Profiling Financial Institutions Operating in Difficult Environments The Case of MEB, Kosovo Hanns Martin Hagen Vice President, KfW, Financial Sector,

Profiling Financial InstitutionsOperating in Difficult Environments

The Case of MEB, Kosovo

Hanns Martin HagenVice President, KfW, Financial Sector, Europe

Session VIThe World Bank/Brookings Conference on Access to Finance, 2006

2

KfW – who we are…

Promotional bank of the Federal Republic of Germany.

Founded in 1948 as a corporation under public law. Shareholders: Federal Republic of Germany (80%),German federal states (20%).

Headquarters: Frankfurt am Main;Branch offices: Berlin and Bonn.

Balance sheet total at the end of 2005: EUR 365 billion.

Employees at the end of 2005: 3,710.

KfW bonds have been assigned the highest rating by Standard & Poor's, Moody's and Fitch Ratings.

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Financing volume in 2005EUR 38.7 billion (+12.2%)

Financing volume in 2005EUR 15.5 billion (+10.7%)

Business volume in 2005EUR 12.1 billion (+1.7%)

Financing volume in 2005EUR 2.6 billion (+2.6%)

KfW – what we do…Promotion of developing & transition economiesis one of KfW’s four main fields of activity

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March 1999: Civil war ended by NATO intervention

June 1999: UN Interim Administration for Kosovo (UNMIK) established

July 1999: UN Civil Administrator for Kosovo Bernard Kouchner decided that:„... commencement of banking initiatives is essential for the revival of the economy of Kosovo.“(UN Resolution 1244 [1999])

IFC, EBRD, KfW and FMOasked to support establishment of (a) new bank for Kosovo(b) safe, efficient, reliable payment system

What we do... The Case of MEB, Kosovo

Kosovo, 1999Who wants to open a bank here?

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• 90% of inhabitants ethnic Albanians

• Deep divisions between Albanians and their former Serb oppressors

• Violent clashes between Albanians and Serbs despite presence of 40,000 peace keeping troops and foreign police

=> Difficult security situation,e.g. Christmas 1999:- two hospitals robbed- one foreign aid office robbed

Kosovo, 1999:Post-conflict environment

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Yugoslavia‘s poorhouse... • Population: 2.5 million

• GDP/capita: USD 750 (Indonesia / Djibouti)

• > 50% living under poverty line

with a devastated post-war economy• Infrastructure and housing severely

damaged • Economy shrinking

(GDP growth, 1998: - 2.5%)• Unemployment > 50%• Formal financial sector ceased to exist• Dinar consumed by inflation

=> Deutsche Mark as legal tender

Post-conflict Kosovo, 1999:Social and economic environment

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Relevance

200 medium and large enterprises: 20% of GDP

5,000 micro- and small entrepreneurs: 80% of GDP

Methodology=> structured interviews with 866 randomly sampled entrepreneurs in Kosovo

Characteristics of the interviewed entrepreneurs63 % traders18 % other services13 % manufacturing / craftsmen 6 % farmers

Micro- and small entrepreneurs Market Survey by DOEN Foundation, 1999 (1)

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1. Enterprises on average rather small

- for 522 (of 866) respondents business main source of family income

- fulltime entrepreneurs: inventory ~ EUR 5,000; 2 employees

2. Micro- and small entrepreneurs well experienced

- 2/3 in business for >5 years

3. Lacking financial services

- Only 2 % had access to credit during last 3 years

- Only 6 % had a savings or current account

Micro- and small entrepreneursMarket Survey by DOEN Foundation, 1999 (2)

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4. Attributes of a Bank Ranked by Respondents „Very Important“

Micro- and small entrepreneursMarket Survey by DOEN Foundation, 1999 (3)

Safe deposits, reasonable interest rates 82 %

International Ownership of bank 73 %

International money transfers at affordable rates 63 %

Easy to reach (good branch network) 61 %

Low collateral requirements 58 %

Reasonable interest rates, loans 39 %

Quick credit decisions 35 %

Competent staff 23 %

Friendliness 11 %

Local Ownership 10 %

Wide choice of financial services 3 %

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Opening: 17 January 2000

Equity and Shareholders:Paid-in equity: EUR 2.3 million

21.7 %

21.7 %

21.7 %

17.4 %

17.4 %

Characteristics:- fully licensed bank- focus on financial services for micro and small enterprises

The Founding ofMicroenterprise Bank of Kosovo

FEFAD

Products at bank opening:

- savings deposits

- money transfer

- micro enterprise loan

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Microfinance Bank of KosovoSafe place to save(Development of deposits, 01 - 06/2000)

0

1.000

2.000

3.000

4.000

5.000

6.000

7.000

8.000

9.000

10.000

Jan 00

Feb 00

Mrz 00

Apr 00

Mai 00

Jun 00

0

2.000.000

4.000.000

6.000.000

8.000.000

10.000.000

12.000.000

14.000.000

16.000.000

18.000.000

Deposits of legal persons (average: EUR 6,820)

No. of deposits (columns) Volume of deposits, in € (area)

Deposits of natural persons (average: EUR 274)

12

Microfinance Bank of KosovoMoney transfers in high demand(no. of money transfers, processed monthly, 01 - 06/2000)

Outgoing money transfers(total volume, 01- 06/2000: € 32.1 million)

Jan Feb March April May June

Incoming money transfers(total volume, 01- 06/2000: € 224.6 million)

244

1975

12171303

1494

2379

13

050

100150200250300350400450500550600

Jan 00

Feb 00

Mrz 00

Apr 00

Mai 00

Jun 00

0

200.000

400.000

600.000

800.000

1.000.000

1.200.000

Small Loans > EUR 1,000Micro Loans < EUR 1,000

No. of loans outstanding, end of month (columns)

Loans outstanding, volume in €,end of month (area)

Microfinance Bank of KosovoSlow start in micro lending(loans outstanding, end of month, 01 - 06/2000)

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MEB, KosovoAmbitious Business Planning (06/2000)

06 / 2000 2000 (Plan) 2003 (Plan)

Clients 8,021 16,000 78,000

Customer deposits, no. 9,254 16,000 73,000

Customer deposits (volume, in million €)

16.1 48 73

Loans outstanding (volume, in million €) 1.4 3.3 70

Money transfers (volume, in million €) 256.7 450 78

Profit (Loss) after tax (0.4) (1.0) 0.5

Branches, no. 2 4 10

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Micro Enterprise BankQuo vadis?

Challenges

Attract and train qualified staff

Expand branch network to rural areas

Develop financial services according to the need of micro and small entrepreneurs

Contribute to financial sector development in Kosovo

Positive impact on micro-enterprise clients

Quiz-Question:

On 30 June 2000 MEB had 8.021 Customers, many of them poor.How many clients does MEB have on 30 May 2006?

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Micro Enterprise Bank, KosovoBranching out into rural areas

20004 branches

MEB2006 27 branches

+ 8 mobile branches

Mobile branch Kamenica:

76 villages, 63,000 inhabitants,

only 1,900 reached from Gjilan

ProCredit

17

75 staff10 expatriates

5 local management

35 loan officers

25 banking services

ProCredit Bank, KosovoAttract and train local staff

2000

558 staff4 expatriates

58 local management

182 loan officers

314 banking services

2006

Challenges

- training local middle and top management

- staff hired by other banks

Challenges

- lack of qualified local staff(Universities in Kosovo had beenclosed)

- no bank training facilities in Kosovo

=> Training held at FEFAD Bank, Albania

75 staff10 expatriates

5 local management

35 loan officers

25 banking services

2000

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2000: Standard Savings Account Current Account

2000-2006: Time Deposit Accounts Savings Plan “ProFit Plus”

ProCredit Bank, Kosovo Developing Deposit Services

19

0

50

100

150

200

250

300

2000 2001 2002 2003 2004 2005

EU

R m

illi

on

ProCredit Bank, KosovoMaturities of deposits increased(2000 – 2005, volume)

Legal maturity < 3 months Legal maturity > 3 months < 12 months

Legal maturity > 12 months

20

0

50.000

100.000

150.000

200.000

250.000

300.000

350.000

400.000

Jan 0

0

Mrz

00

Mai

00

Jul 0

0

Sep 0

0

Nov 0

0

Jan 0

1

Mrz

01

Mai

01

Jul 0

1

Sep 0

1

Nov 0

1

Jan 0

2

Mrz

02

Mai

02

Jul 0

2

Sep 0

2

Nov 0

2

Jan 0

3

0

20.000

40.000

60.000

80.000

100.000

120.000

ProCredit Bank, Kosovo Quantitative development of deposits (01/2000-03/2002)

Volume of deposits, in TEUR (columns)

Number of deposits, (line graph)

Conversion to EURO

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Motives for Introduction of Card

High and swiftly increasing number of cash transactions=> strain on PCB’s systems

Long queues in front of box offices => inconvenient for clients

Cards / ATM less costly in long run- in US: cost of for bank: cash withdrawal at ATM: USD 0.21 cash withdrawal at teller: USD 1.08

Card offers clients 24 h access to accounts

Challenges

Introduction of Cards, ATMs and POS make high investments necessary

Large card operators not interested (in 2002)

ProCredit Bank, Kosovo Qualitative development of Deposit ServicesIntroducing Debit Card „MEB X-Card“in 2002 (1)

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Meeting the challenges

System and expertise supplied by Compass+(Magnitogorsk, Russia)

Services

ATM Withdrawal (easy to use, voice instructions)

Balance inquiries

Payments at ATMs (also for loan repayments)

PoS purchases (e.g. supermarkets, petrol stations)

ProCredit Bank, Kosovo Qualitative development of Deposit ServicesIntroducing Debit Card „MEB X-Card“in 2002 (2)

102,000 cards issued to clients

82,000 active cards

34 ATMs

256 PoS terminals

Maestro card member (since January 2004)

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200.000

220.000

240.000

260.000

280.000

300.000

320.000

340.000

360.000

Jan 0

3

Mrz

03

Mai

03

Jul 0

3

Sep 0

3

Nov 0

3

Jan 0

4

Mrz

04

Mai

04

Jul 0

4

Sep 0

4

Nov 0

4

Jan 0

5

Mrz

05

Mai

05

Jul 0

5

Sep 0

5

Nov 0

5

Jan 0

6

Mrz

06

Mai

06

0

50.000

100.000

150.000

200.000

250.000

Volume of deposits, in TEUR (columns)

Number of deposits, (line graph)

ProCredit Bank, Kosovo Quantitative development of deposits (01/2003-05/2006)

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Very small andSmall DepositsIa: < € 500Ib: € 501 – € 1,000

Ø-Size of DepositIa: € 81 Ib: € 749

ProCredit Bank, KosovoSmall deposits still the focus(no. of deposits as of 05/2006: 214,325)

I a (49.2 %)

III (0,7 %)IIa (11,2 %)

Medium- andLarge DepositsIIa: € 1.000 – € 10.000IIb: € 10.001 – € 50.000 III: > € 50.000

Ø-Size of Deposit IIa: € 3.254IIb: € 19.578III: € 63.285

I b (39.1 %)

IIb (2,2 %)

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2000: Micro- and Small-Enterprise Loans

2006: Express Micro-Loans Small-Enterprise-Loans SME Loans Housing Loans

- only repeat clients- up to EUR 15,000- up to 7 years

- for rehabilitation / renovation only - no mortgage as collateral required

Agricultural Loans

ProCredit Bank, Kosovo Developing Loan Products: Overview

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Eligible Clients and Loan Conditions Clients generate income from agricultural

activities Have minimum 2 seasons of business

experience Tenure: max. 36 Months Irregular/seasonal repayment possible Minimum amount: EUR 100 Collateral:

micro loans (< EUR 5,000) no collateral,

small loans (< EUR 10,000) moveable securities,

medium loans (> EUR 25,000) moveable securities plus 1 guarantor

ProCredit Bank, Kosovo Developing Loan Products: Agro Loans

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-

20

40

60

80

100

120

140

160

180

Jan02

Apr02

Jul02

Okt02

Jan03

Apr03

Jul03

Okt03

Jan04

Apr04

Jul04

Okt04

Jan05

Apr05

Jul05

Okt05

Jan06

Apr06

ProCredit Bank, Kosovo Quantitative development of lending (outstanding loans in € million, 01/2002 – 05/2006)

Agro-Loans

Housing-Rehabilitation Loans

SME-Loans

Small Enter-prise Loans

Micro Enter-prise Loans

Outstanding loan portfolioin million €

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PAR

-

20

40

60

80

100

120

140

160

180

200

am

ou

nt

ou

tsta

nd

ing

(m

io)

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

PA

R

outstanding portfolio PAR

total write-offs: 1.21 mEURtotal recovered: 297 kEUR

ProCredit Bank, Kosovo Good quality of loan portfolio (portfolio at risk (>30 days), 01/2002 – 12/2005)

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Micro- andSmall LoansIa: < € 1,000Ib: € 1,001 – € 10,000

Ø-Size of LoansIa: € 489Ib: € 6,210

ProCredit Bank, KosovoFocus still on micro- and small loans(micro- and small loans as % of no. of total loans as of 05/2006: 43,237)

I a (52.9 %)

III (1.2 %)II (9.3 %)

Medium- andLarge DepositsII: € 10.001 – € 50.000 III: > € 50.000

Ø-Size of Loans II: € 3.254III: € 19.578

I b (36.6 %)

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ProCredit Bank, Kosovo since 2000Financial performance much better than planned...

...partly due to first mover advantage during 2000 and 2001

2000 (plan) 2000 (real) 2003 (plan) 2003 (real) 2005

Deposits,no.

16,000 26,000 73,000 124,241 196,794

Deposits(in mio. €)

48 89 73 263 343

Loans outstanding(in mio. €)

3.3 3.3 70 72 171

Money transfers (in mio. €)

450 488 78 583 483

Profit (Loss) (1.0) 3.2 0.5 3.9 3.8

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Financial Sector, Kosovo2000... and today

Banking and PaymentsAuthority BPK

7 CommercialBanks

15 Micro CreditOrganisations

8 InsuranceCompanies

7% of Fin Sector Assets 5% of Fin Sector Assets

5 LocalBanks

2 Foreign(PCB, Raiffeisen)

65% of Bank. Sector Assets 35% of Bank. Sector Assets

Kosovo CreditInformation System

(KCIS)

87% of Fin Sector Assets

Institutions operating in 2000

32

Kosovar’s financial sector reaching who?

Middle and Upper Class

Economically Active Poor

Very Poor

Poverty Line

Absolute Poor

5 Local commercial banks

15 Micro Credit Organisations

Social transfers (non-bankable segment)

Raiffeisen Bank

ProCredit Bank

33

ProCredit Bank, KosovoMarket share reduced to below 40%......banks entered market, supported by joint donor initiative (in red: banks receiving TA and funding from KfW (EFK))

Share in Assets (%)

Share in Deposits (%)

Share in Loans (%)

Share in Long-Term Loans (%)

Share in Equity (%)

Share in Profits (%) (2004)

ProCredit 42.6 42.6 30.3 38.0 27.4 32.1

Raiffeisen 22.1 22.5 29.2 37.9 26.4 27.4

Kasabank 12.7 12.4 16.5 6.6 14.8 12.8

New Bank of Kosovo

6.6 6.3 5.6 0.9 8.8 9.9

Bank for Priv. Bus.

6.0 6.1 7.3 6.9 6.5 7.1

Banka Kreditore

5.5 5.3 6.6 5.3 7.5 5.5

Banka Ekonomike

4.6 4.9 4.5 4.5 8.6 5.3

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ProCredit Bank, KosovoAny impact on deposit mobilisation?

2000 2001 2002 2003 2004 2005

Cash Holding (in mio. €)

668.0 589.0 529.0 404.8 297.0

Deposits(in mio. €)

106.0 486.8 413.6 534.7 720.2 869.6

PCB Share of Deposits

92% 72.4% 65.0% 47.7% 43.4% 39.5%

M2/GDP 71.1% 57.8% 57.3% 59.4% 58.4%

Trust of savers in the banking system revived Cash holding behaviour through ATMs and PoS reduced

35

ProCredit Bank, KosovoImpact on small enterprises ? (1)

Study by Addai / Nienborg (2004)

(interviews, 70 micro and small entrepreneurs, non-clients and clients of PCB)

PCB-Client Non-client

% of start-ups 10 % 6 %

Full-time employees(24 months ago)

1.3 3.5

Average monthly sales turn-over (previous 12 months)

€ 4,000 € 4,500

Average investment (in previous 12 months)

€ 7,000 € 8,000

Time as PCB client 22 months n.a.

Characteristics of interviewed entrepreneurs

36

ProCredit Bank, KosovoImpact on small enterprises ? (2)

Difficult environment in 2002 / 2003

2000 2001 2002 2003 2004

Cash Holding (in mio. €)

16.6 -2.9 -1.4 3.7 -0.5

Inflation - - 1.6 -2.5 -1.5

Transfers by donorsin % GDP

47 36 31 30 29

Remittances in % GDP

13 14 13 13 14

37

ProCredit Bank, KosovoImpact on small enterprises ? (3)

Household expenditure(compared to 12 months ago)

PCB-Client Non-client

Lower than 12 months ago 25.0% 69.5%

About the same as 12 months ago

31.0% 25.4%

Higher than 12 months ago 44.0% 3.4%

No reply 0.0% 1.7%

Access to finance only one factor

But, PCB-Clients cope better than non-clients

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ProCredit Bank, KosovoSummarising Impact

Demonstration effects at the sector level(a) revived confidence in banking sector(b) set standards for banking operations (money transfers, technology, risk management)(c) promoted creation of the Kosovo Credit Information Service (d) competition ensured by sector-wide TA and funding facility (EFK)

Crisis alleviation at the client level

(a) offered small home rehabilitation loans to families in need

(b) enabled small pensions disbursements to Kosovars who had worked abroad (German, Swiss and Austrian Public pension systems)

(c) developed financial services according to need of micro entrepreneurs thus creating and securing employment and income.

39

ProCredit Bank, KosovoOpportunities and Challenges

Opportunities

Partnership between public and private shareholders especially appropriate for volatile post-conflict situations:

(a) Public shareholders able to bear higher risk / play catalytic role.

(b) Private shareholder essential know-how provider.

Full banking licence from start => flexibility to react to demand / adopt to volatile environment

Challenges

ensuring competition

Balancing outreach, sector impact and profitability in a PPP

enhancing products/services in agricultural and rural lending

40

Solution of the Quiz-QuestionQuiz-Question(number of clients, 30/06/2000: 8,021)

End of May 2006: 231,143 clients