1 / 43

Dr. Mark Schwiete Principal Financial Sector Expert

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.

barbara-acevedo
Download Presentation

Dr. Mark Schwiete Principal Financial Sector Expert

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  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

  2. 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 withinKfW Bankengruppe. EU-Microfinance Financing volume in 2006 EUR 3.4 billion (+ 30.8%) Financing volume in 2006 EUR 35.5 billion (- 8.3%) Financing volume in 2006 EUR 22.8 billion (+ 47.1%) Financing volume n in 2006 EUR 15.0 billion (+24%)

  4. 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) Key Figures for KfW Entwicklungsbank. Loans outstanding 18.5 billion EUR • of which budget funds • of which KfW funds 15.7 billion EUR 2.8 billion EUR

  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)

  7. Microfinance Portfolio by Regions Traditionally strong in Eastern Europe Global: 13% Africa 10% Asia 9% MENA: 2% Latin America 22% & Eastern Europe Caucasus: 44%

  8. KfW complements German Budget Funding Microfinance: Funding is increasingly commercial Mi c rofinan ce P ortfolio by • 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. Finan c i ng Instruments F C Promotional Budget ary Loans : 32% r efinan cing l in e s : 49% F C Promotional E quity Participation in c l. Mezzan ine 10% B udget f unding for F C Fiduciary technical assistance : 5% Participation : 4%

  9. 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 peopleliving under $1/dayby 2015 Targets 4,5,6:Health Target 2: Primary educationfor all children

  11. The Target Group in Developing Countries:Microfinance aims at “Ordinary People” Upper Class Commercial Banks Middle Class Micro Banks, Credit Unions, Specialised Banks 100 KfW Microfinance Partners in42 countries serve about 12 million customers Economically Active Poor Poverty Line Finance NGOs VeryPoor Social transfers (non-bankable segment) Absolute Poor

  12. 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 fully-fledged 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 Increase in operational complexity and need for professional management Integration into local capital markets Establishing full range of services for ordinary customers, particularly deposits Contribution to local financial market development 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 PoorKfW 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. Share class C “Junior” Share class B “Mezz.” Share / Notes class A “Senior” • Banks • NGO´s Example of an Investment FundEuropean Fund for South-East Europe one of the largest microfinance fund worldwide Fund Volume in million EUR Several risk tranches 1st closing 12/05 02/07 12/09 66 119 140 60 80 80 20 222 280  146 421 500 Donors DFIs Private Investors

  18. 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 • 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 networkFunds: 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)

  22. Integrating the MAP guarantee into KfW‘s StartGeld Programme EIF 40% risk MAP/EU Budget funding guarantee for 50% of KfW risk KfW40% risk On-lendingBank20% risk SMEs micro loan loan with 80% exemtion from liability

  23. 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. Sound local financial markets need bottom-up development

  25. 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 • Further develop rural finance, especially for smallholders • Attracting more private capital and know-how to scale-up microfinance

  26. 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

  27. 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. • Problem • Small and micro enterprises as engines of reconstruction and growth are rarely given loans from conventional banks. • Approach • Establishment of ProCredit Bank Kosovo withtarget 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)

  29. Institution Rating Country Risk (=Country Ceiling) Fitch (Long Term Issuer Default Rating) 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 Moody’s (Long Term Issuer Rating) ACLEDA Bank (Cambodia) B2 not rated Succeeding in imperfect markets:Solid microfinance institutions can rank among the country’s best rated addresses

  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 ProCredit Bank, Kosovo ProCredit Bank, Bulgaria Banco ProCredit, El Salvador ProCredit Bank, Albania Banco ProCredit, Nicaragua ProCreditBank, Congo Banco ProCredit, Equador ProCredit,Ghana NovoBanco,Mozambique Banco Los Andes ProCredit,Bolivia ProCredit Bank,Sierra Leone NovoBanco,Angola

  31. 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) • Reasonable profitability (ROE: > 13% p.a.) (figures as per 1 September 2006)

  33. Shareholder structure of ProCredit Holding

  34. Microloans in Germany – Framework Conditions and Current Developments

  35. 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 • 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).

  37. 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 banks2. 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: • Exemption from liability and reimbursement of part of the commission Example: KfW ”Micro Loan“ / ”Micro-10“ • Linking financing and advisory offersExample: 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 • 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 networkFunds: 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)

  42. Microfinance Fund Germany DMI Microfinance FundGermany Recommendation on cooperation with micro-finance provider Cash deposit(100%) Microfinance provider assumes 20% of the first loss • Qualification • Accreditation • Monitoring Bank Loan recommendation Interest and redemption Loan agreement Advice Microfinance provider (e.g. start-up centre) Start-up Loan application

More Related