The Luxembourg Microfinance and Development Fund Social ...
Capital Sub Fund
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
The Luxembourg Microfinance and Development Fund - Social Venture Capital Sub Fund 02 - 03
"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-
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.
The Fund aims at a financial return of at least inflation in order to preserve the capital of the investor in
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.
· 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’ notice
EUR 100 per share · Target size: EUR 25 million
The Luxembourg Microfinance and Development Fund - Social Venture Capital Sub Fund 04 - 05
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 the adapted financial services to those excluded from
economic crisis and food price inflation have stalled the 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 the micro-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 to
help 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 public and small scale agriculture are plentiful and micro-
knowledge that microfinance plays a role in helping loans 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 clients ica 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 the
repayment 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 insurance lending 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 of land, 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 force Strong developmental leverage results from the
in the global microfinance movement. offering of microcredit together with savings and
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 invested
capital in real terms.
The Luxembourg Microfinance and Development Fund - Social Venture Capital Sub Fund 06 - 07
Graph 1: How to invest in microfinance? Graph 2: Different microfinance institutions
Shareholder 70% 2% of all MFIs
Strong operational and financial track record.
Have access to international and often local financing.
target’s 8% of all MFIs
institutions Smaller and younger MFIs at or near profitability with
Guarantee Issuer strong development perspective. Most have or are
developing access to international and local refinancing.
Loan Equity Guarantee 20% of all MFIs
35% Institutional shortcomings due to young age.
Lack of access to capital.
70% of all MFIs
May-be start-ups, weak or stagnating institution or NGOs
MFI MFI MFI where microfinance is not a focus. Some will progress up.
Need and subsidies to develop.
Micro-entrepreneurs Source: Adapted from J. Meehan (2004)
"LMDF supports smaller microfinance institutions
in Africa, Asia and Latin America"
How does LMDF invest in Which type of MFI does
microfinance? LMDF invest in?
LMDF does not directly engage in the provision Commercially-oriented microfinance investment
of micro-loans or other microfinance products to vehicles (MIVs) have grown significantly during the
the poor. LMDF works with microfinance institu- last years. Those MIVs invest mainly in large and
tions based in developing countries and who in mature MFIs (so called Tier 1 institutions). LMDF,
turn provide adapted financial products to poor as a social venture capital fund aims to support
households. mainly those MFIs which have only limited or no
access to international financing. These so-called
LMDF provides loans to re-finance the growth of Tier 2 and Tier 3 institutions usually grow very
the loan portfolio of these MFIs, invests in equity quickly and we expect our partner MFIs to be
instruments issued by MFIs and may arrange strongly committed to improving their governance,
guarantees. Guarantees consist of a bank in a products and processes. (Graph 2)
developing country lending to an MFI, normally
in local currency, and LMDF providing a guarantee Geographically, 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 less
LMDF has appointed Appui au Développement prominent on the global microfinance map.
Autonome (ADA) as investment advisor. ADA has Last 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 alternative
player within the global microfinance movement. products such as micro-insurance or micro-leasing.
The Luxembourg Microfinance and Development Fund - Social Venture Capital Sub Fund 08 - 09
"An innovative microfinance fund which meets
Connected to the objective of facilitating the Therefore LMDF intends to provide loans in local cur-
development of Tier 2 and Tier 3 MFIs, LMDF has rency whenever we are in a position to manage the
identified 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 any
able partners. LMDF considers that financing for other financial institution, need to be appropriately
terms of less than 3 years often does not give the capitalized. Raising equity from external investors
MFIs enough room to focus on the vital areas such is often a key challenge for smaller MFIs but vital
as 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-taking
provide 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 of
loans, 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 development
micro-entrepreneur in local currency tool and supports the dual objectives of the fund,
· The micro-entrepreneur him- or herself if he or she social impact and financial return. The typical inves-
borrows in € or $ to invest in an activity-generating tor is willing to invest for the long term and accepts
local currency income a possibly lower return than available from purely
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.
The Luxembourg Microfinance and Development Fund - Social Venture Capital Sub Fund 10 - 11
Following client stories have been
submitted by Maxima Mikroheranhvatho,
a microfinance institution in Cambodia
supported by LMDF.
Torn Phaly and Bou Bin have 4 children, 2 sons and But By is married to Chorn Savang and they have
2 daughters. Torn started her wedding planning 2 children, 1 son and 1 daughter. Their daughter is
and decoration business more than 20 years ago studying at high school in the Koh Dach commune
in Koh Oknha Tey. She learnt this business from and their son is studying civil engineering at uni-
her neighbour. In addition, Torn is also weaving silk versity in Phnom Penh. But By is in the business of
at home, which she also learnt from her neighbour making and selling white foam of melted soy bean
and has started making silk in 1990. Her eldest and is raising pigs. His wife is helping him with his
daughter is married and lives with her husband in a business at home and looks after their family.
different village. One of her children is a construc-
tion worker and travels from one village to another But By has borrowed from Maxima for 2 cycles and
for his work. The other two children are studying at is applying for a third loan. The first and second
the primary school in the village. Her husband, Bou loans were used to expand the business of making
Bin is assisting her in the wedding planning and and selling white foam of melted soy bean. His
decoration. They both did not benefit from higher business is growing well. Now he is asking for a
studies. Therefore, they send all their children to the loan for $2,000. He will use this loan to buy 40
local school and of course they encourage them to baby pigs. He is capable of handling the loan and
pursue a higher education. could repay it without any problem.
Torn Phaly has borrowed seven times from Maxima
already and the current loan amount is US$ 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.
The Luxembourg Microfinance and Development Fund - Social Venture Capital Sub Fund 12 - 13
Risks and return Investment horizon and reporting
An investment in LMDF is not comparable to an Any investment in LMDF should be regarded as
investment in equity or bond funds investing in long-term to allow LMDF to achieve its objectives.
instruments traded on the stock exchange or other LMDF reports at least semi-annually, as at 31st
liquid markets. Even though LMDF always intends March and 30th September on its financial and
to minimize risks through diligent selection of social 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 to chure, the prospectus and annual or semi-annual
LMDF’s prospectus for a detailed description of reports.
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 LMDF’s administrative
These two objectives may sometimes conflict and agent. Subscription can be made quarterly on 31st
investors in LMDF should expect a lower financial March, 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 LMDF’s 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 through period by the investor before the abovementioned
the provision of financial services to marginalized quarterly dates.
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 compensation create a social investment fund"
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.