the luxembourg microfinance and development fund social

The Luxembourg Microfinance and Development Fund

Social Venture Capital Sub Fund

English

The Luxembourg Microfinance and Development Fund - Social Venture Capital Sub Fund 02 - 03

Summary

05 Short profile of the Fund

07 Microfinance, a helping hand /// Microfinance and micro-loans

08 How does LMDF invest in microfinance? /// Which type of MFI does LMDF invest in?

11 Key challenges /// The typical investor

13 Reportage: Client stories submitted by Maxima Mikroheranhvatho

14 Risks and return /// Investment horizon and reporting

15 LMDF’s basic factsheet /// Important Information /// Imprint

Short profileof the Fund


Investment policy

Investment in debt, equity, guarantees and related financial instruments issued by microfinance institutions in developing countries (Africa, Asia and Latin America).

The typical investor

Has an interest in microfinance as a development tool and supports the dual objectives of the Fund, social impact and financial return. The typical investor is willing to invest for the long term and accepts a possibly lower return than available from purely return-oriented investments.

Expected return

The Fund aims at a financial return of at least inflation in order to preserve the capital of the investor in real terms.

Main risks

Investors in Class C shares are covered from credit or counterparty risks first by the capital of Class A shares (Luxembourg government and ADA). Investors are exposed to country, currency, liquidity, valuati-on and operational risks.

Key features

· Type: SICAV Part II

· Inception date: 7th October 2009

· ISIN (Class C): LU0456967404

· Currency: EUR

· Initial subscription price per Class C share: EUR 100 per share

· Dividend policy: Capitalization

· NAV frequency: Quarterly

· Subscription: Quarterly with 5 business days’ notice

· Redemption: Quarterly with 45 days’ notice

· Target size: EUR 25 million

Microfinance consists of credits, savings and insurance to help poor households overcome their precariousness. Through the commitment of the government, non-governmental organizations and the financial place, Luxembourg has become an important force in the global micro-finance movement.

"An investment with return for the poor"

In the interest of microfinance


Microfinance, a helping hand

The 2009 report on the progress to achieving the millennium development goals notes that the economic crisis and food price inflation have stalled some of the progress made in eradicating extreme poverty and hunger. The UN considers that the number of people living with less than $1.25 per day has increased by 55 to 90 million in 2009 to roughly one quarter of all humans.

Since the United Nations declared 2005 the “International Year of Microcredit”, it is public knowledge that microfinance plays a role in helping poor households to overcome their precarious-ness. The Microcredit Summit Campaign measured the number of poorest households with access to microfinance at 100 million in 2007. 83% of clients were women and the Campaign hopes to reach 175 million families by 2015. At the same time about 2.5 billion adults, just over half of the entire adult population, do not have access to formal financial services to save or borrow (Financial Access Initia-tive 2009).

Particularly in difficult times, access to a small loan, a place to store your savings safely or insurance makes a difference to a poor family faced with significant uncertainty. Microfinance consists of credits, savings and insurance to help poor house-holds. Through the commitment of the government, non-governmental organizations and the financial place, Luxembourg has become an important force in the global microfinance movement.

The Luxembourg Microfinance and Development Fund (“LMDF”) is a SICAV whose aim is to support the providers of adapted financial products and contribute to the alleviation of poverty in developing countries (Africa, Asia and Latin America) while giv-ing its shareholders a financial return which com-pensates at least for inflation to preserve invested capital in real terms.

Microfinance and micro-loans

Microfinance consists of providing reliable, fair and adapted financial services to those excluded from the traditional financial system. Financial services offered by microfinance institutions (“MFIs”) include micro-loans, savings and insurance products.

Micro-loans are based on the principle of providing the means to a poor but entrepreneurial person to help him- or herself to complete a project. Income generating opportunities in the informal economy and small scale agriculture are plentiful and micro-loans are often used to finance working capital needs or small capital investments in machinery and equipment. Median micro-loans amounted to $360 in Africa, $310 in Asia and $675 in Latin Amer-ica in 2008 (Microbanking Bulletin Dec. 2009).

Lending small amounts to borrowers with no or very limited collateral and credit history requires innovative approaches. One of these innovations was the realization that lenders organized in groups and which are collectively responsible for the repayment of each individual group member lead to very low default rates. An alternative to the group lending methodology are individual credits, which are usually secured against some asset such as land, machinery or equipment. The latter type of microfinance normally involves higher loan amounts than the group lending methodology.

Strong developmental leverage results from the offering of microcredit together with savings and insurance products.

" Half of humanity does not have access to the formal banking system"

How does LMDF invest in microfinance?

LMDF does not directly engage in the provision of micro-loans or other microfinance products to the poor. LMDF works with microfinance institu-tions based in developing countries and who in turn provide adapted financial products to poor households.

LMDF provides loans to re-finance the growth of the loan portfolio of these MFIs, invests in equity instruments issued by MFIs and may arrange guarantees. Guarantees consist of a bank in a developing country lending to an MFI, normally in local currency, and LMDF providing a guarantee to such bank. (Graph 1)

LMDF has appointed Appui au Développement Autonome (ADA) as investment advisor. ADA has a proven track record of successfully managing microfinance investments and is a highly reputed player within the global microfinance movement.

Which type of MFI does LMDF invest in?

Commercially-oriented microfinance investment vehicles (MIVs) have grown significantly during the last years. Those MIVs invest mainly in large and mature MFIs (so called Tier 1 institutions). LMDF, as a social venture capital fund aims to support mainly those MFIs which have only limited or no access to international financing. These so-called Tier 2 and Tier 3 institutions usually grow very quickly and we expect our partner MFIs to be strongly committed to improving their governance, products and processes. (Graph 2)

Geographically, LMDF may invest in Latin America, Africa and Asia. Our investment approach implies that LMDF engages in countries which may be less prominent on the global microfinance map.Last but not least, whereas microfinance is com-monly associated with the provision of micro-loans, LMDF sees a large potential in financing alternative products such as micro-insurance or micro-leasing.

Graph 1: How to invest in microfinance? Graph 2: Different microfinance institutions

Tier

1

Tier

2

LMDF target’s institutions

Tier

3

Tier

4

70%

35%

0%Source: Adapted from J. Meehan (2004)

2% of all MFIsStrong operational and financial track record.Have access to international and often local financing.

8% of all MFIsSmaller and younger MFIs at or near profitability with strong development perspective. Most have or are developing access to international and local refinancing.

20% of all MFIsInstitutional shortcomings due to young age. Lack of access to capital.

70% of all MFIsMay-be start-ups, weak or stagnating institution or NGOs where microfinance is not a focus. Some will progress up. Need and subsidies to develop.

" LMDF supports smaller microfinance institutions in Africa, Asia and Latin America"

Shareholder

LMDF

Guarantee Issuer

GuaranteeLoan Equity

MFIMFI MFI

Foreign Bank

Micro-entrepreneurs


Key challenges

Connected to the objective of facilitating the development of Tier 2 and Tier 3 MFIs, LMDF has identified a number of key challenges.

Smaller MFIs require a clear perspective and reli-able partners. LMDF considers that financing for terms of less than 3 years often does not give the MFIs enough room to focus on the vital areas such as product innovation, social impact considera-tions or staff development. LMDF therefore aims to provide financing for longer terms up to 7 years.

When providing funds to an MFI in the form of loans, three actors can take on the currency risk:

· LMDF if we lend in the local currency of the MFI· The MFI if it borrows in € or $ and lends to a micro-entrepreneur in local currency

· The micro-entrepreneur him- or herself if he or she borrows in € or $ to invest in an activity-generating local currency income

Of these three actors, the micro-entrepreneur is certainly in the worst position to manage currency risk. The MFIs we target have normally not yet developed sophisticated asset-liability risk manage-ment strategies in order to manage currency risks.

Therefore LMDF intends to provide loans in local cur-rency whenever we are in a position to manage the associated risks through diversification or hedging.

To sustain growth and protect clients, MFIs, like any other financial institution, need to be appropriately capitalized. Raising equity from external investors is often a key challenge for smaller MFIs but vital to attract loans and eventually reach the capitali-zation necessary to convert into a deposit-taking institution. LMDF intends to invest a large part of its portfolio in the equity of Tier 2 or Tier 3 institutions.

The typical investor

Has an interest in microfinance as a development tool and supports the dual objectives of the fund, social impact and financial return. The typical inves-tor is willing to invest for the long term and accepts a possibly lower return than available from purely return-oriented investments.

" An innovative microfinance fund which meets micro-entrepreneurs’ needs"

Reportage


01

Torn Phaly and Bou Bin have 4 children, 2 sons and 2 daughters. Torn started her wedding planning and decoration business more than 20 years ago in Koh Oknha Tey. She learnt this business from her neighbour. In addition, Torn is also weaving silk at home, which she also learnt from her neighbour and has started making silk in 1990. Her eldest daughter is married and lives with her husband in a different village. One of her children is a construc-tion worker and travels from one village to another for his work. The other two children are studying at the primary school in the village. Her husband, Bou Bin is assisting her in the wedding planning and decoration. They both did not benefit from higher studies. Therefore, they send all their children to the local school and of course they encourage them to pursue a higher education.

Torn Phaly has borrowed seven times from Maxima already and the current loan amount is US$ 2,000 and the loan term will be 20 months. Of this loan amount, she will use US$ 1,700 to purchase wed-ding decoration materials and US$ 300 will be used to buy silk material and sewing thread, as well as for fees for selecting and preparing thread on the loom for continuing to expand her silk production.

02

But By is married to Chorn Savang and they have 2 children, 1 son and 1 daughter. Their daughter is studying at high school in the Koh Dach commune and their son is studying civil engineering at uni-versity in Phnom Penh. But By is in the business of making and selling white foam of melted soy bean and is raising pigs. His wife is helping him with his business at home and looks after their family.

But By has borrowed from Maxima for 2 cycles and is applying for a third loan. The first and second loans were used to expand the business of making and selling white foam of melted soy bean. His business is growing well. Now he is asking for a loan for $2,000. He will use this loan to buy 40 baby pigs. He is capable of handling the loan and could repay it without any problem.

Following client stories have been submitted by Maxima Mikroheranhvatho, a microfinance institution in Cambodia supported by LMDF.

0201

Risks and return

An investment in LMDF is not comparable to an investment in equity or bond funds investing in instruments traded on the stock exchange or other liquid markets. Even though LMDF always intends to minimize risks through diligent selection of investments and diversification, investors may be exposed significantly to currency and country risks, credit or counterparty risk, liquidity and valuation risks as well as operational risks. Please refer to LMDF’s prospectus for a detailed description of these risks and the instruments we intend to use in order to manage such risks.

LMDF seeks a dual return: social and financial. These two objectives may sometimes conflict and investors in LMDF should expect a lower financial return than available from comparable commercial structures. Social return for LMDF’s investors is less easy to quantify but we will report regularly on the MFIs and, if feasible, the impact they make through the provision of financial services to marginalized populations.

Investors in Class C shares are protected from counterparty risks (the risk that the MFI does not honour its obligation) through a loss compensation from Class A share capital (subscribed for by the Luxembourg government and ADA). Class C shares may only be subscribed by private individuals or not for profit entities.

It is important to note that the counterparty risk cover does not include country, currency, liquidity or valuation risks and should not be understood as a guarantee that the net asset value per share of Class C shares may never decrease.

Investment horizon and reporting

Any investment in LMDF should be regarded as long-term to allow LMDF to achieve its objectives.LMDF reports at least semi-annually, as at 31st March and 30th September on its financial and social performance.

We invite you to visit our website at www.lmdf.lu to obtain updated information and to consult this bro-chure, the prospectus and annual or semi-annual reports.

How can I invest?LMDF is distributed through most major banks in Luxembourg or directly via LMDF’s administrative agent. Subscription can be made quarterly on 31st March, 30th June, 30th September and 31st December with a notification period of 5 business days.

Redemptions are subject to a 45 days’ notification period by the investor before the abovementioned quarterly dates.

" A public-private partnership to create a social investment fund"


LMDF’s basic factsheet

Type: SICAV, part II of the 2002 law // Inception date: 7th October 2009 // ISIN of Class C: LU0456967404 // LMDF’s currency: EUR // Type of shares: Capitalization // NAV: Quarterly, 31st March, 30th June, 30th September and 31st December // Subscription: Quarterly, 5 business days’ notice period // Subscription commission: Up to 2% in favour of the distributor // Redemption: Quarterly, 45 days’ notice period // Redemption commission: Up to 2% in favour of the Fund // Management fees: Maximum 1.75% of the average net asset value, except during the first year when such fee may be higher // Investment advisory fees: Maximum of 2% of the average net asset value // Members of the board of directors: Axel de Ville, Chairman (ADA), Marc Elvinger, Vice-chairman (Independent), Anouk Agnes (Ministry of Finance), Marc Bichler (Ministry of Foreign Affairs, Directorate for Development Cooperation and Hu-manitarian Action), Mark Cunningham (ADA), Paolo Vinciarelli (Banque et Caisse d’Epargne de l’Etat), Patrick Wallerand (Independent), Kaspar Wansleben (Managing director) // Promoters: Luxembourg state and ADA // Investment advisor: Appui au Développement Autonome (ADA) // Custodian bank: Banque et Caisse d’Epargne de l’Etat // Administrative agent: European Fund Administration // Auditor: BDO Audit // Legal advisor: Elvinger, Hoss & Prussen

Important Information

This material comprises information relating to Luxembourg Microfinance and Development Fund – Social Venture Capital Sub-Fund ("LMDF"). It is not LMDF’s sales prospectus. An investment in LMDF may only be made on the basis of the current prospectus and the latest available annual and semi-annual reports. Such documents are available free of charge at the registered office of LMDF at 2, place de Metz, L-1930 Luxembourg and on the Internet site www.lmdf.lu. If you are in any doubt about the contents of the present material, annual or semi-annual reports or the prospectus you should consult your stockbroker, bank manager, solicitor, accountant or other financial adviser.

The typical investor in LMDF is an individual or institution who has an interest in microfinance as an instrument for the advancement of marginalized popula-tions in developing countries. The typical investor is aware that LMDF seeks dual objectives, social impact and financial return. The typical investor is willing to invest for the long term and accepts a possibly lower return on investment than available from purely return-oriented investment vehicles. There can be no guarantee that the objective of LMDF will be achieved.

LMDF has been authorised to distribute its shares to the people of the Grand Duchy of Luxembourg. Every potential shares applicant living in a territory other than the Grand Duchy of Luxembourg cannot consider these documents as an invitation to buy or apply for these shares, unless in that territory such an invitation can be carried out within full compliance of the law, without any registration or other modalities, or unless this person is to comply with the legislation in effect in the concerned territory, to obtain all governmental or other required authorisations and to subject him- or herself to all applicable requirements.

None of LMDF’s shares have been registered under the United States Securities Act of 1933 or registered or qualified under applicable state statutes and LMDF has not been registered under the United States Investment Company Act of 1940. None of the shares may be offered or sold, directly or indirectly, in the United States of America or in any of its territories or possessions (the "United States"), or to any US Person or on their behalf, except as part of an exemption to the transferable securities laws in effect in the United States or as part of a transaction not subject to these laws.

Imprint

Conception and Layoutbinsfeld corporate

© PhotosADA, Luxembourg (p. 06, 09) ADA / Guy Wolff (p. 14, 15)Intean Poalroath Rongroeurnd Ltd, Cambodia (p. 10, 11)Maxima Mikroheranhvatho Co. Ltd, Cambodia (p. 13)

© The Luxembourg Microfinance and Development Fund − Social Venture Capital Sub Fund, 2010All rights reserved

Société d’Investissement à Capital Variable /// 2, place de Metz /// L-1930 LuxembourgT.: +352 27 47 35 /// F.: +352 27 47 35 72 /// [email protected] /// www.lmdf.lu

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