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Overview of micro finance and Luxembourg advantages with investment funds in microfinance

Overview of micro finance and Luxembourg advantages with investment funds in microfinance

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Microfinance Microfinance Document Transcript

  • Pierre Alexandre DELAGARDELLE Erwin SOTIRI Partner Partner DELAGARDELLE & SOTIRI - JURISCONSUL - MICROFINANCE March 2010
  • DELAGARDELLE & SOTIRI -JURISCONSUL- Luxembourg contribution to microfinance investments Poverty is the primary cause of concern in the efforts of improving the economic status of developing countries. People with very little means of subsistence are also in need of a diverse range of financial instruments in order do aim building assets and protect themselves against life risks. "Microfinance, is banking the unbankables, bringing credit, savings and other essential financial services within the reach of millions of people who are too poor to be served by regular banks, in most cases because they are unable to offer sufficient collateral. In general, banks are for people with 1 money, not for people without." 1 Gert van Maanen, Microcredit: Sound Business or Development Instrument, Oikocredit , 2004 2
  • DELAGARDELLE & SOTIRI -JURISCONSUL- CONTENTS MICROFINANCE INVESTMENTS ................................................................................... 4 1. INTRODUCTION .......................................................................................................... 4 1.1 Definition .................................................................................................................................. 4 1.2 Origines ..................................................................................................................................... 4 2. ACTORS...................................................................................................................... 4 2.1 Micro-entrepreneurs ................................................................................................................ 4 2.2 Microfinance institutions .......................................................................................................... 4 2.2.1 Non-governmental organisations ......................................................................................... 5 2.2.2 Credit unions ........................................................................................................................ 5 2.2.3 Cooperatives......................................................................................................................... 5 2.2.4 Associations .......................................................................................................................... 5 2.2.5 Private commercial banks .................................................................................................... 5 2.2.6 Non-bank financial institutions ............................................................................................ 5 2.3 Luxembourg microfinance agencies ......................................................................................... 6 2.3.1 ADA ....................................................................................................................................... 6 2.3.2 LuxFLAG ................................................................................................................................ 6 MICROFINANCE INVESTMENT VEHICLES...................................................................... 6 1. Luxembourg’s attractiveness for microfinance investment vehicles ............................. 6 2. Main differences between Luxembourg Microfinance Investment Vehicles ................. 7 3. Investment strategies of Microfinance Investment Vehicles ...................................... 10 3.1 General investment objectives and policies ........................................................................... 10 3.2 Direct/Indirect investments .................................................................................................... 10 3.3 Guarantee mechanism ............................................................................................................ 11 3.4 Specific risks related to investments in Microfinance Investment Vehicles ........................... 11 3.4.1 Counterparty risk ................................................................................................................ 11 3.4.2 Currency risk ....................................................................................................................... 11 3.4.3 Political and economic risks ............................................................................................... 11 3.4.4 Non-listed instruments ....................................................................................................... 11 3.4.5 Liquidity risk ....................................................................................................................... 11 3.4.6 Specific risks linked to the valuation of illiquid and unlisted investments ......................... 12 4. Existing Luxembourg Microfinance Investment vehicles ............................................ 12 4.1.1 Luxmint ............................................................................................................................... 12 4.1.2 Advans S.A. SICAR ............................................................................................................... 12 4.1.3 The Luxembourg Microfinance and Development Fund .................................................... 13 5. The Future of Microfinance: ..................................................................................... 13 5.1.1 Increase of competition ..................................................................................................... 13 5.1.2 Technology ......................................................................................................................... 14 5.1.3 Regulatory Environment & Political Risk ............................................................................ 14 5.1.4 Recent tax developments ................................................................................................... 14 3
  • DELAGARDELLE & SOTIRI -JURISCONSUL- MICROFINANCE INVESTMENTS 1. INTRODUCTION 1.1 Definition Microfinance may be defined as the provision of segment specific financial services to low-income individuals or microenterprises. Microfinance works on the principle that financially destitute individuals are capable of starting up income-generating activities if they are given the little bit of help they need to launch their projects. 1.2 Origines Microfinance has its origins in micro credit consisting in the lending of small amounts of money, generally EUR 50,- (fifty euros) to EUR 5.000,- (five thousand euros), to low-income individuals to help them be self-employed. Microfinance has long been perceived as essentially a charity activity. Microfinance came to prominence in the 1980s, although early experiments date back 30 (thirty) years in Bangladesh, Brazil and a few other countries. By lending a small amount of money (a microloan or microcredit) to a person who earns just enough to survive, this poverty-reduction tool enables him to develop an agricultural activity, a trading activity or a microenterprise. The enthusiasm of southern countries for microfinance is undoubtedly due to its demonstrated effectiveness in terms of improved living conditions. Over time, microfinance has come to include a broader range of services, including credit, savings, insurance, etc. as northern countries came to realize that the very poor also require a variety of financial products. 2. ACTORS 2.1 Micro-entrepreneurs A handful of euros may be enough to launch a microenterprise in a developing country. However, when one may barely afford to eat, the only solution to find the money is credit. Traditional banks usually grant credit to customers who are able to provide a guarantee of reimbursement and a certain number of official documents. Without these prerequisites banks would refuse to grant any credit. The emergence of microfinance institutions ("MFIs") is changing the situation. These "microbanks" have provided low-income individuals and microenterprises not only with access to microcredit but also to a whole range of financial products as savings, housing loans, health insurance, etc.. Given that microfinance also deals with bottom of the pyramid or base of the pyramid ("BoP") issues while referring to "BoP Market" and that this "market" has become very popular in the economy headlines the issue of ethics might be raised. In economics, the BoP is the largest, but poorest socio-economic group. In global terms, this is the 2.5 billion people who live on less than $2.50 per day. The phrase "bottom of the pyramid" is used in particular by people developing new models of doing business that deliberately target that demographic, often using new technology. 2.2 Microfinance institutions "Microfinance" generally refers to the provision of financial services via MFIs. 4
  • DELAGARDELLE & SOTIRI -JURISCONSUL- An MFI may be defined as an organization that offers financial services to low income populations and microenterprises. Almost all MFIs offer microcredit and only take back small amounts of savings from their own borrowers, not from the general public. An overseas MFI is like a small bank with the same challenges and capital needs confronting any expanding small venture but with the added responsibility of serving economically-marginalized populations. The notion of MFI has come to refer to a wide range of organizations dedicated to providing these services: 2.2.1 Non-governmental organisations By referring to MFIs, most people think of non-governmental organizations ("NGOs") dedicated to offering financial services. However, in most cases NGOs are not allowed to capture savings deposits from the general public. Most of the NGOs that offer microcredit also offer other non-financial development activities and would bristle at the suggestion that they are essentially financial institutions. However, since they are engaged in supplying financial services to the poor, they can be defined as MFIs from an industry perspective. 2.2.2 Credit unions A credit union is a member-driven self-help financial institute that saves money and makes loans to their members at reasonable interest rates. A credit union membership is free to all, and follows a democratic approach in electing the director as well as the committee representatives. 2.2.3 Cooperatives A cooperative is an independent association of people who come together voluntarily to meet their mutual economic, social and cultural aspirations and needs through an egalitarian controlled enterprise. Sometimes, these cooperatives include savings activities and member-financing. 2.2.4 Associations In this context, a target community forges together to form an association through which a variety of microfinance activities are initiated. The microfinance activities may also include savings. 2.2.5 Private commercial banks The experience of private commercial banks in microfinance is still relatively limited. 2.2.6 Non-bank financial institutions Non-bank financial institutions are often transformed from NGOs into regulated institutions and parts of state-owned banks, for example. It is estimated that around 10.000 (ten thousand) MFIs exist today, serving over 133 (hundred thirty three) million clients worldwide. Among the existing MFIs, about 200 (two hundred) are thought to be financially autonomous and have access to financial markets. This number is continuously increasing. 5
  • DELAGARDELLE & SOTIRI -JURISCONSUL- 2.3 Luxembourg microfinance agencies 2.3.1 ADA ADA (Appui au développement autonome) is a Luxembourg NGO specialising in microfinance. A.D.A. provides direct technical and/or financial support to MFIs located in Africa, Asia and Latin America in order to help poor households work their way out of poverty. A.D.A. has been mandated by the Ministry of Foreign Affairs Cooperation Department and has been operating since 5 July 2007 under the High Patronage of Grand Duchess Maria Teresa. 2.3.2 LuxFLAG The Luxembourg Fund Labelling Agency ("LuxFLAG") was created on July 2006 by founders representing the private sector, the NGOs’ sector and the State of Luxembourg. LuxFLAG promotes the raising of capital for microfinance by awarding a recognisable label to eligible MIVs. Its objective is to reassure investors that the MIV actually invests, directly or indirectly, in the microfinance sector. Investing indirectly means that the MIV can, rather than giving direct loans to MFIs, invest into other MIVs, themselves investing more than 50% (fifty per cent) in Microfinance. The MIV may be domiciled in any jurisdiction that is subject to a level of national supervision equivalent to that available in EU countries. MICROFINANCE INVESTMENT VEHICLES 1. LUXEMBOURG’S ATTRACTIVENESS FOR MICROFINANCE INVESTMENT VEHICLES MFIs which offer banking services to micro-entrepreneurs in poor and developing countries are increasingly turning to the capital markets to raise money to increase their reach into the poor urban and rural areas which they serve. Microfinance investment vehicles ("MIVs") have been created to meet this demand for capital, at the same time producing some return for socially aware investors. The Grand Duchy of Luxembourg has become an important center for the international funding of microfinance concentrating 45% (forty-five per cent) of worldwide MIVs assets. Its attractiveness in microfinance results from its adequate legal, regulatory and fiscal framework for the incorporation of MIVs. The flexibility of the available legal vehicles, combined with a recognized regulatory framework and favorable tax environment shape the Luxembourg financial sector’s attractiveness. Luxembourg also promotes the raising of private capital for microfinance through the creation of the Luxembourg Fund Labelling Agency ASBL ("LuxFLAG"). As described in the above section 2.3.2., LuxFLag is a nonprofit association (ASBL) that aims to promote the raising of capital for microfinance by awarding a recognisable label to eligible MIVs. Sponsors make use of a variety of regulated and unregulated structures to meet their needs. MIVs may be set up as : 6
  • DELAGARDELLE & SOTIRI -JURISCONSUL- (i) undertakings for collective investment ("UCIs") governed by Part II of the Law of 20 December 2002 relating to undertakings for collective investment, as amended (the "2002 Law") (the "Part II Funds"); (ii) investment companies in risk capital ("SICARs"), governed by the law of 15 June 2004 relating to the investment company in risk capital, as amended from time to time (the "2004 Law"); (iii) specialized investment funds ("SIFs") governed by the law of 13 February 2007 on specialised investments funds, as amended (the "2007 Law"); or (iv) securitization vehicles governed by the Luxembourg law of 22 March 2004 on securitisation (hereinafter, referred to as the "2004 Law"). This article aims at giving its readers an overview of the most common Luxembourg investment vehicles used in microfinance which are (i) SIFs, (ii) Part II Funds and (iii) SICARS. 2. MAIN DIFFERENCES BETWEEN LUXEMBOURG MICROFINANCE INVESTMENT VEHICLES SIFs SICARs Part II Funds Promoter A SIF’s promoter is not supervised by the The creation of a SICAR does not require the The CSSF will check whether the promoter CSSF, nor does the 2007 Law require CSSF services of a promoter. disposes of the required professional authorisation of the promoter. qualification and relevant experience for the Neither a promoter, nor an investment exercise of his/her functions. manager/adviser of a SICAR needs the CSSFs approval. With the FCP, the CSSF will check that the management company complies with the applicable legal requirements, as provided for specifically in the 2002 Law. Eligible investors The shares in a SIF can only be subscribed The shares in a SICAR can only be subscribed Unrestricted. by: by: (i) Institutional investors; or (i) Institutional investors ; or (ii) Professional investors; or (ii) Professional investors ; or (iii) Well-informed investors. (iii) Well-informed investors. The derogation providing that the general partners of limited partnerships do not need to qualify as "well informed investors", should they which to subscribe to shares in the SICAR has been extended by the law of 24 October 2008 improving the legal framework of the Luxembourg financial sector, modifying, inter alia, the 2004 Law and published in Luxembourg’s official journal (the "Memorial") on 29 October 2008 (the "2008 Law") to the directors and all persons who operate the management of the SICAR regardless of its legal structure. Entity type (i) SICAV/F (S. A., S.C.A., S.à r.l., SCoSA); Corporate entity (S.A., S.C.A., S.à r.l., SCoSA, (i) SICAV (S.A.) ; (ii) FCP; or S.C.S.. (ii) SICAF (S.A., S.C.A., S.à r.l.); or (iii) Other (e.g., fiduciary structure). (iii) FCP. Eligible assets / The purpose of SIFs is to invest their funds All types of private equity / venture capital Part II of the 2002 Law does not provide any Strategies investments (including microfinance, real specific provisions regarding investment policies in "values". The use of the term "value" estate private equity). for Part II Funds. There are however a many seems to indicate that almost any type of applicable CSSF circulars and interpretations investment is accepted. The SIF may hence Temporary investments in other assets regarding such. invest in a broad range of assets, including pending investments in private equity / microfinance, but also derivatives, real venture capital are possible. The CSSF has issued circulars regarding investments by Part II Funds in transferable estate, hedge funds and private equity. securities, alternative investments, venture capital, future contracts and options and real 7
  • DELAGARDELLE & SOTIRI -JURISCONSUL- The policy and limits are to be set out in the estate. offering document. Eligible MFIs Generally, SIFs mainly focus on top layer Generally, SICARs mainly focus on the bottom Generally, Part II Funds mainly focus on top layer and middle layer MFIs, i.e. intermediary, layer MFIs and middle layer MFIs. growing and maturing institutions that have a positive social impact and that are not yet, Bottom layer MFIs are normally judged too risky but striving to become financially for Part II Funds. autonomous. Risk No investment or borrowing restrictions are The 2004 Law does not impose any Except during a transitional period, investment diversification investment diversification rules. A SICAR may in any target company may not exceed 20% of defined in the SIF Law, with the exception of requirements therefore invest in just one or two companies the NAV. the principle of risk-spreading: or MFIs, for example in particularly narrow (i) A SIF may not invest more than 30% of sectors such as microfinance, biotechnology its assets or commitments to subscribe or geological prospecting. in securities of the same nature issued by the same issuer. A SICAR invests its assets in securities (ii) Short sales may not result in the SIF representing risk capital. By risk capital is holding an open position on securities understood the direct or indirect contribution of the same nature issued by the same of assets to entities in view of their launch, issuer representing more than 30% of their development or their listing on a stock its assets. exchange. (iii) When using derivative financial instruments, a SIF must ensure risk- spreading comparable to the above via an appropriate diversification of such derivatives’ underlying assets. Segregated sub- The 2007 Law provides for compartments or The 2008 Law provides for the introduction of The 2002 Law provides for the possibility to funds sub-funds in a SIF. Each compartment can compartments in a SICAR. Each compartment create several compartments with strict have its own specific investment policy and, can have its own specific investment policy segregation of assets and liabilities between as applicable, with securities of a different and each company may offer securities of a compartments. par value or no nominal value. different par value or no nominal value. The constitutional documents of the SIF The constitutional documents must expressly must expressly provide for the creation of provide for the creation of multiple compartments or sub-funds. A multiple compartments or sub-funds within a SICAR. compartment SIF, by itself, is an individual legal entity. However, in contrast to the Luxembourg Civil Code, the assets and liabilities of each compartment are segregated and are only subject to the liabilities of that specific compartment, unless otherwise provided for in the constitutional documents. Required service (i) Depositary (credit institution); Idem. Idem. providers in (ii) Administrative agent; Luxembourg (iii) Independent auditors. Minimum capital For FCPs Upon incorporation: For FCPs / net assets Net assets must reach EUR 1,25 Mio within Net assets must reach EUR 1.25 Mio 6 months from authorisation. requirements within 12 months from authorisation. (i) For an S.A./S.C.A.: EUR 31,000,-; (ii) For an S.à r.l.: EUR 12,500,-. For SICAV/Fs For SICAV/Fs Subscribed share capital must reach EUR 1 a) Upon incorporation: Mio within 12 months of authorisation. a) Upon incorporation: SA/SCA: EUR 31,000 ; - S.A./S.C.A.: EUR 31.000,-; S.à r.l.: EUR 12,500. S.à r.l.: EUR 12.500,-. b) Share capital must reach EUR 1,25 Mio b) Subscribed share capital and within 6 months of authorisation. share premium must reach EUR 1,25 Mio within 12 months of authorisation. Structuring of Capital calls may be organized either by way Capital calls may be organized either by way of For FCPs capital calls and of capital commitments or through the issue capital commitments or through the issue of Capital calls may be organized either by issue of shares / of partly paid shares (to be paid up to 5% at partly paid shares (to be paid up to 5% at way of capital commitments or through the least) or units. least) or units. units issue of partly paid units. Existing unitholders do not have a pre-emptive right The issue of shares of a SICAV does not Investors' subscriptions for shares can also be of subscription in case of issue of units, require an amendment of the articles of done on an ongoing basis (i.e. without specific unless otherwise provided for in the incorporation before a public notary. commitment or contractual undertaking of the management regulations. 8
  • DELAGARDELLE & SOTIRI -JURISCONSUL- investors to subscribe for shares/units of the The issue price may be freely determined in SICAR upon request of the SICAR). Units must be issued at a price based on accordance with the principles laid down in the NAV (plus costs and actualization the articles of incorporation / management interests, if appropriate). regulations. For SICAVs For SICAVs, existing shareholders have no Capital calls must be organised by way of pre-emptive right of subscription, unless capital commitments (shares must be fully otherwise provided for in the articles of paid-up). incorporation. Existing shareholders do not have a pre- emptive right of subscription in case of issue of shares, except if otherwise provided for in the articles of incorporation. Issues of shares do not require an amendment of the articles of incorporation before a public notary. Distribution of For SIF-FCPs and SIF-SICAVs There are no statutory restrictions on The distribution of dividends is not limited to Dividends payments of (interim) dividends (except for accrued income but also includes, for example, There are no statutory restrictions on compliance with minimum capital interests, dividends and other income from payments of (interim) dividends requirement). investments made by the FCP or the SICAV as (except for compliance with minimum well as capital gains registered in relation to the net assets / capital requirement). FCP's or the SICAV's portfolio of assets (even when these capital gains are not realised yet). For SICAFs However, the payment of distributions must not result in the net assets of the FCP or the SICAV Distributions may not reduce the falling below the minimum required by the 2002 SICAF’s assets, as reported in the last Law (i.e. EUR 1.250.000,-). annual reports, to an amount less than one-and-a-half times the total amount of the SICAF’s liabilities to its creditors. Interim dividends are subject to statutory conditions. Calculation of The NAV must be determined in accordance The NAV must be determined at least once a with the rules laid down in the articles of year. The requirement for investors to be Part II UCIs must calculate the net asset value of NAV their shares or units at least once per month. incorporation or management regulations of informed at least once every six month about the SIF. As a matter of principle, it will be the NAV has been abolished by the 2008 Law. Exceptions may be granted by the CSSF (for determined at least once a year, namely at example for real estate funds). the end of the financial year. Assets are to be valued at fair value. For the microfinance fund "LMDF", the NAV is Assets are to be valued at fair value. determined as at the last calendar day of March, June, September and December. Financial reports Audited annual report (within 6 months Audited annual report (within 6 months from Part II Funds must publish: / Consolidation from end of relevant period). end of relevant period). - an annual report for each financial year; and Explicit exemption from consolidation Explicit exemption from consolidation - a half-yearly report covering the first six requirements. requirements months of each financial year. Tax regime SIF level The income tax treatment of the SICAR Part II funds are subject to an annual depends upon the legal form under which it subscription tax (taxe d’abonnement) of 0.05% Any SIF is exempt from corporate has been incorporated. p.a. of their NAV. Classes of shares which are income tax, municipal business tax and reserved for institutional investors are subject to net wealth tax. a subscription tax at a reduced rate of 0.01%. (i) Incorporation of the SICAR; In addition to a specific registration tax (ii) Capital duty: EUR 75,- flat; of EUR 75, the only tax payable by a SIF (iii) General tax features: The Luxembourg Government, in its proposal is the annual subscription tax which - EU directives and tax treaties are in for the State Budget 2010 proposed to amend amounts to 0,01%, levied on the net principle compatible, a SICAR article 129(3) of the 2002 Law in order to asset value of the SIF as per the last should be considered as a "fully exempt Microfinance-Part II Funds from the day of each quarter. taxable" company; subscription tax. - VAT: Management services Exemptions from the annual rendered to a SICAR are VAT Unlike FCPs, SICAV/Fs benefit from certain subscription tax are available. In exempted; double tax treaties. Investments may be made particular, the Luxembourg - Annual Subscription Tax: through fully taxable subsidiaries benefiting Government, in its proposal for the Exempted. from double tax treaties and the EU parent- State Budget 2010 proposed to amend - Net Worth Tax ("ISF"): Exempted. subsidiary directive. article 68(2) of the 2007 Law in order to exempt Microfinance-SIFs from the subscription tax. No capital duty is due upon incorporation of Part II UCIs. However, a fixed registration duty of Investor level 9
  • DELAGARDELLE & SOTIRI -JURISCONSUL- EUR 75 has been introduced. No withholding tax is levied on income distributed by the SIF to investors unless the "European Savings Directive" is applicable. A VAT exemption is applicable to management services rendered to a SIF. For corporate SIF’s, the benefits of some of the double tax treaties concluded by Luxembourg may be available. 3. INVESTMENT STRATEGIES OF MICROFINANCE INVESTMENT VEHICLES 3.1 General investment objectives and policies Depending on the legal structure of the MIV (SIF, Part II Fund or SICAR) an MIV may invest in MIFs based in developing countries and who in turn provide adapted financial products to poor households. Sometimes, MIVs also invest in small and medium-sized enterprises ("SMEs") getting loans from micro-credit programs for creating employment, increasing income etc. When financial support to an MFI is granted by the MIV, a contract is negotiated and signed between the MFI and the MIV or through an intermediate holding entity. Eligible "MFI countries" are mostly transitioning and developing countries which typically are not members of the OECD; Generally, MIVs engage in debt instruments rather than in equity, prefer to use hard currencies rather than the domestic currencies of MFIs and they prefer to commit for the short term rather than for the medium to long term. MIVs may also provide loans to re-finance the growth of the loan portfolio of MFIs, invest directly in equity instruments issued by MFIs and may arrange guarantees consisting of a bank in a developing country lending to an MFI and the MIV providing a guarantee to such bank. The general investment strategy of a Luxembourg MIV may (depending on the legal structure of the MIV) include the following investments: (i) Equity investments; (ii) Loans; (iii) Credit products and other financing instruments, such as senior loans, term deposits, promissory notes or bonds ; (iv) Issuance of guarantees and letters of credit; (v) Capital Participations. The specific investment objective of SICARs may consist in creating new MIFs or investing in the BoP market. The proposed exit strategies for MIVs may include a listing or a secondary sale of the MFIs to a trade or financial buyer or other sector investor. 3.2 Direct/Indirect investments MIVs may invest in MFIs directly or indirectly through a Luxembourg or a foreign holding company or private equity funds, if such structure is deemed within the best interest of the MIV, notably to benefit from double taxation treaties. 10
  • DELAGARDELLE & SOTIRI -JURISCONSUL- MIVs may also establish one or more subsidiaries for investment purposes. All investments made by such subsidiaries are subject to the MIVs investment objective as described in the offering documents and articles of incorporation or management regulations in case of an FCP. 3.3 Guarantee mechanism MIVs guarantee mechanism usually consist of a deposit made by them at a Luxembourg bank, which in turn issues a letter of credit to a lender, domestic (same country as the MFI) or international, who in turn provides credit facilities to the MFI, in view of linking the MFI to financial markets and alleviating the currency risk for the MFI. The MIV receives a commission based on the guaranteed amount from the MFI. 3.4 Specific risks related to investments in Microfinance Investment Vehicles Investment in MIVs is not comparable to investments in instruments traded on the stock exchange or other liquid markets. Even though MIVs usually intend 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: 3.4.1 Counterparty risk A significant risk of MIVs is exposed to their counterparty risk as the MIVs assets consist of portfolios of capital participations in guarantees and loans to MFIs whose counterparties may be perceived as high risk. 3.4.2 Currency risk Microfinance involves the provision of capital in a different currency than the currency the end-client of the MFI borrows in. The capital provided by foreign investors is usually converted into the local currency of the MFI at the beginning of the engagement, and reconverted at the end of the engagement. As currency exchange rates may vary significantly, MIVs are exposed to currency risk. 3.4.3 Political and economic risks The investments’ value of the MIVs may be affected by uncertainties in the form of unforeseen political developments. This may include changes of policy with regard to taxation, the government’s fiscal and monetary stance, currency repatriation and other economic regulations are also possible. It may also include expropriation, nationalization or confiscation of assets. 3.4.4 Non-listed instruments Most of the instruments MIVs invest in are neither listed on a stock exchange nor dealt in on a regulated market. Thus, there may be no liquidity with regard to these instruments. Moreover some of the MFIs may not be subject to any regulatory control by a supervisory authority in the country of origin. 3.4.5 Liquidity risk 11
  • DELAGARDELLE & SOTIRI -JURISCONSUL- MIVs generally invest a majority of their assets in illiquid instruments and equity participations with uncertain exit timing. Hence, there is no guarantee MIVs are able to honour all redemption requests at the valuation days. Therefore, MIVs generally limit their liquidity risks through a liquidity reserve (amounting up to 10% of their net assets) and through credit lines it may negotiate with third parties. 3.4.6 Specific risks linked to the valuation of illiquid and unlisted investments The determination of the NAV of MIVs may contain some subjective elements because of the lack of an active public market for securities and debt instruments. Therefore, the calculation of the NAV of MIVs is normally approved by a so-called "valuation committee" consisting of independent experts at the central administration agent. Financial instruments which are traded on a regulated market allow for easy measurement of their fair value through the availability of prices of recent transactions. 4. EXISTING LUXEMBOURG MICROFINANCE INVESTMENT VEHICLES 4.1.1 Luxmint The Luxembourg Microbank Intermediary Scheme ("LUXMINT") is a non-profit fund established in 2000 by A.D.A. and by the government of Luxembourg which aims at granting loans and bank guarantees to certain MFIs. LUXMINT provided funding support to MFIs in developing countries that have the potential to become financially autonomous. The initial working capital of LUXMINT, USD 800,000,- was provided by the Directorate for Development Cooperation of the Ministry of Foreign Affairs of the Grand Duchy of Luxembourg. 4.1.2 Advans S.A. SICAR LuxFLAG has for the first time granted its Label to an MIV taking the form of a SICAR, the Advans S.A. SICAR. Advans S.A. SICAR, 69, route d’Esch, L-1470 Luxembourg was incorporated in Luxembourg on 29th August 2005 and is registered with the Registre de Commerce et des Sociétés Luxembourg ("RCS") under number B 110.428. Advans S.A. SICAR is a venture capital investment company launched in December 2005. Advans’ mission is to build a network of MFIsin developing and emerging countries assisting the financial needs of micro, small, and medium sized enterprises, which have limited or no access to formal banking services. Advans S.A. SICARs strategy is to create new MFIs in which it invests as lead shareholder, alone or with other shareholders with similar interests and vision. As of today, Advans S.A. SICAR has invested in five MFIs: 1. Amret (Cambodia); 2. Advans Cameroun; 12
  • DELAGARDELLE & SOTIRI -JURISCONSUL- 3. Advans Ghana; 4. Advans Banque Congo; and 5. Advans Côte d’Ivoire. This SICAR is one of the eight MIVs to have the LuxFLAG label. As further described above, the LuxFLAG's label is to encourage the inflow of capital in microfinance by reassuring investors that the MIVs bearing the label really invest in microfinance. 4.1.3 The Luxembourg Microfinance and Development Fund (i) Fund structure The Luxembourg Microfinance and Development Fund ("LMDF") is an open-ended investment company organized as a public limited company (S.A.) under the laws of the Grand Duchy of Luxembourg and qualifies as a SICAV. LMDF was incorporated in Luxembourg on 7 October 2009 and is registered with the RCS under number B 148826. LMDF is authorised as a Part II Fund. LMDF is an umbrella fund and as such may operate separate sub-funds, each of which is represented by one or more classes of shares. (ii) Funds investment policy LMDF mainly focuses on top layer and middle layer MFIs and does not directly engage in the provision of micro-loans or other microfinance products to the poor but works with MIFs 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 Geographically, LMDF may invest in Latin America, Africa and Asia. Its investments include inter alia: - Equity and quasi-equity investments; - Issuance of guarantees and letters of credit; and - Various credit products and other financing instruments, such as senior loans, term deposits, promissory notes, bonds or other interest bearing instruments. 5. THE FUTURE OF MICROFINANCE There are four primary changes that are going to impact the future of the microfinance: 5.1.1 Increase of competition Based on the reported success of a number of the larger MFIs, commercial banks and others are starting to bring their capital, infrastructure, technology and systems to this market. 13
  • DELAGARDELLE & SOTIRI -JURISCONSUL- Certain retailers like Tesco in the UK are providing credit in order to increase the sale of their goods. Telecommunications companies are offering payments services by cell phone text messaging, and pharmacies and postal savings banks are entering into distribution partnerships. These corporate players have large outreach through their links with consumers, and they have the techniques in place for large scale financing, such as credit scoring. 5.1.2 Technology Technology innovations could have the greatest impact on microfinance and the delivery of financial services because it spans time and space with ease. MFIs need to understand how to redesign their business models for new ways to deliver their services, and they need to help their customers master these new ways to receive services. 5.1.3 Regulatory Environment & Political Risk The regulatory environment has until recently been a movement from state-controlled and distorted financial markets toward more liberalized financial markets, which has been good for microfinance. However, there have been some troubling recent events. The rise of populist governments in Bolivia, Venzuela, Ecuador as well as the threat of interest rate caps in Rwanda and China threaten a return to distorted markets and a real threat to the sustainable commercial model that hold the most promise for the permanency of financial services to low-income families. 5.1.4 Recent tax developments According to a recommendation issued by ALFI, which has considered for a long time that the elimination of the subscription tax will encourage the development of this fund type in Luxembourg, the Luxembourg Government, in its proposal for the State Budget 2010, to be adopted by the Luxembourg Parliament in December 2009, has included an exemption from subscription tax for MIVs and proposed to amend article 129(3) of the 2002 Law and article 68(2) of the 2007 Law accordingly. This provision, if enacted, would make Luxembourg the second country in the world after the Netherlands to offer a tax advantage to taxpayers investing in socially responsible products. This clearly reflects the willingness of Luxembourg to develop microfinance amongst the financial center and to make Luxembourg the most attractive financial center for a transparent and responsible microfinance industry. 14
  • DELAGARDELLE & SOTIRI -JURISCONSUL- INFORMATION SOURCES (i) www.luxflag.lu The Luxembourg Fund Labelling Agency ASBL. (ii) www.cssf.lu; The Commission de Surveillance du Secteur Financier (Luxembourg Financial Supervisory Commission). (iii) www.alfi.lu The Association of Luxembourg Fund Industry. (iv) www.microcapital.org Specialized news and information on international microfinance. (v) www.microfinanceassociation.org The Microfinance Association. 15