Microfinance in Practice: Lessons learned from Microfinance Banks

1. Microfinance in Practice: Lessons learned from Microfinance Banks Istanbul, February 2006 Global Development Services USA Elvira Lefting

2. History of Microfinance Banks in South East Europe Economic & Political Situation at the start (�90s): Formation of New Countries and institutions (but with strong carry-over from the past) Post war situation / Ethnic conflicts High inflation High levels of poverty, especially in rural areas Flight of capital and work force to capital cities

3. History of Microfinance Banks Banking Sector: Legacy of banks channelling state funds to industry Limited lending skills Lending decisions based on collateral, connections, size, and enormous documentation requirements Risk aversion and/or easy money to be made on non-credit operations, e.g. Treasury bonds Banking Experience with SMEs Government (and donor) guarantee programs and subsidised credit lines misdirected and/or with poor results This reinforced banks� views of SMEs as high risk => less intermediation

4. History of Microfinance Banks Main Objective in Microfinance: Provide sustainable access to financial services to micro and small enterprises not presently catered for by the formal financial sector. Working capital for recurring and ad-hoc needs Longer term investment capital Other financial services, e.g. remittances, deposits Provide loan range in line with real finance gap (example ProCredit only): Micro Loans between $10 and $10,000 Small Loans typically between $10,000 and $200,000 Overall average loan size < $8,000 Average �express-micro� size < $1,000 Adjust loan products and requirements to the needs of MSEs Lending decisions based on cash flow not assets of MSEs Lending decision based on merits of the MSE not business plan/paper trail Target first time borrowers without a formal credit history

5. History of Microfinance Banks IFIs focused on set up of Microfinance Banks in SEE as they combine the following key components: Transparent ownership and integrity Like-minded shareholders with development focus Clear mission and mandate to focus on MSEs Credit technology adapted to the specifics of MSEs Streamlined loan processing and monitoring to handle inherently higher transaction costs Political independence Possible Side benefits Fuels competition in banking sector for MSEs Increases relevant information base for credit bureaus/registries Pushes improvements in legal and regulatory framework for MSEs and banks lending to MSEs (e.g. set up of pledge registry Kosovo, Serbia&Montenegro) IT Innovations (e.g. on-line banking) Improved payment/settlement systems (e.g. ProPay)

6. Foundation of Microfinance Banks in SEE Albania: 1995 Bosnia: 1997 Kosovo: 2000 Serbia&Montenegro: 2001 (PCB), 2003 (OI) Bulgaria: 2001 Romania: 2001 Macedonia: 2003 (set up under specialised law)

7. Results achieved so far (ProCredit Banks only) Monthly lending to MSEs (December 2005) Albania: 1,254 loans to MSEs for $6.7 million Bosnia: 2,840 loans to MSEs for $10.8 million Kosovo: 1,547 loans to MSEs for $19.5 million Serbia&Mont:4,027 loans to MSEs for $31 million Bulgaria: 2,494 loans to MSEs for $27.2 million Romania: 1,383 loans to MSEs for $11.8 million Macedonia: 1,380 loans to MSEs for $10.8 million Total: 15,000 loans to MSEs for $118 million monthly

8. Results achieved so far Loans outstanding to MSEs (December 2005) Albania: 18,000 loans to MSEs for $84 million Bosnia: 26,000 loans to MSEs for $85 million Kosovo: 18,000 loans to MSEs for $144 million Serbia&Mont:36,000 loans to MSEs for $200 million Bulgaria: 28,000 loans to MSEs for $240 million Romania: 19,000 loans to MSEs for $95 million Macedonia: 12,000 loans to MSEs for $26 million Total: 156,000 loans to MSEs for $875 million outstanding via 170 branches/outlets

9. Who gets what type of finance in ProCredit Banks? 92% of all new clients are first time borrowers in the banking sector Average age of financed MSEs is 1-2 years Economic Sectors (by loan volume): 10% Agriculture 20% Industry/Production 10% Transport/Tourism 60% Trade/Other/Mixed Average Loan Maturity is 12-24 months (increasing) Mortgages account for only 15% of loan security

10. Lessons learned in PCBs Less than 1% payments overdue for more than 30 days across all sectors and sizes of MSEs (i.e. better repayment performance than corporates) MSEs are not price sensitive but see processing time and entry barriers as key factors MSEs require full range of financial services (only credit or low credit ceilings hamper growth of MSEs and banks) Aggressive consumer lending in banking sectors causes over-indebtness and defaults (e.g. Bulgaria) High transaction costs and need for extensive branch network can be optimised but not overcome (thus commercial banks still focused on more �established� and larger clients) Deposit mobilisation and capital market funding are crucial to enable Microfinance Banks to grow in line with existing demand from MSEs (on average PCBs show 100% year on year asset growth)

11. Impact of PCBs in the region MSEs have become �bankable� Competition for bank loans to MSEs above USD 5,000, resulting in decreasing interest rates and longer maturities Legal and regulatory improvements (e.g. set up of pledge registries; lower fees) Improved payment/settlement systems PCBs serve as �training centre� Push into rural areas and agriculture sector PCBs continue to push the frontier of finance

12. Growth prospects for PCBs Regional branch expansion Expanding portfolio in non-trade sector Increasing loan maturities Continued focus on first time borrowers and �growing� existing clients Increase (direct) marketing and �transparency� initiatives to inform potential borrowers

13. PCBs and Start-ups PCBs fund start-ups under the following conditions: Owner has previous experience in this field Owner can contribute at least 30% of the initial investment in cash or kind Owner has realistic plans and assumptions PCBs do not focus on start-ups given the high demand of existing businesses and the inherent risks PCBs do however regularly finance companies/entrepreneurs that are in operation less than one year (standard requirement is 3 months)

14. Thank you