Responsible Investing (part II) : what really make a difference ?

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Responsible Investing is a process in which the Environmental, Social and Governance (ESG) criteria are taken into account along with the usual financial criteria.

Part I deals with listed RI (SRI funds and stocks) : Is it still a credible alternative against the mainstream ?

Part II deals with microfinance.

Part III deals with impact investing, as direct investment in not-listed companies

The author, Xavier Heude has been entirely dedicated to the development of Responsible Finance by the mean of promoting Impact Investing, mainly. He is convinced that Private and Institutional investors are growingly interested in putting some part of their money in business activities or projects where they can themselves follow up the financial performance, and last but not least, the social and environmental outcomes generated.
He is Co-founder of meso IMPACT Finance, a Luxembourg-based holding company aimed at taking stakes in SMEs that generate a social and environmental (measurable) impact. MIF helps them develop through a financial and extra-financial support (i.e. technical assistance).
He is also Délégué Général of SAKURA Initiative, a Luxembourg-based not-for-profit organisation promoting social and responsible practices in the economic and financial sector, through various means such as conferences and communication.

Xavier Heude founded also the “PEERS Direct Investment” – registered trademark in 2011, after having stated for many years, that there are still quite few incentives and operational frameworks and guidelines allowing and encouraging a large public to invest in socially responsible business activities or to support valuable social initiatives.
A network is being built, in order to contribute to expand the mark and get it known worldwide.

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Responsible Investing (part II) : what really make a difference ?

  1. 1. 1 Microfinance Concept – Investment vehicules and framework – Microfinance in the field … Xavier Heude xh@peersdirectinvestment.com 2nd update - March, 2015
  2. 2. 22
  3. 3. 3  History  What is microfinance ?
  4. 4. 4 Pope Leo X authorises the Mont de Piété to charge interest to cover their costs Ireland : small unsecured loans are developed for the very poor farmers An Italian monk creates the first official European Mont de Piété in order to counteract “loan-sharks” HISTORY of MICROCREDIT Financial cooperative systems grow in Europe and North America 1472 1515 1700’s 1800’s These models are extended to Latin America1900’s
  5. 5. 5  70’s : several experimental programmes (Grameen Bank, Sewa, Accion) grant loans to poverty-stricken women from MICROCREDIT … to MICROFINANCE  In the 90’s • spread of microcredit throughout Western countries • development of savings schemes, followed by micro-insurance • increase in the number of operators • diversification of the target populations
  6. 6. 6  2005 : International Year of Microcredit  2006 : Nobel Peace Prize divided into : Muhammad Yunus / Grameen Bank « … Lasting peace can not be achieved unless large population groups find ways in which to break out of poverty. Microcredit is one such means … » CONSECRATION of MICROFINANCE Income generating activity Wedding 1st child Activity improvement 2nd child Children illness 3rd child School expenses Funerals Children wedding Accident Health problems Source : ADA
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  8. 8. 8 Thousands of operators around the world with more and more diverse profiles, and diverging interests :  Money lenders  Traditional systems  Cooperatives  NGOs  Microfinance institutions  Networks of operators  Local governmental agencies  Specialised banks  Commercial banks  Private investors TODAY …
  9. 9. 9 Developing Countries Western Countries Eradicate poverty Tackle marginalization and social exclusion Get out people from the survival spiral Give people fair business opportunities Support new businesses that have long -term impact on people's life Support microbusinesses that are not served by mainstream banks Microfinance is global - micro-loans < EUR 25,000 tailored to micro-enterprises (91% of all European businesses) - compared to the South, the European microfinance market is a young, highly heterogeneous with growing market segment
  10. 10. 10 Job hunting support for the youth Savings to face unexpected hardships and to secure projects in the long-term Individualised follow-up to ensure families get the most out of their loan Training (management, skill and social) to help loan recipients gain independence Loans to develop an income-generating activity  MICROFINANCE SERVICES AT LARGE  Microinsurance to cover many kind of incidents
  11. 11. 11 Improve areas of activities in : 1. Financial support for clients : Products, outreach, support and other services (manage client activities more actively and respond to needs) 2. Non-financial support : Manage client evolvement, advice and support of client activites (workshops/education in accounting, agriculture and animal farming, entrepreneurship … ) 3. Social services : Advice and support health and community development (family planning, drug abuse, gender empowerment, literacy, electricity, insurance … ) RESPONSIBLE microfinance Balancing financial sustainability with social impact
  12. 12. 1212
  13. 13. 13 • More than 200 million beneficiaries vs. 15 millions in 2000 Potential : 500 million • 74% of all microfinance clients worldwide are women • Existing offer in at least 134 countries (out of 194) Key-figures … 2.5 billion people currently excluded from the traditional banking system across the globe
  14. 14. 50 to 70 MFIs 250 to 500 MFIs Non-bank regulated financial institutions Downscalling or specialized banks NGOs, Credit cooperatives, savings houses 1.000 to 5.000 MFIs • 10.000 MFIs worldwide (estimate)
  15. 15. 15 • +/- 2.100 institutions reporting to MIX in 2014 The 100 largest institutions outreach 77% of the borrowers • Average loan amount (NGOs) : USD 300 Median loan amount (Banks) : USD 2.000 • Average savings amount: USD 287 … but one universal observation : microfinance still just barely reaches out to the poorest families
  16. 16. (2010)
  17. 17. 17
  18. 18. Microfinance Market Outlook 2014 No “sudden stop”: demand for microfinance soars
  19. 19. 20 The deterioration in MFI portfolio quality is related to 3 trends 1) fast expansion led to an increase in the share of wealthier and more risky borrowers 2) MFIs lack adequate risk management capacities (no centralised data => multiple borrowing) 3) microfinance initially introduced as a development tool in a largely non-competitive setting. With increasing commercialisation and competition, the instruments used to overcome moral hazard and adverse selection became less effective. • Rehabilitate microfinance as a development tool (cannot simply return to its origin of subsidised group-lending) • Learning how the clients live, what they need and demand
  20. 20. Local deposits remain the dominant source of funding for MFIs globally
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  22. 22. 2323
  23. 23. 24 How investing into microfinance ? Interests Dividends InterestsMicrocredits Microfinance Institution Microbank Debt Equity Microfinance Investment Vehicle (MIV) Micro-entrepreneurs Modèle ADA SICAV, FCP Part II, SICAR, FIS Securitization Vehicles Guarantees & guarantee funds
  24. 24. 80 MIVs surveyed out of the 106 MIVs identified Assets Under Management in USD Billion (2013) Volume of private cross-border investments in microfinance MIV Total Asset Growth
  25. 25. 26
  26. 26. In 2013, the 80 participating MIVs were managed by 44 asset managers (which are currently located in 15 different countries) responsAbility (CH) KfW (D) Triodos IM (NL)
  27. 27. MIV Inception and Targeted Closing Dates
  28. 28. 30 2013 Symbiotics MIV Survey
  29. 29. (2010)
  30. 30. 34 MIV Growth Drivers Transparency - increased MFI & MIV data / oversight via MIX-Market, CGAP, LuxFLAG … Investors seeking relatively uncorrelated assets Survey conducted in January and February 2014 and is based on 306 responses from 70 countries
  31. 31. 2013 Financial Performance – Leveraged Vehicles (Fixed Income Funds and Mixed Funds included) Sample size in brackets 2013 Financial Performance – Unleveraged Vehicles Sample size in brackets
  32. 32. Geographical Allocation 2013 vs. 2012 Geographical Allocation: % of Direct Investees (microfinance investees)
  33. 33. Calculation based on a constant sample of 47 MIVs over the period 2010-2013
  34. 34. 3838
  35. 35. 39 A microfinance programme in Vietnam
  36. 36. 40 Case study Chi-Em (Dien Bien Phu), 20-27th June’09 - Field analysis Methodology applied - Interviews with villagers (8 clients, 20 non-clients) - Participation in village workshop (introduction of Chi-Em and loan program) - Observation of operations in branch offices and field activity : > processing of client information > identification of potential clients > administrative tasks > analysis of client database / reporting tools - Discussions with Phan Thị Tuyết Thanh (Country Director), Hoang Thi Ven (Branch Manager) and field staff - Overview of village needs and surrounding areas
  37. 37. 41 Chi-Em (Dien Bien Phu), 20-27th June’09 - Field analysis Portrait 1 / Mrs. Oanh  Loan : 1.500.000 VND (60 €), 6 months maturity, 1% interest, 2nd loan cycle  Usage : purchase of animal stock (fish, chicken) and rice cultivation  Approx. income p/month from loan : 180.000 VND (7,20 €), plus additional gains  No repayment difficulties so far, seems to be on a good way Meet the clients…. Mrs. Oanh - Houi Le B village (commune of Noong Het, Dien Bien district) – June ‘09 Case study
  38. 38. 42 Capacity building : 8 workstreams 1. Client data collection (structure) 2. Client support – non-financial services (training & technical assistance) 3. Development of new products & services (financial) 4. Internal organisation of the program 5. Human resources policy 6. Internal control / MIS (management information system) 7. Business development (clients) & networking 8. External communication Funding : Loan capital Case study Chi-Em (Dien Bien Phu), 20-27th June’09 - key findings Chi-Em offices in Dien Bien district) – June ‘09
  39. 39. PAT – Poverty Assessment Tool
  40. 40. 46 Assessment of the poverty level
  41. 41. LOAN application form
  42. 42. Client Database
  43. 43. Credit database
  44. 44. 52 Promotion - tuyên truyền Orientation - tập huấn Partnership Registration- đăng kí k.hàng Loan Application- đơn vay vốn Home Visit- thăm nhà k.h Credit Committee-Họp ban tín dụng Loan Approval and Rejection- Đồng ý cho vay hoặc từ chối Bank withdrawal to replenish the vault- rút tiền bổ sung két Loan Disbursement- giải ngân vốn vay Loan Repayment and Mandatory Savings collection-hoàn trả vay nợ và thu t.kiệm bắt buộc Voluntary Savings deposit- gửi tiết kiệm tự nguyện Voluntary Savings Withdrawal- rút tiết kiệm tự nguyện Bank Remittance after collection-gửi n.hàng sau khi thu Closing the Loan and Mandatory Savings transfer- k.thúc món vay và chuyển tiết kiệm BB Collection transferred to the CCO-chuyển tiền thu được tới CCO LPF LPF LPFLPFLPFLPF LPF LPF LPF LPF Loan Utilization Check and PAT- kiểm tra sử dụng vốn vay+ PAT LPF LPF Monthly Collection Meeting by the Cluster Head- thu tiền hàng tháng bởi cụm trưởng LPF Credit request workflow
  45. 45. 53 REPORTING LOAN PROCESS IDENTIFICATION CLIENT TRAINING Promotion Identification / objectif de la formation Sélection des participants Organisation Prospects Ouverture du prospect Activation du client Analyse Décaissement Collecte Collecte de l’information par district Réalisation Distribution ProcessusMétier Processus Support I - Workflows Modifications des données client Clôture du compte Dépôt retrait Clôture • Crédit • Épargne
  46. 46. Training supports to credit beneficiaries
  47. 47. Training supports to beneficiaries
  48. 48. 56 Portfolio size reference table Staff incentives Amount to be taken into account for portfolio size (basic amount for bonus calculation) CH 3 000 VND CCO 500 VND Step 1 Step 2 Step 3 Step 4 Example If number of active clients at the end of the month = 80 If PAR 30 at the end of the month =1,5% If Voluntary savings balance at the end of the month = 1,500,000 VND Total bonus of the month Cluster Head 80*3000 VND = 240,000 VND 20% increase = 240,000*1.2= 288,000 VND 1,500,000 * 2% = 30,000 VND =80*3,000*1.2+ 30,000= 318,000 VND Cluster Head •Cluster Head bonus = 3,000 VND * number of active borrowers * PAR 30 adjustment percentage (see PAR adjustement reference table) + 2% of voluntary savings balance. Example: Portfolio quality increase or decrease PAR 30 = 0% 1.4 PAR 30 < 1% 1.3 PAR 30 < 2% 1.2 PAR 30 < 3% 1 PAR 30 < 5% 0.6 PAR 30 >= 5% 0.3
  49. 49. 57 Training bonus reference table Number of trainees for TO Bonus for TO Bonus for NFSM From 80 50000 VND 30000 VND From 100 75000 VND 50000 VND From 120 100000 VND 75000 VND From 130 125000 VND 100000 VND From 140 150000 VND 120000 VND Step 1 Step 2 Step 3 Example If number of active trainees at the end of the month = 130 If number of client visited= 80 Total bonus of the month TO 125,000 VND (80- 40)*2500=100,000 =125,000+100,000 = 225,000 VND •Training Officer = bonus based on number of trainees (see reference table) + bonus on the number of non compulsory visits (see reference table) minimum number of non compulsory visits conducted by TO Amount to be received per additional client visit 40 2 500 VND Staff incentives
  50. 50. 58 Risks registar Risk Rating: 1= Low, 2=Medium, 3= High Examples Example RISK NO. Risk Rating Risk Description Type of PROCESS Type of DEPARTMENT R001 3 Wrong processing of data during Mbwin Conversion. System Conversion MIS R002 3 Discrepancy in Loan and Saving ledger balances due of data processing in different system. System Conversion MIS R003 2 Risk of failure of product in a new market. Launching new product Operation R004 3 Risk of non-recovery in a new branch area. Entering new market Operation R005 2 Risk of non-availability of secure office place in new branch area. Opening new Branch Operation R006 2 Risk of non-availability of qualified? staff in new market or branch area. Opening new Branch HR R007 3 Failure of new loan or saving product Launching new product Operation R008 3 Risk of wrong selection of clients Loan Origination Operation R009 3 Risk of moving away from target client Loan Origination Operation R010 3 Risk of moving away from organizational stated goals and mission Loan Origination, Launching new product, Opening new branch offices Operation R011 3 Risk of wrong appraisal of borrowers repayment capacity. Loan appraisal Operation Internal AuditCategory of risks
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  52. 52. 60 Discover how to invest with difference on : www.mesoimpactfinance.com https://www.facebook.com/mesoIMPACTfinance Follow me and express your opinion on : https://www.facebook.com/PEERSDirectInvestment

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