, "W10 - Development Banks Mark Schwiete.ppt"

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

Dr. Mark SchwietePrincipal Financial Sector ExpertCompetency Centre Sustainable Economic Development

4th European Microfinance Conference 2007April 27, 2007, Berlin

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Content

KfW‘s Microfinance Portfolio

Highlight – Structured Finance

KfW – Microfinance in Germany

Impact and Outlook

Short Introduction to KfW Entwicklungsbank

Why KfW Finances Microfinance

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KfW Entwicklungsbank withinKfW Bankengruppe.

Financing volume in 2006EUR 35.5 billion (- 8.3%)

Financing volume in 2006EUR 22.8 billion (+ 47.1%)

Financing volume n in 2006EUR 15.0 billion (+24%)

Financing volume in 2006EUR 3.4 billion (+ 30.8%)

EU-Microfinance

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Key Figures for KfW Entwicklungsbank.

EUR 1.5 billion (of which EUR 1.1 billion from budget funds)

Disbursements (2006)

EUR 1.0 billion of which KfW's own funds

EUR 2.5 billionCommitments (2006)

About 50Representative offices abroad

over 1,400 in over 100 countriesOngoing projects

387Number of Staff

15.7 billion EUR

2.8 billion EUR

of which budget funds of which KfW funds

18.5 billion EURLoans outstanding

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Content


Impact and Outlook





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Financial Sector Portfolio: Role of Microfinance and SME Financing

25%

43%

32%

Microfinance

SME-Financing

Others

Outstanding Portfolio: 2.4 bn € (223 Projects)

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Microfinance Portfolio by Regions

Traditionally strong in Eastern Europe

Africa 10%

Asia 9%

Eastern Europe & Caucasus: 44%

Latin America 22%

MENA: 2%

Global: 13%

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KfW complements German Budget Funding Microfinance: Funding is increasingly commercial

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.

Microfinance Portfolio by

Financing Instruments

Budgetary refinancing lines: 49%

FC Fiduciary Participation: 4%

FC Promotional Loans: 32%

Budget funding for technical assistance: 5%

FC Promotional Equity Participation incl. Mezzanine10%

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Content


Impact and Outlook





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The poverty dimension:Where financial sector development can improve lives

Target 1: Half number of peopleliving under $1/dayby 2015

Target 3:Gender equality

Targets 4,5,6:Health

Target 2: Primary educationfor all children

It tackles six out of the eight Millennium Development Goals...

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The Target Group in Developing Countries:Microfinance aims at “Ordinary People”

Middle Class

Economically Active Poor

Very Poor

Poverty Line

Absolute Poor

Commercial Banks

Micro Banks, Credit Unions, Specialised Banks

Finance NGOs

Social transfers (non-bankable segment)

100 KfW Microfinance Partners in42 countries serve about 12 million customers

Upper Class

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Four approaches to establishing Microfinance services – adopted to the specific financial sector deficiencies

„Down-scaling“Supporting commercial

banks to serve the micro segment

„Up-grading“Transformation of a

credit NGO into a fully-fledged micro bank

„Linking“Connect Microfinance

Institutions with the national or international

capital market

„Greenfielding“Foundation of a new

Microfinance Institution (MFI)

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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

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Building sound financial systems from the ground:Strategic path for MFIs to ensure access to financial resources and for growth

Building professional credit institutions

Integration into international capital

markets

Establishing full range of services for ordinary customers, particularly deposits

Integration into local capital marketsIncrease in operatio

nal complexity and

need for p

rofessional management

Contributio

n to lo

cal financial m

arket development

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Content


Impact and Outlook





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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

Financial Engineering for the Poor

KfW deploys state-of-the-art know-how in development

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Share class C

“Junior”

Share class B

“Mezz.”

Share / Notes class A

“Senior”

Banks NGO´s

Several risk tranches

66 119 140

60 80 80

20 222 280

146 421 500

1st closing 12/05 02/07 12/09

Fund Volume in million EUR

Donors

DFIs

Private Investors

Example of an Investment FundEuropean Fund for South-East Europe one of the largest microfinance fund worldwide

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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

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Content


Impact and Outlook





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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

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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)

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Integrating the MAP guarantee into KfW‘s StartGeld Programme

EIF 40% risk

MAP/EUBudget

KfW40% risk

On-lendingBank

20% riskSMEs

micro loanloan with 80% exemtion from liability

funding

guarantee for 50% of KfW risk

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Content


Highlight – ProCredit Group


Impact and Outlook



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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

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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

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

Dr. Mark SchwietePrincipal Financial Sector ExpertCompetency Centre Sustainable Economic Development

4th European Microfinance Conference 2007April 27, 2007, Berlin

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Content


Highlight – ProCredit Group


Impact and Outlook



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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)

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Succeeding in imperfect markets:Solid microfinance institutions can rank among the country’s best rated addresses

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

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Succeeding in imperfect markets:

The ProCredit Network is operating in 19 countries

ProCredit Bank, Georgia

ProCredit Bank, Ukraine

ProCredit Moldova

ProCredit Bank. Rumania

ProCredit Bank, Serbia

ProCredit Bank, BiH

ProCredit Bank, Kosovo ProCredit Bank,

BulgariaProCredit Bank, Albania

NovoBanco,Mozambique

NovoBanco,Angola

ProCredit,Ghana

Banco ProCredit, El Salvador

Banco ProCredit, Nicaragua

Banco ProCredit, Equador

Banco Los Andes ProCredit,Bolivia

ProCredit Bank, Macedonia

ProCreditBank, Congo

ProCredit Bank,Sierra Leone

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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 .

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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)

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Shareholder structure of ProCredit Holding

aims to expand the “frontier of finance”, i.e. to extend downward the range of

market segments served by formal and commercial financial institutions.

21%

5%

18%

3%

1%

1%

18%

17%*

8%*

8%

TIAA-CREF and the Omidyar Tufts Microfinance Fund have invested EUR 40 million in non-voting preference shares. They will acquire a 5% voting share from *IFIs in 2007

Capital base: Voting Capital € 152 million 84% Non-Voting Capital € 28 million 16%Share Premium € 36 millionTotal € 216 million

Shareholder Structure of Voting Capital:

Microloans in Germany – Framework Conditions and Current Developments

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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

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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).

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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

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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

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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

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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

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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)

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Cash deposit(100%)

Recommendation on cooperation with micro-finance provider

DMIMicrofinance Fund

Germany

Loan agreement

•Qualification•Accreditation•Monitoring

Microfinance provider assumes 20% of the first loss

Loan recommendation

Microfinance provider (e.g. start-up centre)

Bank

Start-up

Interest and redemption

Advice

Loan application

, "W10 - Development Banks Mark Schwiete.ppt"

Documents

kfw microfinance partners

kfw funds

role of microfinance

kfw bankengruppe

funds eur

eur loans outstanding

financial sector portfolio

portfolio budget funding