3. Half Of The Developing World
Lives On Less Than $2 A Day
• 1.2 billion people
live on less than
$1 a day
• 2.8 billion people
live on less than
$2 a day
3
4. A Typical Microenterprise…
• Has fewer than 10
employees
• Has less than $1,000
in capital
• Is located in the
home
4
5. What Is Microfinance?
• Small loans extended to
very poor people for
self-employment
enterprises.
5
6. Characteristics of Microfinance
• 13 million borrowers around
the world
• $7 billion in outstanding loans
• 30% annual growth
• 98% repayment rate
• Estimated market size = 500
million microentrepreneurs
worldwide
6
7. The Necessary Scale of Microfinance
• To reach 100 million of the world’s
poorest families by 2005, the
microfinance industry will require $21
billion in capital
7
8. Grameen Bank Model Of Microfinance
• Group lending model
• Groups of 5 borrowers
are formed; at first only
2 of them receive loans
• Only if these 2 repay the
loans do other members
become eligible for loans
8
13. Microfinance in Asia
No. of No. of
Borrowers Savers
Bank Rakyat 12
2.5 million
(Indonesia) million
Bank of Agriculture
3.6
(Thailand) 1 million
million
13
14. Bolivia’s Banco Sol
First Microfinance Commercial Bank
Average Loan
Loan Portfolio
Size
2002 $81 million $1,900
2001 $81 million $1,500
2000 $78 million $1,300
1999 $82 million $1,100
1998 $75 million $916
14
17. Microfinance Less Sensitive to Crisis
BRI’s Loan Portfolio During the Asia Crisis
Corporate Portfolio Retail Portfolio
100% Loss 50% Loss
Microfinance Portfolio
2.5% Loss
17
18. Credit Unions Around The World
• 37,000 Credit Unions
• 112 million members
• $530 billion in savings
• $606 billion in assets
18
19. Microfinancial Institutions
Around The World
World Average
Total Assets $5.7 million
Outstanding Loans $3.9 million
ROA 5.5%
ROE 14.1%
Non-performing Loans 2.3%
19
20. UN Capital Development Fund’s
$40 Million Microfinance Portfolio
Latin America Asia
$8 million $4 million
10%
20%
70%
Africa
$28 million
20
21. Models of Microfinance
• Individual lending
– Micro loans are given directly to individual
borrowers
– Loans often part of broader assistance package
• Group lending
– Groups of five borrowers
– Relies on social networks to increase likelihood of
repayment
• Village banking
– The entire community is treated as one borrower
– Village-based institutions to dispense loans
21
22. The Value of Microfinance Networks
• Lower costs as a result of centralizing the
financing unit
• Sufficient asset size to attract private capital
• Transparency to external actors
• Monitoring and evaluation of member MFIs
• Accountability of member MFIs
22
23. Microfinance Lending Networks – A
Potential Model
Donors
$ MFI
$
Micro-
finance $ MFI Center MFI $ Borrower
Funds
$
MFI
Investors $
23
24. Top 10 Microfinance Funds
2002 Assets (millions)
Oikocredit $170
Khula Enterprise Finance $85
Calvert Foundation $50
UN Capital Dev. Fund $40
Pofund $22
AMINA African Development Fund $20
Triodos-Doen $20
Dexia Blue Orchard Microcredit $17
CORDAID $14
Internationale Micro Investitionen $12
24
25. Challenges
• Attract private capital
• Reach scale
• Achieve positive return on assets
• Balance financial and social objectives
• Balance cooperation and competition
25
26. An Initial Observation
• 3 billion people in the world live on less
than 2USD per day
• To survive, these people create their own
job through the establishment of micro-
enterprises
26
27. The Microenterprises
• Active in very different sectors
• Closely linked to family economics
• Need diversified financial services
27
28. An Important Potential Market
• 500 million micro-enterprises in the
world
• Annual average funding need per micro-
enterprise: USD 500
• New products will generate new
opportunities: savings, insurance, credit
cards, payments, etc
28
29. The Offer of Financial Services
to Microenterprises
• Friends and family or loan sharks (10%
interest rate per day); traditional banks
are absent from this market
• 10,000 micro-finance institutions (MFI)
all over the world, of which about 250 are
profitable and fast growing
• Those MFI only cover about 5% of
potential demand
29
30. Microfinance Institutions
• Specialized financial intermediaries
• Methodology adapted to target segment
(example : solidarity group lending)
• Diverse legal structures : NGO, NBFI,
Co-op, Banks
• Excellent results : average
reimbursement rates close to 97%
30
31. Examples of MFI
BlueOrchard Clients: 12/2002
Mikrofin Adopem Share
Bosnia Dom. Rep. India
Outstanding portfolio $8.8 $12.9 $8.7
(million)
Portfolio At Risk (> 30 days) 0% 2.7% 0%
Portfolio growth 2002 91.6% 17.6% 56.0%
Portfolio growth 2001 29.7% 33.5% 64.6%
Number of clients 5,622 36,670 109,212
Average loan to clients $1,510 $351 $79
31
33. The Microfinance Industry is
Structuring Itself
• Standardization of financial information
and ratios
• Regular external audits
• Specialized rating agencies
• International networks with technical
assistance
• Specific legislation and supervision from
Superintendents
• Access to private commercial funding
33
34. Microfinance Impacts go Beyond
the Purely Economic Sphere
Family welfare
Financial and Self esteem and
economic impact “empowerment”
Microenterprise
Micro-finance
Financial services to micro-enterprises
34
35. The Philosophy of Sustainable
Development
• No contradiction between profitability
and social impact
• Sustainability of impact is made possible
by profitability
• From a logic of assistance to a logic of
partnership
35
36. The Trend in Socially Responsible
Investments
• We observe a growth in demand for
products :
– Combining financial return and social
impact
– With low correlation to other asset classes
– Targeting growth areas
ØA micro-finance investment fund meets
those expectations
36
37. BlueOrchard Finance
• A link between Capital markets and MFI
• A specialized advisor for Microfinance
investments
37
38. Dexia Micro-Credit Fund
The First Private Commercial Fund for Microfinance
• $30 million Luxembourg-based investment fund
• Specialized lending to best MFIs in the world
• Current clients include top 30 MFIs in 20 countries
• 4.5 years excellent track record
• Cumulated net return in USD of 24% since inception
• Over 85 disbursed loans, not a single default
• Cumulated portfolio of our 30 clients approximate 1
million micro-enterprises
38
39. Dexia Micro-Credit Fund
The Fund Flows
Libor USD
investor +2-3%
IMF
IMF
IMF Libor USD
IMF Dexia
BlueOrchard +4.5-6%
IMF
Buy shares Fund
from the SICAV Issues direct
loans
MFI 1-6% per month
IMF
IMF local currency
IMF
IMF
IMF micro-
29 institutions entrepreneur
18 countries Issues direct IMF
loans IMF
USD 17.5 millions IMF
of current loans IMF
IMF
IMF
IMF
IMF 837’330
IMF
IMF micro-enterprises;
IMF USD 501’657’359
micro-credits
39
40. Dexia Micro-Credit Fund
BlueOrchard Debt USD 5/2003
•DMCF USD 26 MFIs in 17 Countries
•Net Asset Value $18.4 million
•2000 ROI 7.77%
•MFI Loans $13.4 million
•2001 ROI 6.78%
•Average loan $432,700
•2002 ROI 4.10%
•Average maturity 19.1 Months
40
44. DEXIA Micro-Credit Fund
The Technical Details
• Luxembourg SICAV Part 2
• Minimum investment : CHF 15,000 , USD 10,000; EUR
10,000
• Entry fees : 0-4% (decision of distributor)
• No exit fees
• Public / open-ended / Monthly NAV and liquidity
• Microfinance portfolio : Max 80% of total assets
• Net expected return : USD Libor +2%
• No FX risk taken
44
46. DEXIA Micro-Credit Fund
Benchmark against World Global Bond Index
120
DMCF Share Value
115
IO SB WGBI 1+ $ - USD
110
105
100
95
05/00 08/00 11/00 02/01 05/01 08/01 11/01 02/02 05/02 08/02 11/02
46
47. DEXIA Micro-Credit Fund
Benchmark against Emerging Market Bond Index
125
120
115
110
105
DMCF Share Value
100 IO JPM EMBI+ COMPOSITE - USD
95
05/00 08/00 11/00 02/01 05/01 08/01 11/01 02/02 05/02 08/02 11/02
47
48. DEXIA Micro-Credit Fund
The Risk-Return Profile of A New Asset Class
Steady returns Microfinance brings a new
Low credit risk social impact dimension to
Strong resistance to external shocks the money invested
FX risk hedged
Low correlation with other assets
48
49. Meeting Microfinance
Institutions’ Needs
International Capital
Markets
BlueOrchard Finance s.a.
Short Term Debt Long Term Debt Short Term Debt Guarantee Private Equity
Hard Currency Hard Currency Local Currency Local Currency Local Currency
Dexia Micro-Credit Fund w Fund x Fund y Fund z
Fund
Microfinance Institutions
49
50. BlueOrchard MFLO
Project Manager
Investment Bank
Rating Agency
Legal Advisor
Back-office bank
Issue of Bonds Loans
Special Purpose Vehicle
Interest Interest
Rate Rate
Leading MFI
Leading MFI
Senior Note (70%) Leading MFI
Leading MFI
Equity (30%) Leading MFI
Portfolio of Loans
Leading MFI
backs issue of bonds
Leading MFI
Leading MFI
Buy
Leading MFI
Bonds
Leading MFI
Investment
Community
50
51. MFLO Value Added
• To put microfinance on the capital markets
map and to bring in mainstream actors
• To become a new opportunity for efficient
private-public partnership
• To create an attractive solution for MFI
funding
– Large amounts
– Longer maturity
• Additional fine tuning will make participation
to other rounds of securitization attractive to
many MFIs all over the world
51
52. The MFLO - One Major Bottleneck
• To find equity investors willing to earn
6% returns for a 7-year USD investment
in a cutting edge sustainable development
product
52
53. Potential Models for Commercial Bank
Involvement in Microfinance
• Separate MFI subsidiaries
• Acquisition of existing MFIs and
operation of them as separate businesses
• Microfinance integrated into regular
bank operations
53
54. Potential Microfinance
Development Goals
• Establish linkages between MFIs and the
formal financial sector and capital
markets
• Support banks moving into the
microfinance market – demonstration
effect
• Identify and develop financial
technologies that improve risk
management and profitability and
increase efficiency
54
55. History of Microfinance
Commercialization
• 1980s - demonstrated microfinance could
provide large scale outreach profitably
• 1990s - microfinance began to develop as
an industry
• 2000s - objective - to satisfy unmet
demand on a much larger scale, which
will play a role in reducing poverty
55
56. Challenges to Microfinance
Commercialization
• Inappropriate donor subsidies
• Poor regulation and supervision
• Few MFIs mobilize savings
• Limited management capacity in MFIs
• Institutional inefficiencies
• Need for rural and agricultural
methodologies
56
57. Microfinance Dependency on Subsidy
• Donors helped create industry, but
unclear how to support
commercialization without distorting
market mechanisms.
• Availability of grants and soft-loans for
on-lending discourages MFIs from
pursuing commercial sources of capital
57
58. Challenges to MFIs
MFIs need to develop expertise in:
• Risk management
• Management information and internal
control
• Marketing and customer responsiveness
• Human resource development
58
59. Potential Rural Finance Methodologies
• Microfinance has been most successful in
densely populated rural areas
• New approaches include:
– building on local knowledge
– developing rural loan officers
knowledge of agricultural markets
59
60. Myths and Facts of Microfinance
Myth Fact
“Poor people don’t repay Early 80’s – Many MFIs have
loans” better repayment than banks
“The poor can’t pay the Early 90’s – a few MFIs
full cost of microfinance” began covering all their
costs
“MFIs must depend on Mid-90’s – Top MFIs began
donor funding rather than to attract significant
commercial sources” commercial funding
“MFIs cannot be profitable Today – MFIs are striving to
and reach the poorest.” reach these twin objectives
60
61. Evolution of Microfinance
Flexible, financial
services for poor
families
Microfinance
Institutions
Donor-dependent
microenterprise
credit programs
61
62. State of Global Microfinance: 2001
Unserved: 526 million
• 10,000 MFIs reach only
4% of the potential
market.
• Top 5 institutions reach
almost half of that
market
• 1% of MFIs are
financially sustainable. Clients: 24 million
62
63. Increasing the Scale of Microfinance
• Donor money is limited and
unpredictable
• Massive scale will require commercial
fund
– Commercial Funds are only available to
viable institutions
– Reaching large numbers of poor
depends on institutional sustainability
63
64. Potential Future of Microfinance
• Microfinance integrated into
financial system
• Most MFIs regulated
• Increased emphasis on savings
• Diverse institutional models
64
65. What the Industry Needs to
Grow in the Future
• Put clients at the center
• Build institutional
capacity
• Increase scale of
microfinance
• Increase efficiency
• Extend the poverty-
sustainability frontier
65
66. Extending the Frontier: Greater
Sustainability and Poorer Clients
Regular banks
MFI
Sustainability
Most MFIs
Pure Charity
MFI Depth of Outreach
66
