commercial investments in microfinance

Equity Investment in Micro Finance: when

Financieros sin Fronteras. Instituto de empresa, Madrid 4 Feb 2011

Jorge Berezo - Oikocredit

Equity Investment in Micro Finance: when

financial gains drive social improvements

0. Oikocredit

1. Microfinance: then and now

2. Commercial investments in MF2. Commercial investments in MF

3. Challenges

OikocreditOikocredit

Oikocredit: not just another fund

• International credit cooperative society under Dutch law

• Mission: global justice through SRI and enabling access to financial • Mission: global justice through SRI and enabling access to financial

services

• Finances projects in the South with a positive impact in

development

• Not for profit maximization. High social return. Very modest

financial return.

• Founded in 1975. Very solid organization

• Ecumenical origin and spirit

• Leading private investor in microfinance

Investment criteria

The project…

• comes from a cooperative, MFI or SME?• comes from a cooperative, MFI or SME?

• benefits disadvantaged people?

• makes women influential in management or implementation?

• is responsible in terms of the environmental impact?

• seems financially sustainable?

• needs foreign investment?• needs foreign investment?

Financed projects: project partners

• Organizations (not individuals)

• With a mission and a project coherent with our mission

• (Very often) not financed from commercial banks

• In any of the “focus countries” of Oikocredit

• Types of projects:

o Microfinance projects / Microfinance institutions

o Production Cooperatives (agriculture, livestock, manufacturing…)o Production Cooperatives (agriculture, livestock, manufacturing…)

o SMEs

o Fair trade projects

o Others (seldom)

Product diversity

1. Loans in hard currency

2. Loans in local currency

3. Credit lines3. Credit lines

4. Equity investment

5. Guarantees

Loans

• Adjusted interest rate

• From € 50.000

CEDO, Giida Namirembe

• From € 50.000

• Long term (3 to 10 years)

• Collateral according to the project

• Grace period

• Partnership ”walking a 2nd mile”

• Technical assistance

Network in the field

35 offices worldwide to analize projects

31 support associations to channel retail investment (16 countries)

Facts and figures (as per 31/12/2011 preliminary not audited)

863 projects financed outstanding (592 in microfinance)

€ 481 million total capital outstanding

(% outstanding capital)

Social performance

Select the right projects

• Project selection criteria

• Social Performance Indicators

Help financed projects gauge and improve their impact

• People out of Poverty Index (Grameen Foundation),

• Social Performance Indicators (Cerise)

• Client protection principles• Client protection principles

• MF transparency

Monitor our operations

• ESG (environmental, social, governance) indicators

Social performance – data (as per 31/12/2009)

• number of borrowers reached by Oikocredit’s microfinance

partners : 17 million, of which

▪ 1 million approx. is due to Oikocredit’s funds

▪ 85% are women

▪ 53% are rural clients

(based on 68% of the microfinance partners reporting)

▪ More that 2/3 of the supported IMF are small or mid-sized.

• Around 1/3 of the project partners operate only in rural areas

• Committed with the poor

• Credit in rural and urban areas

• Committed with the poor

• Credit in rural and urban areas

What makes Oikocredit different?

• Credit in rural and urban areas

• Credit for production projects

• From the South, for the South

• Local currency

• Under local law

• Credit in rural and urban areas

• Credit for production projects

• From the South, for the South

• Local currency

• Under local law• Under local law

• Long term

• Cooperative, over 35 years experience

• Under local law

• Long term

• Cooperative, over 35 years experience

Oikocredit in SpainOikocredit Euskadi

Viuda de Epalza 6 (Kidenda)

48005 Bilbao

Tel. 94 416 68 56

Oikocredit Catalunya

Bisbe Laguarda, 4

08001 Barcelona

Tel: 93 441 63 06

Oikocredit Sevilla

Avda. de Ramón y Cajal, nº 24, 1a

41005 Sevilla

Tel. 646 360 038Tel. 94 416 68 56

euskadi@oikocredit.org

www.oikocrediteuskadi.org

Tel: 93 441 63 06

catalunya@oikocredit.org

www.oikocredit.cat

Tel. 646 360 038

sevilla@oikocredit.org

www.oikocredit.org

Microfinance: then and nowMicrofinance: then and now

What do we mean by microfinance?

Definition from the Microcredit Summit Campaign 1997

• Programs to extend small loans to the poorest of the poor so as to allow • Programs to extend small loans to the poorest of the poor so as to allow

them to pursue entrepreneurial projects that generate extra income, thus

helping them to better provide for themselves and their families.

Definition from the Microcredit Summit Campaign 2007

• Programs to extend loans for self-employment and other entrepreneurial • Programs to extend loans for self-employment and other entrepreneurial

and financial services (including savings and technical assistance) to very

poor people.

Then Now

Microcredit:

Evolution (1)

Microcredit:

- Group lending

- Microentreprise�

Microcredit:

- Group and individual

- Microentreprise, consumption, housing

Microsavings

Pension funds

Microinsurance

Payment services (remittances, transfers…)

Small scale � Large scale Small scale � Large scale (154 M clients – MSCampaign 31/12/2007)

Target group: the poorest and the

very poor�

Target group: wide (including SMEs, middle

class…)

Then Now

Evolution (2)

RoSCAs + village banks

Credit and saving cooperatives

NGOs�

RoSCAs (federated) + village banks

Credit and saving cooperatives

NGOs

Up-scaled NGOs (4th sector)

For profit

Non-formal institutions (self-

owned, NGOs)�

Non-formal institutions (self-owned, NGOs)

Non-bank financial institutions (regulated)owned, NGOs)

� Non-bank financial institutions (regulated)

Banks

Then Now

Evolution (3)

Hardly operationally sustainable �

Search for sustainability

Many financially sustainable

Some very profitable

Social impact taken for granted � Social impact to be proven

Funding: grants �Funding: grants, reserves, savings,

investment, capital markets…Funding: grants �

Funding: grants, reserves, savings,

investment, capital markets…

Why such a success?

1. Great innovation. Blends features from informal and

formal sectors

From the informal sector From the formal sectorFrom the informal sector From the formal sector

Loans without collateral Trust and institutional stability

Closeness and knowledge of the

client (personal and culturally)

Tendency to efficiency and professionalism in

the operations

Simple and quick procedures Availability of funds

Amount and terms adapted to poor

clients

Interest rates often lower than informal

sector

Source: Gutiérrez-Goiria, J. (2009) Las microfinanzas y el desarrollo. Situación

actual, debates y perspectivas, Cuaderno de trabajo Hegoa, nº49, Bilbao.

clients sector

2. High expectancies. Huge political impulse

Commercial investments in

microfinancemicrofinance

Source of funds (1)

Source: MIX Microfinance World: Microfinance Market Report for Latin America

and the Caribbean 2010

Source of funds (2)

Source: CGAP (2009). Microfinance Funder Survey

Funding landscape (1)

Quoted in: Fondos de inversión microfinanciera: Características clave y

mejores prácticas. Setem 2006

Funding landscape (2)

Source: CGAP Focus Note 44. Foreign Capital Investment in Microfinance.

Balancing Social and Financial Returns (based on a 2006 Survey)

MIV: a growing phenomenon

Source: Glisovic-Mezieres and Reille (2010) and MicroRate (2010) quoted in

An Empirical Analysis on the Efficiency of the Microfinance Investment

Market. Dec 2010, Inoue, T. & Hamori, S.

MIV returns

Source: Glisovic-Mezieres and Reille (2010) Microfinance Investors Adjust

Strategy in Tougher Market Conditions. CGAP Brief. October 2010

MIV landscape

Source: Glisovic-Mezieres and Reille (2010) Microfinance Investors Adjust

Strategy in Tougher Market Conditions. CGAP Brief. October 2010

Source: Fondos de Source: Fondos de

inversión microfinanciera:

Características clave y

mejores prácticas. Setem

2006

1. Increasing commercial investors

2. From own management of the portfolio to structured funds

MIV (+ institutional investors’) evolution

3. Increasing competition

- Inflow

- Outflow

- Talent attraction

4. Market not mature

5. Latest developments / sophistication:

• Of MFIs: securitization, bond emissions, OTC trade, go listed, IPOs…• Of MFIs: securitization, bond emissions, OTC trade, go listed, IPOs…

• Of MIVs: structured investment vehicles, funds of funds,

securitization into structured funds

• Of markets: MF index, investment managers, IMF and MIV ratings…

6. Lack of sector standards

Sophistication

Equity investments

1. DFI and Social investors were the first investors in equity with

the aim of helping young and promising MFIs develop. It

continues.continues.

2. Commercial investors attracted by high ROE

3. Banks buying MFIs to enter BoP business

ChallengesChallenges

Microfinance at stake

Challenges for MIVs and institutional investors

What do you think?

Challenges for MIVs and institutional investors

Risks from growth of MIVs

The industry reacts

1. Range of Services. We will actively support retail providers to innovate and expand the range of

financial services available to low income people in order to help them reduce their vulnerability,

build assets, manage cash-flow, and increase incomes.

The industry reacts

2. Client Protection. We believe that client protection is crucial for low income clients. Therefore

we will integrate client protection in our investment policies and practices.

3. Fair treatment. We will treat our investees fairly with appropriate financing that meets demand,

clear and balanced contracts, and fair processes for resolving disputes.

4. Responsible Investment. We will include environmental, social and corporate governance (ESG)

issues in our investment policies and reporting.

5. Transparency. We will actively promote transparency in all aspects. 5. Transparency. We will actively promote transparency in all aspects.

6. Balanced Returns. We will strive for a balanced long-term social and financial risk-adjusted

return that recognizes the interests of clients, retail providers, and our investors.

7. Standards. We will collaborate to set harmonised investor standards that support the further

development of inclusive finance.

Smart Campaign – Client protection principles

1. Avoidance of Over-Indebtedness.

The industry reacts

1. Avoidance of Over-Indebtedness.

2. Transparent and Responsible Pricing.

3. Appropriate Collections Practices.

4. Ethical Staff Behaviour.

5. Mechanisms for Redress of Grievances.

6. Privacy of Client Data.

JORGE BEREZO

Oikocredit Euskadi

THANK YOU!!!!!

Viuda de Epalza 6 (Kidenda)

48005 Bilbao

Tel. 94 416 68 56

jberezo@oikocredit.org

www.oikocrediteuskadi.org