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Gc03 microfinance
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- 3. Half Of TheDeveloping World Lives 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
- 4. A Typical Microenterprise… • Has fewer than 10 employees • Has less than $1,000 in capital • Is located in the home 4
- 5. What Is Microfinance? • Small loans extended to very poor people for self-employment enterprises. 5
- 6. 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
- 7. The Necessary Scaleof Microfinance • To reach 100 million of the world’s poorest families by 2005, the microfinance industry will require $21 billion in capital 7
- 8. Grameen Bank ModelOf Microfinance • Group lending model • Groups of 5 borrowers are formed; at first only 2 of them receive loans • Only if these 2 repay the loans do other members become eligible for loans 8
- 9. Grameen Bank Members Millions 2.5 2.0 1.5 1.0 0.5 0.0 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 9
- 10. Loans Made ByGrameen Bank US$ Millions 300 250 200 150 100 50 0 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 10
- 11. Non-Performing Loans % 8 Grameen Bank U.S. Commercial Banks 6 4 2 0 97 98 99 00 01 11
- 12. Bangladeshi Microfinance Reaches 75% Of Poor Households Households Reached Bangladesh 75% World Average 10% 12
- 13. Microfinance in Asia No. of No. of Borrowers Savers Bank Rakyat 12 2.5 million (Indonesia) million Bank of Agriculture 3.6 (Thailand) 1 million million 13
- 14. Bolivia’s Banco Sol First Microfinance Commercial Bank Average Loan Loan Portfolio Size 2002 $81 million $1,900 2001 $81 million $1,500 2000 $78 million $1,300 1999 $82 million $1,100 1998 $75 million $916 14
- 15. Microfinance Outperforms Commercial Banks in Peru % 30 ROE: Microfinance Institutions 25 ROE: Commercial Banks 20 15 10 5 0 1998 1999 2000 2001 15
- 16. Microfinance Outperforms Commercial Banks in Bolivia % 30 ROE: Microfinance Institutions 20 ROE: Commercial Banks 10 0 -10 -20 -30 1998 1999 2000 2001 16
- 17. Microfinance Less Sensitiveto Crisis BRI’s Loan Portfolio During the Asia Crisis Corporate Portfolio Retail Portfolio 100% Loss 50% Loss Microfinance Portfolio 2.5% Loss 17
- 18. Credit Unions AroundThe World • 37,000 Credit Unions • 112 million members • $530 billion in savings • $606 billion in assets 18
- 19. Microfinancial Institutions Around The World World Average Total Assets $5.7 million Outstanding Loans $3.9 million ROA 5.5% ROE 14.1% Non-performing Loans 2.3% 19
- 20. UN Capital DevelopmentFund’s $40 Million Microfinance Portfolio Latin America Asia $8 million $4 million 10% 20% 70% Africa $28 million 20
- 21. 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
- 22. The Value ofMicrofinance 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
- 23. Microfinance Lending Networks– A Potential Model Donors $ MFI $ Micro- finance $ MFI Center MFI $ Borrower Funds $ MFI Investors $ 23
- 24. Top 10 MicrofinanceFunds 2002 Assets (millions) Oikocredit $170 Khula Enterprise Finance $85 Calvert Foundation $50 UN Capital Dev. Fund $40 Pofund $22 AMINA African Development Fund $20 Triodos-Doen $20 Dexia Blue Orchard Microcredit $17 CORDAID $14 Internationale Micro Investitionen $12 24
- 25. Challenges • Attract private capital • Reach scale • Achieve positive return on assets • Balance financial and social objectives • Balance cooperation and competition 25
- 26. 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
- 27. The Microenterprises • Activein very different sectors • Closely linked to family economics • Need diversified financial services 27
- 28. An Important PotentialMarket • 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
- 29. The Offer ofFinancial 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
- 30. Microfinance Institutions • Specializedfinancial 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
- 31. Examples of MFI BlueOrchard Clients: 12/2002 Mikrofin Adopem Share Bosnia Dom. Rep. India Outstanding 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 36,670 109,212 Average loan to clients $1,510 $351 $79 31
- 32. Examples of MFI BlueOrchard Clients: 12/2002 Mikrofin Adopem Share Bosnia Dom. Rep. India ROA 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
- 33. The Microfinance Industryis 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
- 34. Microfinance Impacts goBeyond the Purely Economic Sphere Family welfare Financial and Self esteem and economic impact “empowerment” Microenterprise Micro-finance Financial services to micro-enterprises 34
- 35. The Philosophy ofSustainable 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
- 36. The Trend inSocially 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 areas ØA micro-finance investment fund meets those expectations 36
- 37. BlueOrchard Finance • Alink between Capital markets and MFI • A specialized advisor for Microfinance investments 37
- 38. Dexia Micro-Credit Fund TheFirst 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
- 39. 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
- 40. 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
- 41. Dexia Micro-Credit Fund BlueOrchard Debt USD 5/2003 Uruguay 15.0 12'500 Philippines 0.1% Albania 2.2% 1.5% Bolivia 12.7% 12.5 12'000 Peru Bosnia 18.1% 1.5% Cambodia 10.0 2.5% 11'500 Colombia 1.9% 7.5 Dominican 11'000 Nicaragua Republic 8.9% 5.0 14.9% Ecuador 10'500 7.5% 2.5 Mongolia Guatemala 1.5% 1.9% Morocco India - 10'000 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
- 42. 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
- 43. Dexia Micro-Credit Fund BlueOrchard Debt CHF 5/2003 Kazakhstan 2.2% Bolivia Uganda 7.8% 8.0 10'200 3.4% Cambodia Peru 4.5% 7.0 16.9% 10'150 6.0 Colombia 16.9% 5.0 10'100 4.0 10'050 3.0 Nicaragua 2.0 16.9% 10'000 Dominican Republic 1.0 9.0% Ecuador - 9'950 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
- 44. 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
- 45. DEXIA Micro-Credit Fund Benchmark against reinvested 6M Libor USD 120 115 110 105 DMCF Share Value 100 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
- 46. DEXIA Micro-Credit Fund Benchmark against World Global Bond Index 120 DMCF Share Value 115 IO SB WGBI 1+ $ - USD 110 105 100 95 05/00 08/00 11/00 02/01 05/01 08/01 11/01 02/02 05/02 08/02 11/02 46
- 47. DEXIA Micro-Credit Fund Benchmark against Emerging Market Bond Index 125 120 115 110 105 DMCF Share Value 100 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
- 48. DEXIA Micro-Credit Fund The Risk-Return Profile of A New Asset Class Steady returns Microfinance brings a new Low credit risk social impact dimension to Strong resistance to external shocks the money invested FX risk hedged Low correlation with other assets 48
- 49. 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 Currency Dexia Micro-Credit Fund w Fund x Fund y Fund z Fund Microfinance Institutions 49
- 50. 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 MFI Senior 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
- 51. 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
- 52. 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
- 53. Potential Models forCommercial 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
- 54. 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
- 55. 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
- 56. 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
- 57. Microfinance Dependency onSubsidy • 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
- 58. Challenges to MFIs MFIsneed to develop expertise in: • Risk management • Management information and internal control • Marketing and customer responsiveness • Human resource development 58
- 59. Potential Rural FinanceMethodologies • 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
- 60. Myths and Factsof Microfinance Myth Fact “Poor people don’t repay Early 80’s – Many MFIs have loans” better repayment than banks “The poor can’t pay the Early 90’s – a few MFIs full cost of microfinance” began covering all their costs “MFIs must depend on Mid-90’s – Top MFIs began donor funding rather than to attract significant commercial sources” commercial funding “MFIs cannot be profitable Today – MFIs are striving to and reach the poorest.” reach these twin objectives 60
- 61. Evolution of Microfinance Flexible, financial services for poor families Microfinance Institutions Donor-dependent microenterprise credit programs 61
- 62. State of GlobalMicrofinance: 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
- 63. Increasing the Scaleof 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
- 64. Potential Future ofMicrofinance • Microfinance integrated into financial system • Most MFIs regulated • Increased emphasis on savings • Diverse institutional models 64
- 65. What the IndustryNeeds 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
- 66. Extending the Frontier:Greater Sustainability and Poorer Clients Regular banks MFI Sustainability Most MFIs Pure Charity MFI Depth of Outreach 66