Transcript New Developments in Microfinance ─ Instrument of Financial Sector Promotion in Developing and Transition Economies Dr.

1
New Developments in Microfinance
─ Instrument of Financial Sector Promotion
in Developing and Transition Economies
Dr. Mark Schwiete
Principal Financial Sector Expert
Competency Centre Sustainable Economic Development
4th European Microfinance Conference 2007
April 27, 2007, Berlin
Content
Short Introduction to KfW Entwicklungsbank
KfW‘s Microfinance Portfolio
Why KfW Finances Microfinance
Highlight – Structured Finance
KfW – Microfinance in Germany
Impact and Outlook
3
KfW Entwicklungsbank within
KfW Bankengruppe.
EU-Microfinance
Financing volume in 2006
EUR 35.5 billion (- 8.3%)
4
Financing volume in 2006
EUR 22.8 billion (+ 47.1%)
Financing volume n in 2006
EUR 15.0 billion (+24%)
Financing volume in 2006
EUR 3.4 billion (+ 30.8%)
Key Figures for
KfW Entwicklungsbank.
Number of Staff
387
Ongoing projects
over 1,400 in over 100 countries
Representative offices abroad
About 50
Commitments (2006)
EUR 2.5 billion
 of which KfW's own funds
EUR 1.0 billion
Disbursements (2006)
EUR 1.5 billion (of which EUR 1.1
billion from budget funds)
Loans outstanding
18.5 billion EUR
 of which budget funds
15.7 billion EUR
2.8 billion EUR
 of which KfW funds
5
Content
Short Introduction to KfW Entwicklungsbank
KfW‘s Microfinance Portfolio
Why KfW Finances Microfinance
Highlight – Structured Finance
KfW – Microfinance in Germany
Impact and Outlook
6
Financial Sector Portfolio:
Role of Microfinance and SME Financing
Outstanding Portfolio: 2.4 bn € (223 Projects)
25%
32%
Microfinance
SME-Financing
Others
43%
7
Microfinance Portfolio by Regions
Traditionally strong in Eastern Europe
Global: 13%
MENA: 2%
Africa 10%
Asia 9%
Latin
America
22%
Eastern Europe &
Caucasus: 44%
8
KfW complements German Budget Funding
Microfinance: Funding is increasingly commercial
Microfinance Portfolio by
Financing Instruments
FC Promotional
Loans: 32%
Budgetary
refinancing
lines: 49%
FC Promotional
Equity Participation
incl. Mezzanine10%
FC Fiduciary
Participation: 4%
9
Budget funding for
technical assistance: 5%
 FC Promotional Loans and
Equity Participation (KfW own
risk) make up almost half of
the portfolio
 Budget funding retains its
high significance – especially
in high risk countries - for
start-up financing and for
technical assistance.
Content
Short Introduction to KfW Entwicklungsbank
KfW‘s Microfinance Portfolio
Why KfW Finances Microfinance
Highlight – Structured Finance
KfW – Microfinance in Germany
Impact and Outlook
10
The poverty dimension:
Where financial sector development can improve lives
It tackles six out of the eight Millennium Development Goals...
Target 3:
Gender equality
Target 1:
Half number of people
living under $1/day
by 2015
Target 2:
Primary education
for all children
11
Targets 4,5,6:
Health
The Target Group in Developing
Countries:
Microfinance aims at “Ordinary People”
Upper Class
Commercial
Banks
Middle Class
Poverty Line
Economically
Active Poor
Micro Banks,
Credit Unions,
Specialised
Banks
Finance NGOs
Very Poor
Absolute Poor
12
Social transfers
(non-bankable segment)
100 KfW
Microfinance
Partners in
42 countries
serve about
12 million
customers
Four approaches to establishing
Microfinance services
– adopted to the specific financial sector deficiencies
„Greenfielding“
Foundation of a new
Microfinance Institution
(MFI)
„Up-grading“
Transformation of a
credit NGO into a fullyfledged micro bank
„Down-scaling“
Supporting commercial
banks to serve the
micro segment
„Linking“
Connect Microfinance
Institutions with the
national or international
capital market
13
Development banks bring in their
know-how as financial institutions
KfW employs and develops a range of different instruments
 Basic products to support MFIs
 Credit lines
 Guarantees
 Equity
 Technical Assistance
 Elaborate products
(in order to mobilize private resources)
 Structured finance, e.g.
 Mezzanine-Finance
 Microfinance Investment Funds
 Securitization
 Deposit insurance schemes
14
Building sound financial systems from the
ground:
Strategic path for MFIs to ensure access to financial
resources and for growth
Integration into
international capital
markets
Integration into local
capital markets
Establishing full
range of services for
ordinary customers,
particularly deposits
Building professional
credit institutions
15
Content
Short Introduction to KfW Entwicklungsbank
KfW‘s Microfinance Portfolio
Why KfW Finances Microfinance
Highlight – Structured Finance
KfW – Microfinance in Germany
Impact and Outlook
16
Financial Engineering for the Poor
KfW deploys state-of-the-art know-how in development
Structured finance instruments in development
 Investment funds
 Securitisation
Beneficiaries of these instruments
 microfinance service providers
 micro, small and medium enterprises in developing and transition
economies (finally)
In addition, it contributes to the development of local capital markets
 Legislators, regulators, auditors and financial institutions become
acquainted with the new instruments
17
Example of an Investment Fund
European Fund for South-East Europe
one of the largest microfinance fund worldwide
Several risk tranches
Donors
DFIs
Private
Investors

Share
class C
“Junior”
66
119
Share
class B
“Mezz.”
60
80
Share / Notes
class A
“Senior”
20

140
80

222
280

 146
Banks

18
Fund Volume in million EUR
1st closing

12/05
02/07
12/09
NGO´s
421
500
Building sound financial systems from the ground
Example for Modernization Impulse:
First True-Sale Securitization in Bulgaria
In May 2006, ProCredit Bank Bulgaria securitized a part of its loan portfolio
 Over 7 years micro loans of EUR 840 million will be securitized
 First ever “true sale” in Bulgaria – landmark action for financial sector
development
 Arranged by Deutsche Bank, enhanced by guarantees of KfW
and EIF.
 Senior note rated ‘BBB’ by Fitch Ratings - first publicly rated securitization of
SME and micro loan portfolio in Eastern Europe
 New long-term financing sources for MFIs and structural development
of the financial sector
19
Content
Short Introduction to KfW Entwicklungsbank
KfW‘s Microfinance Portfolio
Why KfW Finances Microfinance
Highlight – Structured Finance
KfW – Microfinance in Germany
Impact and Outlook
20
KfW “Micro Loan“ / “Micro-10“
KfW Micro Loans are on-lend by banks:



Every bank in Germany is entitled to on-lend loans to the ultimate borrower
the on-lending bank receives a margin (1.25% p.a.) and is reimbursed for part of the commission
80% of the liability is assumed by KfW
Micro Loan:







Start of programme: October 2002
Loan amount: max. EUR 25,000
Term: max. 5 years, min. 1.5 years, redemption-free period: max. 6 months
Nominal interest rate: 9.35% p.a. (as of 23 June 2006)
Eligible to apply are natural persons, small enterprises and self-employed professionals
Financing purpose: start-up investments, working capital during the first 6 months and business consolidation for
up to 3 years after start-up
Reimbursement of commission: EUR 600
“Micro 10“:
Special features

Start of programme: March 2005

Loan amount: EUR 5,000 – 10,000

Reimbursement of commission: EUR 1,000

In the event of cooperation between the bank and an advisory firm for start-ups KfW applies a simplifed
procedure for loan disbursements and verification of the use of funds
21
Microfinance Fund Germany








22
Start of programme: September / October 2006
Loan amount: max. EUR 10,000
Term: max. 3 years
Nominal interest rate: 10% (currently planned)
Cooperation between bank, micro-finance provider, DMI (German Microfinance Institute) and
Fund
Bank: Loan decision, legal framework of the lending
Microfinance provider: supports the borrower, prepares the loan decision, handles the loan
processing, assumes part of the liability
DMI: Accreditation and monitoring of the microfinance provider, central control function in the
network
Funds: Acquisition and administration of risk capital, assumption of liability,
Volume: approx. EUR 2 million (EUR 0.5 million KfW; EUR 0.5 million BMWI (German Ministry
of Economics and Technology); EUR 0.5 million BMAS/ESF)
Integrating the MAP guarantee into
KfW‘s StartGeld Programme
EIF
40% risk
funding
MAP/EU
Budget
guarantee for
50% of KfW
risk
KfW
40% risk
23
loan with 80%
exemtion from
liability
On-lending
Bank
20% risk
SMEs
micro loan
Content
Short Introduction to KfW Entwicklungsbank
KfW‘s Microfinance Portfolio
Why KfW Finances Microfinance
Highlight – ProCredit Group
Highlight – Structured Finance
Impact and Outlook
24
Financial sector development and poverty reduction:
KfW’s lessons learned in 38 words
a. Financial sector development has to bring financial
services to the masses in order to contribute to
poverty reduction (Micro = Macro)
b. Professional microfinance institutions can succeed in
imperfect markets (“governance matters”)
c.
25
Sound local financial markets need bottom-up
development
Advancing Microfinance:
Results and future challenges
Our Results

Microfinance financially sustainable (e.g. ProCredit
Banks, BancoSol, Compartamos, UMU)

Good instrument to contribute to the millenium
development goals

Cooperation with private (ethically motivated)
investors necessary and possible, catalytic role of
development banks
Challenges

Securing the double goal of financial sustainability
and increased outreach
26

Further develop rural finance, especially for
smallholders

Attracting more private capital and know-how
to scale-up microfinance
New Developments in Microfinance
─ Instrument of Financial Sector Promotion
in Developing and Transition Economies
Dr. Mark Schwiete
Principal Financial Sector Expert
Competency Centre Sustainable Economic Development
4th European Microfinance Conference 2007
April 27, 2007, Berlin
Content
Short Introduction to KfW Entwicklungsbank
KfW‘s Microfinance Portfolio
Why KfW Finances Microfinance
Highlight – ProCredit Group
Highlight – Structured Finance
Impact and Outlook
28
Example from our project work:
Promoting microfinance in Serbia/Kosovo.




29
Problem
 Small and micro enterprises as engines of reconstruction and growth are rarely
given loans from conventional banks.
Approach
 Establishment of ProCredit Bank Kosovo with
target group specific financial products and
services
Impacts
 over 100,000 commercial loans,
over 170,000 accounts, balance-sheet total
> EUR 300 million, 23 branch offices.
 access to financial services in all regions
(savings deposits, loans, payment transactions).
 creation of employment and income.
Contribution of FC
 EUR 8.3 million in budget funds plus EUR 5 million in KfW funds (2000-2004)
Succeeding in imperfect markets:
Solid microfinance institutions can rank
among the country’s best rated addresses
Institution
Rating
Country Risk (=Country Ceiling)
ProCredit Bank Albania
B+
not rated
ProCredit Bank Bosnia and H.
B
not rated
ProCredit Bank Bulgaria
BB+
BBB
ProCredit Bank Georgia
B
not rated
ProCredit Bank Macedonia
BB
BB
ProCredit Bank Romania
BB+
BBB-
ProCredit Bank Serbia
BB-
BB-
ProCredit Bank Ukraine
BB-
BB-
ProCredit Holding (Germany)
BBB-
AAA
B2
not rated
Fitch (Long Term Issuer Default Rating)
Moody’s (Long Term Issuer Rating)
ACLEDA Bank (Cambodia)
30
Succeeding in imperfect markets:
The ProCredit Network is
operating in 19 countries
ProCredit Moldova
ProCredit Bank. Rumania
ProCredit Bank, Ukraine
ProCredit Bank, Serbia
ProCredit Bank, Georgia
ProCredit Bank,
Macedonia
ProCredit
Bank, BiH
Banco ProCredit,
El Salvador
ProCredit
Bank, Kosovo
ProCredit Bank,
Bulgaria
ProCredit
Bank, Albania
Banco ProCredit,
Nicaragua
Banco ProCredit,
Equador
Banco Los Andes ProCredit, ProCredit Bank,
Bolivia
Sierra Leone
31
ProCredit,
Ghana
NovoBanco,
Angola
ProCredit
Bank, Congo
NovoBanco,
Mozambique
Succeeding in imperfect markets:
ProCredit Banks perform well on both
sides of the balance sheet
Development of loan and deposit volume of ProCredit Group
Bars show deposit
volume. Figures in
million EUR .
32
Succeeding in imperfect markets:
ProCredit network balances
outreach, growth and profit
Broad Outreach
 More than 2 million customers world-wide,
mainly micro and small enterprises
 Close to the micro clients: 446 branches,
covering also rural areas (11,700 employees)
 Financial services according to client needs
(micro enterprise loans, agricultural loan,
remittances, money transfers, insurance)
 Average loan size: 2.770 EUR
Financial Sustainability
 Good Portfolio Quality
(Portfolio at Risk: 1.4%)
 Large loan portfolio
(690,000 loans with total volume of EUR 1.9 bn)
 Large and growing deposit base
(1.9 mn accounts with total volume of EUR 1.6 bn)
(figures as per 1 September 2006)
 Reasonable profitability (ROE: > 13% p.a.)
33
Shareholder structure of ProCredit Holding
34
Microloans in Germany – Framework
Conditions and Current Developments
The German Banking System

Three-pillar structure: 1. Commercial banks, 2. Public-sector banks (savings banks and
Landesbanks), 3. Cooperative banks (credit cooperatives and cooperative central banks)

Bank-based financial system: Companies and private individuals obtain finance mainly through
bank loans, and not through the capital market (so-called “house bank principle”)
→ Balance-sheet total of all credit institutions in Germany is about three times the GDP

Legal basis for the credit institution is the KWG (German Banking Act). A written permission
from the German Financial Supervisory Authority BAFIN is required for banks to conduct
banking transactions (§ 32 KWG).

Total number of credit institutions (as defined in §1 KWG ) as of 31 December 2005: 2,344

Total number of bank branches (headquarters of legally independent credit institutions plus all
their branch offices, including Postbank) as of 31 December 2005: 46,444
High density of banks in Germany ensures that loans and other banking services
are provided on a broad scale everywhere in Germany
36
Framework Conditions for the
Extension of Microloans




37
Microloans are extended under all thee “pillars“ of the banking system and through
the promotional banks. Non-banks are usually not entitled to grant loans.
The promotional, cooperative and savings banks play a major role in micro-lending.
Commercial banks play only a minor role.
There is no special “law on micro-lending” in Germany
→ Micro-loans are extended by the credit institutions in accordance with the
framework conditions of the banking system:
 The BAFIN supervises the extension of microloans (promotional
banks are supervised by public authorities (federal
government/federal states)
 The KWG provides the legal basis
Promotional banks, mortgage banks and credit guarantee companies may facilitate
the banks’ micro-lending activities by assuming liability and reimbursing part of the
commission (promotional banks).
Problems in Microloan Financing

Though there is a broad-scale offer of bank services due to the high density of banks in
Germany, access to microloans is often hampered.

Reasons for these problems:
1.
High processing costs for the credit institutions
- fix process costs in micro-lending
- particularly high need for information and advice on the part of business start-ups/small entrepreneurs
- low interest earnings from small-volume loans
→ unfavourable cost/revenue ratio for the banks
2.
Micro-lending involves high risk
- relatively high default rates
- information asymmetry between lender and borrower
- often no collateral can be provided
3.
Interest ceilings
- problem of adverse selection
- current account lines as a competitive product
- “usury paragraph“
Credit institutions often show great restraint in their micro-lending activities
38
Microloan Programmes in Germany

In reaction to the financing gap in the area of micro-financing a number of microloan programmes have been set
up since the 1990s, which are supported by public authorities, foundations and banks (number in 2004: 24)

The programmes are very heterogeneous: Many ”niche suppliers“ with activities limited to specific regions and/or
groups of persons (unemployed persons, foreigners, youths)

In many cases microloan programmes are established in cooperation with banks, advisory firms and institutions
for economic promotion. This facilitates the lending process for the banks, though the loan decision still remains
with the banks.

In some cases the ”lending“ is implemented via local and municipal authorities. Usually this does not involve
loans in a narrower sense but repayable grants extended to special target groups (unemployed persons,
foreigners).

In individual cases loans are extended by MFIs without cooperation with a bank. In these exceptional cases the
BAFIN has granted permission to non-banks to extend loans under certain conditions (e.g. complete equity
capital financing, customary bank reporting, maximum loan amounts).
No uniform, broad-scale offer of micro-loans
39
Current Developments

Micro-lending is basically possible under the existing framework (high density of banks, good
promotional infrastructure, special permissions to engage in micro-lending are possible)

To offer microloans on a broad-scale all over Germany process and risk costs have to be
reduced further. Two different strategies are pursued in this area:
1.
Exemption from liability and reimbursement of part of the commission
Example: KfW ”Micro Loan“ / ”Micro-10“
2.
Linking financing and advisory offers
Example: Micro-finance Fund Germany
40
KfW “Micro Loan“ / “Micro-10“
KfW Micro Loans are on-lend by banks:



Every bank in Germany is entitled to on-lend loans to the ultimate borrower
the on-lending bank receives a margin (1.25% p.a.) and is reimbursed for part of the commission
80% of the liability is assumed by KfW
Micro Loan:







Start of programme: October 2002
Loan amount: max. EUR 25,000
Term: max. 5 years, min. 1.5 years, redemption-free period: max. 6 months
Nominal interest rate: 9.35% p.a. (as of 23 June 2006)
Eligible to apply are natural persons, small enterprises and self-employed professionals
Financing purpose: start-up investments, working capital during the first 6 months and business consolidation for
up to 3 years after start-up
Reimbursement of commission: EUR 600
“Micro 10“:
Special features

Start of programme: March 2005

Loan amount: EUR 5,000 – 10,000

Reimbursement of commission: EUR 1,000

In the event of cooperation between the bank and an advisory firm for start-ups KfW applies a simplifed
procedure for loan disbursements and verification of the use of funds
41
Microfinance Fund Germany








42
Start of programme: September / October 2006
Loan amount: max. EUR 10,000
Term: max. 3 years
Nominal interest rate: 10% (currently planned)
Cooperation between bank, micro-finance provider, DMI (German Microfinance Institute) and
Fund
Bank: Loan decision, legal framework of the lending
Microfinance provider: supports the borrower, prepares the loan decision, handles the loan
processing, assumes part of the liability
DMI: Accreditation and monitoring of the microfinance provider, central control function in the
network
Funds: Acquisition and administration of risk capital, assumption of liability,
Volume: approx. EUR 2 million (EUR 0.5 million KfW; EUR 0.5 million BMWI (German Ministry
of Economics and Technology); EUR 0.5 million BMAS/ESF)
Microfinance Fund Germany
DMI
•Qualification
•Accreditation
•Monitoring
Recommendation on
cooperation with microfinance provider
Microfinance Fund
Germany
Cash
deposit
(100%)
Microfinance provider assumes
20% of the first loss
Bank
Loan recommendation
Interest and
redemption
Loan
agreement
Advice
Microfinance provider
(e.g. start-up centre)
43
Start-up
Loan application