Gc03 microfinance

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Gc03 microfinance

  1. 1. Panel Sponsored by 2
  2. 2. Half Of The Developing WorldLives On Less Than $2 A Day • 1.2 billion people live on less than $1 a day • 2.8 billion people live on less than $2 a day 3
  3. 3. A Typical Microenterprise… • Has fewer than 10 employees • Has less than $1,000 in capital • Is located in the home 4
  4. 4. What Is Microfinance? • Small loans extended to very poor people for self-employment enterprises. 5
  5. 5. Characteristics of Microfinance • 13 million borrowers around the world • $7 billion in outstanding loans • 30% annual growth • 98% repayment rate • Estimated market size = 500 million microentrepreneurs worldwide 6
  6. 6. The Necessary Scale of Microfinance • To reach 100 million of the world’s poorest families by 2005, the microfinance industry will require $21 billion in capital 7
  7. 7. Grameen Bank Model Of Microfinance • Group lending model • Groups of 5 borrowers are formed; at first only 2 of them receive loans • Only if these 2 repay the loans do other members become eligible for loans 8
  8. 8. Grameen Bank MembersMillions2.52.01.51.00.50.0 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 9
  9. 9. Loans Made By Grameen BankUS$ Millions300250200150100 50 0 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 10
  10. 10. Non-Performing Loans%8 Grameen Bank U.S. Commercial Banks6420 97 98 99 00 01 11
  11. 11. Bangladeshi Microfinance Reaches 75% Of Poor Households Households ReachedBangladesh 75%World Average 10% 12
  12. 12. Microfinance in Asia No. of No. of Borrowers SaversBank Rakyat 12 2.5 million(Indonesia) millionBank of Agriculture 3.6(Thailand) 1 million million 13
  13. 13. Bolivia’s Banco Sol First Microfinance Commercial Bank Average Loan Loan Portfolio Size2002 $81 million $1,9002001 $81 million $1,5002000 $78 million $1,3001999 $82 million $1,1001998 $75 million $916 14
  14. 14. Microfinance Outperforms Commercial Banks in Peru%30 ROE: Microfinance Institutions25 ROE: Commercial Banks20151050 1998 1999 2000 2001 15
  15. 15. Microfinance Outperforms Commercial Banks in Bolivia%30 ROE: Microfinance Institutions20 ROE: Commercial Banks10 0-10-20-30 1998 1999 2000 2001 16
  16. 16. Microfinance Less Sensitive to Crisis BRI’s Loan Portfolio During the Asia Crisis Corporate Portfolio Retail Portfolio 100% Loss 50% Loss Microfinance Portfolio 2.5% Loss 17
  17. 17. Credit Unions Around The World • 37,000 Credit Unions • 112 million members • $530 billion in savings • $606 billion in assets 18
  18. 18. Microfinancial Institutions Around The World World AverageTotal Assets $5.7 millionOutstanding Loans $3.9 millionROA 5.5%ROE 14.1%Non-performing Loans 2.3% 19
  19. 19. UN Capital Development Fund’s$40 Million Microfinance PortfolioLatin America Asia$8 million $4 million 10% 20% 70% Africa $28 million 20
  20. 20. Models of Microfinance• Individual lending – Micro loans are given directly to individual borrowers – Loans often part of broader assistance package• Group lending – Groups of five borrowers – Relies on social networks to increase likelihood of repayment• Village banking – The entire community is treated as one borrower – Village-based institutions to dispense loans 21
  21. 21. The Value of Microfinance Networks• Lower costs as a result of centralizing the financing unit• Sufficient asset size to attract private capital• Transparency to external actors• Monitoring and evaluation of member MFIs• Accountability of member MFIs 22
  22. 22. Microfinance Lending Networks – A Potential ModelDonors $ MFI $Micro-finance $ MFI Center MFI $ Borrower Funds $ MFIInvestors $ 23
  23. 23. Top 10 Microfinance Funds 2002 Assets (millions)Oikocredit $170Khula Enterprise Finance $85Calvert Foundation $50UN Capital Dev. Fund $40Pofund $22AMINA African Development Fund $20Triodos-Doen $20Dexia Blue Orchard Microcredit $17CORDAID $14Internationale Micro Investitionen $12 24
  24. 24. Challenges• Attract private capital• Reach scale• Achieve positive return on assets• Balance financial and social objectives• Balance cooperation and competition 25
  25. 25. An Initial Observation• 3 billion people in the world live on less than 2USD per day• To survive, these people create their own job through the establishment of micro- enterprises 26
  26. 26. The Microenterprises• Active in very different sectors• Closely linked to family economics• Need diversified financial services 27
  27. 27. An Important Potential Market• 500 million micro-enterprises in the world• Annual average funding need per micro- enterprise: USD 500• New products will generate new opportunities: savings, insurance, credit cards, payments, etc 28
  28. 28. The Offer of Financial Services to Microenterprises• Friends and family or loan sharks (10% interest rate per day); traditional banks are absent from this market• 10,000 micro-finance institutions (MFI) all over the world, of which about 250 are profitable and fast growing• Those MFI only cover about 5% of potential demand 29
  29. 29. Microfinance Institutions• Specialized financial intermediaries• Methodology adapted to target segment (example : solidarity group lending)• Diverse legal structures : NGO, NBFI, Co-op, Banks• Excellent results : average reimbursement rates close to 97% 30
  30. 30. Examples of MFI BlueOrchard Clients: 12/2002 Mikrofin Adopem Share Bosnia Dom. Rep. IndiaOutstanding portfolio $8.8 $12.9 $8.7(million)Portfolio At Risk (> 30 days) 0% 2.7% 0%Portfolio growth 2002 91.6% 17.6% 56.0%Portfolio growth 2001 29.7% 33.5% 64.6%Number of clients 5,622 36,670 109,212Average loan to clients $1,510 $351 $79 31
  31. 31. Examples of MFI BlueOrchard Clients: 12/2002 Mikrofin Adopem Share Bosnia Dom. Rep. IndiaROA 2002 7.8% 12,7% 1.1%ROA 2001 9.9% 15.0% 1.8%ROE 2002 22.2% 32,2% 6.7%ROE 2001 44.9% 35.8% 9.1% 32
  32. 32. The Microfinance Industry is Structuring Itself• Standardization of financial information and ratios• Regular external audits• Specialized rating agencies• International networks with technical assistance• Specific legislation and supervision from Superintendents• Access to private commercial funding 33
  33. 33. Microfinance Impacts go Beyond the Purely Economic Sphere Family welfareFinancial and Self esteem andeconomic impact “empowerment” Microenterprise Micro-finance Financial services to micro-enterprises 34
  34. 34. The Philosophy of Sustainable Development• No contradiction between profitability and social impact• Sustainability of impact is made possible by profitability• From a logic of assistance to a logic of partnership 35
  35. 35. The Trend in Socially Responsible Investments• We observe a growth in demand for products : – Combining financial return and social impact – With low correlation to other asset classes – Targeting growth areasØA micro-finance investment fund meets those expectations 36
  36. 36. BlueOrchard Finance• A link between Capital markets and MFI• A specialized advisor for Microfinance investments 37
  37. 37. Dexia Micro-Credit FundThe First Private Commercial Fund for Microfinance• $30 million Luxembourg-based investment fund• Specialized lending to best MFIs in the world• Current clients include top 30 MFIs in 20 countries• 4.5 years excellent track record• Cumulated net return in USD of 24% since inception• Over 85 disbursed loans, not a single default• Cumulated portfolio of our 30 clients approximate 1 million micro-enterprises 38
  38. 38. Dexia Micro-Credit Fund The Fund Flows Libor USD investor +2-3% IMF IMF IMF Libor USD IMF Dexia BlueOrchard +4.5-6%IMF Buy shares Fund from the SICAV Issues direct loans MFI 1-6% per month IMF IMF local currency IMF IMF IMF micro- 29 institutions entrepreneur 18 countries Issues direct IMF loans IMF USD 17.5 millions IMF of current loans IMF IMF IMF IMF IMF 837’330 IMF IMF micro-enterprises; IMF USD 501’657’359 micro-credits 39
  39. 39. Dexia Micro-Credit Fund BlueOrchard Debt USD 5/2003•DMCF USD 26 MFIs in 17 Countries•Net Asset Value $18.4 million•2000 ROI 7.77%•MFI Loans $13.4 million•2001 ROI 6.78%•Average loan $432,700•2002 ROI 4.10%•Average maturity 19.1 Months 40
  40. 40. Dexia Micro-Credit Fund BlueOrchard Debt USD 5/2003 Uruguay 15.0 12500 Philippines 0.1% Albania 2.2% 1.5% Bolivia 12.7% 12.5 12000 Peru Bosnia 18.1% 1.5% Cambodia 10.0 2.5% 11500 Colombia 1.9% 7.5 Dominican 11000Nicaragua Republic 8.9% 5.0 14.9% Ecuador 10500 7.5% 2.5 Mongolia Guatemala 1.5% 1.9% Morocco India - 10000 2.6% Mexico Indonesia 7.5% 09/98 03/99 09/99 03/00 09/00 03/01 09/01 03/02 09/02 7.5% 7.5% Loan Volume USD millions Share Price USD 41
  41. 41. Dexia Micro-Credit Fund BlueOrchard Debt CHF 5/2003•DMCF USD 18 MFIs in 11 Countries•Net Asset Value CHF 8.8 million•2002 ROI 1.6%•MFI Loans CHF 6.9 million•Average loan CHF 384,000•Average maturity 16 Months 42
  42. 42. Dexia Micro-Credit Fund BlueOrchard Debt CHF 5/2003 Kazakhstan 2.2% Bolivia Uganda 7.8% 8.0 10200 3.4% Cambodia Peru 4.5% 7.0 16.9% 10150 6.0 Colombia 16.9% 5.0 10100 4.0 10050 3.0Nicaragua 2.0 16.9% 10000 Dominican Republic 1.0 9.0% Ecuador - 9950 Morocco 6.7% 9.0% Mongolia 12/01 03/02 06/02 09/02 12/02 6.7% Loan Volume USD millions Share Price USD 43
  43. 43. DEXIA Micro-Credit Fund The Technical Details• Luxembourg SICAV Part 2• Minimum investment : CHF 15,000 , USD 10,000; EUR 10,000• Entry fees : 0-4% (decision of distributor)• No exit fees• Public / open-ended / Monthly NAV and liquidity• Microfinance portfolio : Max 80% of total assets• Net expected return : USD Libor +2%• No FX risk taken 44
  44. 44. DEXIA Micro-Credit Fund Benchmark against reinvested 6M Libor USD120115110105 DMCF Share Value100 Libor USD 6 Months Reinvested 95 05/00 08/00 11/00 02/01 05/01 08/01 11/01 02/02 05/02 08/02 11/02 45
  45. 45. DEXIA Micro-Credit Fund Benchmark against World Global Bond Index120 DMCF Share Value115 IO SB WGBI 1+ $ - USD110105100 95 05/00 08/00 11/00 02/01 05/01 08/01 11/01 02/02 05/02 08/02 11/02 46
  46. 46. DEXIA Micro-Credit Fund Benchmark against Emerging Market Bond Index125120115110105 DMCF Share Value100 IO JPM EMBI+ COMPOSITE - USD 95 05/00 08/00 11/00 02/01 05/01 08/01 11/01 02/02 05/02 08/02 11/02 47
  47. 47. DEXIA Micro-Credit Fund The Risk-Return Profile of A New Asset ClassSteady returns Microfinance brings a newLow credit risk social impact dimension toStrong resistance to external shocks the money investedFX risk hedgedLow correlation with other assets 48
  48. 48. Meeting Microfinance Institutions’ Needs International Capital Markets BlueOrchard Finance s.a. Short Term Debt Long Term Debt Short Term Debt Guarantee Private Equity Hard Currency Hard Currency Local Currency Local Currency Local CurrencyDexia Micro-Credit Fund w Fund x Fund y Fund z Fund Microfinance Institutions 49
  49. 49. BlueOrchard MFLO Project Manager Investment Bank Rating Agency Legal Advisor Back-office bank Issue of Bonds Loans Special Purpose Vehicle Interest Interest Rate Rate Leading MFI Leading MFISenior Note (70%) Leading MFI Leading MFI Equity (30%) Leading MFI Portfolio of Loans Leading MFI backs issue of bonds Leading MFI Leading MFI Buy Leading MFI Bonds Leading MFI Investment Community 50
  50. 50. MFLO Value Added• To put microfinance on the capital markets map and to bring in mainstream actors• To become a new opportunity for efficient private-public partnership• To create an attractive solution for MFI funding – Large amounts – Longer maturity• Additional fine tuning will make participation to other rounds of securitization attractive to many MFIs all over the world 51
  51. 51. The MFLO - One Major Bottleneck• To find equity investors willing to earn 6% returns for a 7-year USD investment in a cutting edge sustainable development product 52
  52. 52. Potential Models for Commercial Bank Involvement in Microfinance• Separate MFI subsidiaries• Acquisition of existing MFIs and operation of them as separate businesses• Microfinance integrated into regular bank operations 53
  53. 53. Potential Microfinance Development Goals• Establish linkages between MFIs and the formal financial sector and capital markets• Support banks moving into the microfinance market – demonstration effect• Identify and develop financial technologies that improve risk management and profitability and increase efficiency 54
  54. 54. History of Microfinance Commercialization• 1980s - demonstrated microfinance could provide large scale outreach profitably• 1990s - microfinance began to develop as an industry• 2000s - objective - to satisfy unmet demand on a much larger scale, which will play a role in reducing poverty 55
  55. 55. Challenges to Microfinance Commercialization• Inappropriate donor subsidies• Poor regulation and supervision• Few MFIs mobilize savings• Limited management capacity in MFIs• Institutional inefficiencies• Need for rural and agricultural methodologies 56
  56. 56. Microfinance Dependency on Subsidy • Donors helped create industry, but unclear how to support commercialization without distorting market mechanisms. • Availability of grants and soft-loans for on-lending discourages MFIs from pursuing commercial sources of capital 57
  57. 57. Challenges to MFIsMFIs need to develop expertise in:• Risk management• Management information and internal control• Marketing and customer responsiveness• Human resource development 58
  58. 58. Potential Rural Finance Methodologies • Microfinance has been most successful in densely populated rural areas • New approaches include: – building on local knowledge – developing rural loan officers knowledge of agricultural markets 59
  59. 59. Myths and Facts of Microfinance Myth Fact“Poor people don’t repay Early 80’s – Many MFIs haveloans” better repayment than banks“The poor can’t pay the Early 90’s – a few MFIsfull cost of microfinance” began covering all their costs“MFIs must depend on Mid-90’s – Top MFIs begandonor funding rather than to attract significantcommercial sources” commercial funding“MFIs cannot be profitable Today – MFIs are striving toand reach the poorest.” reach these twin objectives 60
  60. 60. Evolution of Microfinance Flexible, financial services for poor families Microfinance InstitutionsDonor-dependent microenterprisecredit programs 61
  61. 61. State of Global Microfinance: 2001 Unserved: 526 million• 10,000 MFIs reach only 4% of the potential market.• Top 5 institutions reach almost half of that market• 1% of MFIs are financially sustainable. Clients: 24 million 62
  62. 62. Increasing the Scale of Microfinance• Donor money is limited and unpredictable• Massive scale will require commercial fund – Commercial Funds are only available to viable institutions – Reaching large numbers of poor depends on institutional sustainability 63
  63. 63. Potential Future of Microfinance• Microfinance integrated into financial system• Most MFIs regulated• Increased emphasis on savings• Diverse institutional models 64
  64. 64. What the Industry Needs to Grow in the Future• Put clients at the center• Build institutional capacity• Increase scale of microfinance• Increase efficiency• Extend the poverty- sustainability frontier 65
  65. 65. Extending the Frontier: Greater Sustainability and Poorer Clients Regular banksMFISustainability Most MFIs Pure Charity MFI Depth of Outreach 66

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