commercial investments in microfinance


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a short view on microfinance, microfinance investment vehicles and other investors

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commercial investments in microfinance

  1. 1. Equity Investment in Micro Finance: whenfinancial gains drive social improvementsFinancieros sin Fronteras. Instituto de empresa, Madrid 4 Feb 2011Jorge Berezo - Oikocredit
  2. 2. 0. Oikocredit1. Microfinance: then and now2. Commercial investments in MF3. Challenges
  3. 3. Oikocredit
  4. 4. Oikocredit: not just another fund• International credit cooperative society under Dutch law• Mission: global justice through SRI and enabling access to financial services• Finances projects in the South with a positive impact in development• Not for profit maximization. High social return. Very modest financial return.• Founded in 1975. Very solid organization• Ecumenical origin and spirit• Leading private investor in microfinance
  5. 5. Investment criteriaThe project…• comes from a cooperative, MFI or SME?• benefits disadvantaged people?• makes women influential in management or implementation?• is responsible in terms of the environmental impact?• seems financially sustainable?• needs foreign investment?
  6. 6. Financed projects: project partners• Organizations (not individuals)• With a mission and a project coherent with our mission• (Very often) not financed from commercial banks• In any of the “focus countries” of Oikocredit• Types of projects: o Microfinance projects / Microfinance institutions o Production Cooperatives (agriculture, livestock, manufacturing…) o SMEs o Fair trade projects o Others (seldom)
  7. 7. Product diversity 1. Loans in hard currency 2. Loans in local currency 3. Credit lines 4. Equity investment 5. Guarantees Loans • Adjusted interest rate • From € 50.000 • Long term (3 to 10 years) • Collateral according to the project • Grace period CEDO, Giida Namirembe • Partnership ”walking a 2nd mile” • Technical assistance
  8. 8. Network in the field 35 offices worldwide to analize projects 31 support associations to channel retail investment (16 countries)
  9. 9. Facts and figures (as per 31/12/2011 preliminary not audited) 863 projects financed outstanding (592 in microfinance) € 481 million total capital outstanding (% outstanding capital)
  10. 10. Social performanceSelect the right projects • Project selection criteria • Social Performance IndicatorsHelp financed projects gauge and improve their impact • People out of Poverty Index (Grameen Foundation), • Social Performance Indicators (Cerise) • Client protection principles • MF transparencyMonitor our operations • ESG (environmental, social, governance) indicators
  11. 11. Social performance – data (as per 31/12/2009)• number of borrowers reached by Oikocredit’s microfinance partners : 17 million, of which 1 million approx. is due to Oikocredit’s funds 85% are women 53% are rural clients (based on 68% of the microfinance partners reporting) More that 2/3 of the supported IMF are small or mid-sized.• Around 1/3 of the project partners operate only in rural areas
  12. 12. What makes Oikocredit different?• Committed with the poor• Credit in rural and urban areas• Credit for production projects• From the South, for the South• Local currency• Under local law• Long term• Cooperative, over 35 years experience
  13. 13. Oikocredit in SpainOikocredit Catalunya Oikocredit Euskadi Oikocredit SevillaBisbe Laguarda, 4 Viuda de Epalza 6 (Kidenda) Avda. de Ramón y Cajal, nº 24, 1a08001 Barcelona 48005 Bilbao 41005 SevillaTel: 93 441 63 06 Tel. 94 416 68 56 Tel. 646 360
  14. 14. Microfinance: then and now
  15. 15. What do we mean by microfinance?Definition from the Microcredit Summit Campaign 1997• Programs to extend small loans to the poorest of the poor so as to allow them to pursue entrepreneurial projects that generate extra income, thus helping them to better provide for themselves and their families.Definition from the Microcredit Summit Campaign 2007• Programs to extend loans for self-employment and other entrepreneurial and financial services (including savings and technical assistance) to very poor people.
  16. 16. Evolution (1)Then Now Microcredit: - Group and individualMicrocredit: - Microentreprise, consumption, housing - Group lending Microsavings - Microentreprise Pension funds Microinsurance Payment services (remittances, transfers…)Small scale Large scale (154 M clients – MSCampaign 31/12/2007)Target group: the poorest and the Target group: wide (including SMEs, middlevery poor class…)
  17. 17. Evolution (2)Then Now RoSCAs (federated) + village banksRoSCAs + village banks Credit and saving cooperativesCredit and saving cooperatives NGOsNGOs Up-scaled NGOs (4th sector) For profit Non-formal institutions (self-owned, NGOs)Non-formal institutions (self- Non-bank financial institutions (regulated)owned, NGOs) Banks
  18. 18. Evolution (3)Then Now Search for sustainabilityHardly operationally sustainable Many financially sustainable Some very profitableSocial impact taken for granted Social impact to be proven Funding: grants, reserves, savings,Funding: grants investment, capital markets…
  19. 19. Why such a success?1. Great innovation. Blends features from informal and formal sectors From the informal sector From the formal sector Loans without collateral Trust and institutional stability Closeness and knowledge of the Tendency to efficiency and professionalism in client (personal and culturally) the operations Simple and quick procedures Availability of funds Amount and terms adapted to poor Interest rates often lower than informal clients sector Source: Gutiérrez-Goiria, J. (2009) Las microfinanzas y el desarrollo. Situación actual, debates y perspectivas, Cuaderno de trabajo Hegoa, nº49, Bilbao.2. High expectancies. Huge political impulse
  20. 20. Commercial investments inmicrofinance
  21. 21. Source of funds (1)Source: MIX Microfinance World: Microfinance Market Report for Latin Americaand the Caribbean 2010
  22. 22. Source of funds (2)Source: CGAP (2009). Microfinance Funder Survey
  23. 23. Funding landscape (1) Quoted in: Fondos de inversión microfinanciera: Características clave y mejores prácticas. Setem 2006
  24. 24. Funding landscape (2) Source: CGAP Focus Note 44. Foreign Capital Investment in Microfinance. Balancing Social and Financial Returns (based on a 2006 Survey)
  25. 25. MIV: a growing phenomenon Source: Glisovic-Mezieres and Reille (2010) and MicroRate (2010) quoted in An Empirical Analysis on the Efficiency of the Microfinance Investment Market. Dec 2010, Inoue, T. & Hamori, S.
  26. 26. MIV returns Source: Glisovic-Mezieres and Reille (2010) Microfinance Investors Adjust Strategy in Tougher Market Conditions. CGAP Brief. October 2010
  27. 27. MIV landscape Source: Glisovic-Mezieres and Reille (2010) Microfinance Investors Adjust Strategy in Tougher Market Conditions. CGAP Brief. October 2010
  28. 28. Source: Fondos deinversión microfinanciera:Características clave ymejores prácticas. Setem2006
  29. 29. MIV (+ institutional investors’) evolution1. Increasing commercial investors2. From own management of the portfolio to structured funds3. Increasing competition - Inflow - Outflow - Talent attraction4. Market not mature5. Latest developments / sophistication: • Of MFIs: securitization, bond emissions, OTC trade, go listed, IPOs… • Of MIVs: structured investment vehicles, funds of funds, securitization into structured funds • Of markets: MF index, investment managers, IMF and MIV ratings…6. Lack of sector standards
  30. 30. Sophistication
  31. 31. Equity investments1. DFI and Social investors were the first investors in equity with the aim of helping young and promising MFIs develop. It continues.2. Commercial investors attracted by high ROE3. Banks buying MFIs to enter BoP business
  32. 32. Challenges
  33. 33. Microfinance at stake
  34. 34. What do you think? Challenges for MIVs and institutional investors Risks from growth of MIVs
  35. 35. The industry reacts
  36. 36. The industry reacts1. Range of Services. We will actively support retail providers to innovate and expand the range of financial services available to low income people in order to help them reduce their vulnerability, build assets, manage cash-flow, and increase incomes.2. Client Protection. We believe that client protection is crucial for low income clients. Therefore we will integrate client protection in our investment policies and practices.3. Fair treatment. We will treat our investees fairly with appropriate financing that meets demand, clear and balanced contracts, and fair processes for resolving disputes.4. Responsible Investment. We will include environmental, social and corporate governance (ESG) issues in our investment policies and reporting.5. Transparency. We will actively promote transparency in all aspects.6. Balanced Returns. We will strive for a balanced long-term social and financial risk-adjusted return that recognizes the interests of clients, retail providers, and our investors.7. Standards. We will collaborate to set harmonised investor standards that support the further development of inclusive finance.
  37. 37. The industry reactsSmart Campaign – Client protection principles1. Avoidance of Over-Indebtedness.2. Transparent and Responsible Pricing.3. Appropriate Collections Practices.4. Ethical Staff Behaviour.5. Mechanisms for Redress of Grievances.6. Privacy of Client Data.
  38. 38. THANK YOU!!!!! JORGE BEREZO Oikocredit Euskadi Viuda de Epalza 6 (Kidenda) 48005 Bilbao Tel. 94 416 68 56