businesses, resulting in cracks appearing with negative performance, in some case threatening business survival…There is a renewed focus on the monitoring and management of risks associated with business fundamentals”.

For further details, please visit Citi Microfinance website

http://www.citi.com/citi/microfinance

THANK YOU

Commercial Financial

Environment Client / Other ?

Mapping Risks

7.

Corp Governance

23. Ownership

14. Staffing

16. Transparency

19. Mission Drift

15. Managing

Technology

24. Product

Development

1.

Credit Risk

22. Back Office

2.

Liquidity

20. Fraud

6. Too Little Funding

5.

Refinancing

5.

Refinancing10.

Political Interference

Natural Catastrophes

3.

Macro-economic trends

9. Competition

25. Too much

funding

8. Foreign Exchange

8. Foreign Exchange

18. Unrealizable expectations

Strictly Private and Confidential

13.Inappropriate

regulation

21. Depositor confidence

11. Interest Rates

25. Too much

funding

1.

Credit Risk

17. Reputation

4.

Management

12. Profitability

Deteriorating ROE – Credit provisions and declining efficiency

Source: Symbiotics SYM50 Index

MFIs’ performance is hit by increasing loan loss provision and costs linked to monitoring, collection and remedial management.

Credit Risk – Macro Economic Linkage

Portfolio at Risk >30 days%

0%

5%

10%

15%

20%

Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08 Nov 08

Bank A

Bank B

Bank C

Bank D

CEE – MFI Example