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  • 1. English The Luxembourg Microfinance and Development Fund Social Venture Capital Sub Fund

2. Summary05 Short profile of the Fund07 Microfinance, a helping hand /// Microfinance and micro-loans08 How does LMDF invest in microfinance? /// Which type of MFI does LMDF invest in?11 Key challenges /// The typical investor13 Reportage: Client stories submitted by Maxima Mikroheranhvatho14 Risks and return /// Investment horizon and reporting15 LMDFs basic factsheet /// Important Information /// ImprintThe Luxembourg Microfinance and Development Fund - Social Venture Capital Sub Fund 02 - 03 3. Short profile of the Fund 4. "An investment with return for the poor" 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. Investment policyInvestment in debt, equity, guarantees and related financial instruments issued by microfinanceinstitutions in developing countries (Africa, Asia and Latin America). The typical investorHas 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 acceptsa possibly lower return than available from purely return-oriented investments. Expected returnThe Fund aims at a financial return of at least inflation in order to preserve the capital of the investor inreal terms. Main risksInvestors in Class C shares are covered from credit or counterparty risks first by the capital of Class Ashares (Luxembourg government and ADA). Investors are exposed to country, currency, liquidity, valuati-on and operational risks. Key features Type: SICAV Part II Dividend policy: Capitalization Inception date: 7th October 2009 NAV frequency: Quarterly ISIN (Class C): LU0456967404 Subscription: Quarterly with 5 business Currency: EUR days notice Initial subscription price per Class C share: Redemption: Quarterly with 45 days noticeEUR 100 per share Target size: EUR 25 million The Luxembourg Microfinance and Development Fund - Social Venture Capital Sub Fund 04 - 05 5. In the interest of microfinance 6. Microfinance, a helping hand Microfinance and micro-loans The 2009 report on the progress to achieving Microfinance consists of providing reliable, fair and the millennium development goals notes that theadapted financial services to those excluded from economic crisis and food price inflation have stalledthe traditional financial system. Financial services some of the progress made in eradicating extreme offered by microfinance institutions (MFIs) include poverty and hunger. The UN considers that themicro-loans, savings and insurance products. number of people living with less than $1.25 per day has increased by 55 to 90 million in 2009 to Micro-loans are based on the principle of providing roughly one quarter of all humans. the means to a poor but entrepreneurial person tohelp him- or herself to complete a project. Income Since the United Nations declared 2005 the generating opportunities in the informal economy International Year of Microcredit, it is publicand small scale agriculture are plentiful and micro- knowledge that microfinance plays a role in helpingloans are often used to finance working capital poor households to overcome their precarious-needs or small capital investments in machinery ness. The Microcredit Summit Campaign measured and equipment. Median micro-loans amounted to the number of poorest households with access to$360 in Africa, $310 in Asia and $675 in Latin Amer- microfinance at 100 million in 2007. 83% of clientsica in 2008 (Microbanking Bulletin Dec. 2009). were women and the Campaign hopes to reach 175 million families by 2015. At the same time about Lending small amounts to borrowers with no or 2.5 billion adults, just over half of the entire adult very limited collateral and credit history requires population, do not have access to formal financial innovative approaches. One of these innovations services to save or borrow (Financial Access Initia- was the realization that lenders organized in groups tive 2009).and which are collectively responsible for therepayment of each individual group member lead to Particularly in difficult times, access to a small loan, very low default rates. An alternative to the group a place to store your savings safely or insurancelending methodology are individual credits, which makes a difference to a poor family faced with are usually secured against some asset such as significant uncertainty. Microfinance consists ofland, machinery or equipment. The latter type of credits, savings and insurance to help poor house- microfinance normally involves higher loan amounts holds. Through the commitment of the government, than the group lending methodology. non-governmental organizations and the financial place, Luxembourg has become an important forceStrong developmental leverage results from the in the global microfinance movement. offering of microcredit together with savings andinsurance products. 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"Half of humanity does not countries (Africa, Asia and Latin America) while giv-have access to the formal ing its shareholders a financial return which com- pensates at least for inflation to preserve investedbanking system" capital in real terms. The Luxembourg Microfinance and Development Fund - Social Venture Capital Sub Fund 06 - 07 7. Graph 1: How to invest in microfinance? Graph 2: Different microfinance institutions Shareholder70%2% of all MFIsStrong operational and financial track record.Have access to international and often local financing. LMDFLMDF targets 8% of all MFIs institutions Smaller and younger MFIs at or near profitability withGuarantee Issuerstrong development perspective. Most have or aredeveloping access to international and local refinancing.LoanEquityGuarantee20% of all MFIs 35%Institutional shortcomings due to young age.Lack of access to capital. Foreign Bank70% of all MFIsMay-be start-ups, weak or stagnating institution or NGOs MFIMFI MFI where microfinance is not a focus. Some will progress up.Need and subsidies to develop.0%Micro-entrepreneurs Source: Adapted from J. Meehan (2004)Tier 1 Tier 2Tier 3 Tier 4 "LMDF supports smaller microfinance institutions in Africa, Asia and Latin America"How does LMDF invest inWhich type of MFI doesmicrofinance?LMDF invest in?LMDF does not directly engage in the provision Commercially-oriented microfinance investmentof micro-loans or other microfinance products to vehicles (MIVs) have grown significantly during thethe poor. LMDF works with microfinance institu-last years. Those MIVs invest mainly in large andtions based in developing countries and who in mature MFIs (so called Tier 1 institutions). LMDF,turn provide adapted financial products to pooras a social venture capital fund aims to supporthouseholds.mainly those MFIs which have only limited or no access to international financing. These so-calledLMDF provides loans to re-finance the growth ofTier 2 and Tier 3 institutions usually grow verythe loan portfolio of these MFIs, invests in equityquickly and we expect our partner MFIs to beinstruments issued by MFIs and may arrange strongly committed to improving their governance,guarantees. Guarantees consist of a bank in aproducts and processes. (Graph 2)developing country lending to an MFI, normallyin local currency, and LMDF providing a guaranteeGeographically, LMDF may invest in Latin America,to such bank. (Graph 1)Africa and Asia. Our investment approach implies that LMDF engages in countries which may be lessLMDF has appointed Appui au Dveloppementprominent on the global microfinance map.Autonome (ADA) as investment advisor. ADA hasLast but not least, whereas microfinance is com-a proven track record of successfully managing monly associated with the provision of micro-loans,microfinance investments and is a highly reputed LMDF sees a large potential in financing alternativeplayer within the global microfinance movement.products such as micro-insurance or micro-leasing. 8. The Luxembourg Microfinance and Development Fund - Social Venture Capital Sub Fund 08 - 09 9. "An innovative microfinance fund which meetsmicro-entrepreneurs needs"Key challengesConnected to the objective of facilitating the Therefore LMDF intends to provide loans in local cur-development of Tier 2 and Tier 3 MFIs, LMDF hasrency whenever we are in a position to manage theidentified a number of key challenges. associated risks through diversification or hedging. Smaller MFIs require a clear perspective and reli- To sustain growth and protect clients, MFIs, like anyable partners. LMDF considers that financing for other financial institution, need to be appropriatelyterms of less than 3 years often does not give the capitalized. Raising equity from external investorsMFIs enough room to focus on the vital areas suchis often a key challenge for smaller MFIs but vitalas product innovation, social impact considera-to attract loans and eventually reach the capitali-tions or staff development. LMDF therefore aims to zation necessary to convert into a deposit-takingprovide financing for longer terms up to 7 years.institution. LMDF intends to invest a large part of its portfolio in the equity of Tier 2 or Tier 3 institutions.When providing funds to an MFI in the form ofloans, three actors can take on the currency risk: The typical investor LMDF if we lend in the local currency of the MFI The MFI if it borrows in or $ and lends to a Has an interest in microfinance as a developmentmicro-entrepreneur in local currency tool and supports the dual objectives of the fund, The micro-entrepreneur him- or herself if he or shesocial impact and financial return. The typical inves-borrows in or $ to invest in an activity-generatingtor is willing to invest for the long term and acceptslocal currency incomea possibly lower return than available from purely return-oriented investments.Of these three actors, the micro-entrepreneur iscertainly in the worst position to manage currencyrisk. The MFIs we target have normally not yetdeveloped sophisticated asset-liability risk manage-ment strategies in order to manage currency risks. The Luxembourg Microfinance and Development Fund - Social Venture Capital Sub Fund 10 - 11 10. Reportage 11. 0102Following client stories have beensubmitted by Maxima Mikroheranhvatho,a microfinance institution in Cambodiasupported by LMDF. 01 02Torn Phaly and Bou Bin have 4 children, 2 sons and But By is married to Chorn Savang and they have2 daughters. Torn started her wedding planning 2 children, 1 son and 1 daughter. Their daughter isand decoration business more than 20 years ago studying at high school in the Koh Dach communein Koh Oknha Tey. She learnt this business fromand their son is studying civil engineering at uni-her neighbour. In addition, Torn is also weaving silkversity in Phnom Penh. But By is in the business ofat home, which she also learnt from her neighbourmaking and selling white foam of melted soy beanand has started making silk in 1990. Her eldestand is raising pigs. His wife is helping him with hisdaughter is married and lives with her husband in abusiness at home and looks after their family.different village. One of her children is a construc-tion worker and travels from one village to anotherBut By has borrowed from Maxima for 2 cycles andfor his work. The other two children are studying at is applying for a third loan. The first and secondthe primary school in the village. Her husband, Bouloans were used to expand the business of makingBin is assisting her in the wedding planning and and selling white foam of melted soy bean. Hisdecoration. They both did not benefit from higherbusiness is growing well. Now he is asking for astudies. Therefore, they send all their children to theloan for $2,000. He will use this loan to buy 40local school and of course they encourage them tobaby pigs. He is capable of handling the loan andpursue a higher education. could repay it without any problem. Torn Phaly has borrowed seven times from Maximaalready and the current loan amount is US$ 2,000and the loan term will be 20 months. Of this loanamount, she will use US$ 1,700 to purchase wed-ding decoration materials and US$ 300 will be usedto buy silk material and sewing thread, as well asfor fees for selecting and preparing thread on theloom for continuing to expand her silk production. The Luxembourg Microfinance and Development Fund - Social Venture Capital Sub Fund 12 - 13 12. Risks and return Investment horizon and reporting An investment in LMDF is not comparable to anAny investment in LMDF should be regarded as investment in equity or bond funds investing inlong-term to allow LMDF to achieve its objectives. instruments traded on the stock exchange or otherLMDF reports at least semi-annually, as at 31st liquid markets. Even though LMDF always intendsMarch and 30th September on its financial and to minimize risks through diligent selection ofsocial performance. investments and diversification, investors may be exposed significantly to currency and country risks, We invite you to visit our website at www.lmdf.lu to credit or counterparty risk, liquidity and valuation obtain updated information and to consult this bro- risks as well as operational risks. Please refer tochure, the prospectus and annual or semi-annual LMDFs prospectus for a detailed description ofreports. these risks and the instruments we intend to use in order to manage such risks.How can I invest?LMDF is distributed through most major banks in LMDF seeks a dual return: social and financial.Luxembourg or directly via LMDFs administrative These two objectives may sometimes conflict andagent. Subscription can be made quarterly on 31st investors in LMDF should expect a lower financialMarch, 30th June, 30th September and 31st December return than available from comparable commercial with a notification period of 5 business days. structures. Social return for LMDFs investors is less easy to quantify but we will report regularly on the Redemptions are subject to a 45 days notification MFIs and, if feasible, the impact they make throughperiod by the investor before the abovementioned the provision of financial services to marginalizedquarterly dates. populations.Investors in Class C shares are protected from counterparty risks (the risk that the MFI does not "A public-private partnership to honour its obligation) through a loss compensationcreate a social investment fund" from Class A share capital (subscribed for by the Luxembourg government and ADA). Class C shares ma...

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