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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.

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slide2

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
Content

Short Introduction to KfW Entwicklungsbank

KfW‘s Microfinance Portfolio

Why KfW Finances Microfinance

Highlight – Structured Finance

KfW – Microfinance in Germany

Impact and Outlook

kfw entwicklungsbank within kfw bankengruppe
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%)

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)

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

content1
Content

Short Introduction to KfW Entwicklungsbank

KfW‘s Microfinance Portfolio

Why KfW Finances Microfinance

Highlight – Structured Finance

KfW – Microfinance in Germany

Impact and Outlook

financial sector portfolio role of microfinance and sme financing
Financial Sector Portfolio: Role of Microfinance and SME Financing

Outstanding Portfolio: 2.4 bn € (223 Projects)

microfinance portfolio by regions
Microfinance Portfolio by Regions

Traditionally strong in Eastern Europe

Global: 13%

Africa

10%

Asia

9%

MENA: 2%

Latin

America

22%

&

Eastern Europe

Caucasus: 44%

kfw complements german budget funding microfinance funding is increasingly commercial
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%

content2
Content

Short Introduction to KfW Entwicklungsbank

KfW‘s Microfinance Portfolio

Why KfW Finances Microfinance

Highlight – Structured Finance

KfW – Microfinance in Germany

Impact and Outlook

the poverty dimension where financial sector development can improve lives
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

the target group in developing countries microfinance aims at ordinary people
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

slide13
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

slide14

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
slide15

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

content3
Content

Short Introduction to KfW Entwicklungsbank

KfW‘s Microfinance Portfolio

Why KfW Finances Microfinance

Highlight – Structured Finance

KfW – Microfinance in Germany

Impact and Outlook

slide17

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
slide18

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

slide19

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

content4
Content

Short Introduction to KfW Entwicklungsbank

KfW‘s Microfinance Portfolio

Why KfW Finances Microfinance

Highlight – Structured Finance

KfW – Microfinance in Germany

Impact and Outlook

kfw micro loan micro 10
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
microfinance fund germany
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)
integrating the map guarantee into kfw s startgeld programme
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

content5
Content

Short Introduction to KfW Entwicklungsbank

KfW‘s Microfinance Portfolio

Why KfW Finances Microfinance

Highlight – ProCredit Group

Highlight – Structured Finance

Impact and Outlook

financial sector development and poverty reduction kfw s lessons learned in 38 words
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

advancing microfinance results and future challenges
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
slide27

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

content6
Content

Short Introduction to KfW Entwicklungsbank

KfW‘s Microfinance Portfolio

Why KfW Finances Microfinance

Highlight – ProCredit Group

Highlight – Structured Finance

Impact and Outlook

slide29

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)
slide30

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
slide31

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

succeeding in imperfect markets procredit banks perform well on both sides of the balance sheet
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 .

succeeding in imperfect markets procredit network balances outreach growth and profit
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)

the german banking system
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

framework conditions for the extension of microloans
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).
problems in microloan financing
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

microloan programmes in germany
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

current developments
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
kfw micro loan micro 101
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
microfinance fund germany1
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)
microfinance fund germany2
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