Annual report on LuxFLAG labelled MIVs

Transcription

1 Annual report on LuxFLAG labelled MIVs IV Edition July 2012

2 About LuxFLAG - Luxembourg Fund Labelling Agency LuxFLAG is an independent and neutral, non-for-profit association created in Luxembourg in LuxFLAG supports the financing of sustainable development by providing clarity for investors through awarding Labels. Its objective is to reassure investors that the labelled MIV/EIV actually invests, directly or indirectly, in the microfinance/environment sector. The MIV/EIV may be domiciled in any jurisdiction that is subject to a level of national supervision equivalent to that available in European Union countries. LuxFLAG - Luxembourg Fund Labelling Agency 12, Rue Erasme, L-1468 Luxembourg B.P. 206, L-2010 Luxembourg Tel: Fax: info@luxflag.org Website: 2

3 Preface LuxFLAG labelled MIVs Performance Report has now reached its fourth edition. During the past years we have witnessed several changes in the Microfinance industry. This period has been characterised by substantial growth in terms of volume and outreach, turmoil due to the public relations issues and more recently a dose of optimism towards the future. In this context MIVs have played an important role in terms of standardising their operational processes as well as efficiently communicating on their business. On the other side LuxFLAG has played an important role in building confidence among the investor community by promoting transparency through its LuxFLAG Microfinance Label. Its main objective is to reassure investors that the labelled MIVs invest directly or indirectly, in the Microfinance sector. The LuxFLAG Microfinance Label also gives credibility to the MIVs as it has been annually scrutinised by a panel of independent experts against internationally recognised standards in the Microfinance sector, and that it demonstrates an actual commitment to the double bottom line approach by providing financial as well as social returns from the investments. Through this report, we have tried to encompass the current issues related to the Microfinance industry, in specific to the 24 LuxFLAG labelled MIVs. 3

4 Table of contents page I. Introduction 1. Microfinance 5 2. Evolution of Microfinance industry 6 3. Microfinance Investment Vehicles 6 4. Microfinance crisis in Andhra Pradesh 8 II. Performance of LuxFLAG Labelled MIVs 1. Financial section 1.1 Introduction Regional distribution Total Assets and Microfinance Portfolio Liquidity Foreign Exchange Risk Portfolio at Risk (PAR) Net Asset Value (NAV) Conclusion Social section 2.1 Importance of Social Performance from the investors perspective Industry initiatives MFIs Social Performance Initiatives pursued by LuxFLAG 27 III. Conclusion 28 IV. Bibliography 31 V. Information sources 33 VI. Acronyms 34 VII. Glossary 35 VIII. Appendices 1. Eligibility criteria Luminis press release Funds cards LuxFAG labelled MIVs overview 63 4

5 I. Introduction 1. Microfinance Conceived in the initial years as a popular instrument to assist poor people in developing countries by providing financial services, the Microfinance industry has seen exponential growth unprecedented for a sector which was seen as a mere philanthropic activity only a couple of decades ago. The Microfinance sector now provides a wide range of financial services to millions of people, in particular in the developing countries. It has been creating a measurable social impact by helping to democratise access to financial services to poor people in developing countries, resulting in a promising step towards the alleviation from poverty. By offering a stable financial return with a very low correlation to financial markets, in recent years the Microfinance industry has positioned itself as an alternative asset class for commercial investors. As of December 2011, the Microfinance Information exchange (MIX) reports two thousand Microfinance Institutions (MFIs) with more than 92 m of borrowers and 80 m savers, with a total asset volume of approximately 70 bn USD. These numbers are growing by 20% per year, even more in some countries. The Microfinance industry is mainly financed by the commercial Microfinance Investment Vehicles (MIVs), International Development Finance Institutions (DFIs) and local commercial banks in several countries. Nevertheless, in recent years, the Microfinance sector faced severe criticisms due to its commercialisation, considerably high financial returns, suspicious lending practices, weak corporate governance and a possible mission drift from the double bottom line approach in investments. This being said, the Microfinance industry has reached to a turning point where the action plan for the future of microfinance business is on a higher priority than tackling the issue of the impact of the global financial crisis on the Microfinance industry. Microfinance in figures Total population living under 2 USD/day: 2.7 bn* Total estimated potential customers: 1.5 bn* Total estimated Microfinance loans outstanding: 65 USD bn* Estimated funding gap: 235 USD bn* 5

6 Total number of Microfinance Institutions (MFIs): approximately 4500 Total number of Microfinance Investment Vehicles (MIVs): approximately 125 *source: IAMFI (2011) 2. Evolution of Microfinance If on the one side the demand for Microcredit is growing more and more, on the other side the range of other financial services provided by the Microfinance are increasing, in order to create a more customised approach. It is possible to group these services into two main categories: financial (microcredit, microinsurance, money transfers, savings, remittances, etc.); non-financial (skill building trainings, technical assistance for small and medium enterprises, counselling, education, health services, etc.). It could be interesting to focus in particular on microinsurance and remittances. Microinsurance is a quite diversified sector itself. It includes: life insurance, health insurance, crop insurance, livestock insurance, Islamic insurance (takaful), etc. which are all in a way, need for an micro-entrepreneur. Remittances represent a more recent segment for Microfinance actors. Lately, some MFIs have entered into arrangements with companies specialised in remittances in order to facilitate the remittance payments in remote areas through their sale points. Remittances can be an important source of income for poor households, especially for the most vulnerable ones. While international remittances and domestic money transfer services are generally accessible to urban clients, they are increasingly expanding into rural areas. There are still important issues regarding remittances sent to rural areas, such as the cost, safety and speed of transfer. Nonetheless they may offer to MFIs a mean to expand their services, source of income and outreach. 3. Microfinance Investment Vehicles Microfinance Investment Vehicles (MIVs) appeared in the 1990s and since then, by making the sector accessible to private investors, they have managed to substantially increase the available funds. However, amounts are still limited and 6

7 financial exclusion consequently remains high: in developing countries a more democratic access to financial services is still a long way off. Microfinance Investment Vehicles (MIVs) invest both public and private investors money in Microfinance Institutions (MFIs) or in other MIVs. The variety of missions, structures and investment strategies of MIVs (debt, equity, guarantees) grants a wide range of investment options, allowing investors to choose depending on their profile and targets. Moreover, the development of MIVs and their increasing specialisation are attracting an increasing number of institutional investors. Since the beginning, MIVs has succeeded to achieve good financial returns due to the stability of interest rates for loans to MFIs. The repayment rate is close to 100% also indicates the funds have almost no investment losses. Finally, the absence of a secondary market ensures that the value of the debt, recorded at its historical cost, remains stable. These factors make it clear why the SMX (Symbiotics Microfinance index, used to track Microfinance debt) is stable, in particular in 2008, while in the same period the JP Morgan EMBI (Emerging Markets Bond Index, tracing the yields of debt instruments exchanged on emerging markets) fell by 11%. Source: Syminvest Source: ForexBlog On the other hand, the small decline in yields during the beginning of 2009 shows that MIVs performance was affected by the financial crisis. In the beginning of 2009 the high volatility in exchange rates increased foreign exchange hedging costs and generated losses for the MIVs which had invested in local currencies. At the same time, there was a fall in demand for financing from MFIs which had anticipated a 7

8 slowdown in their activities. The resulting rise in liquidities brought down MIVs yields. The following chart shows the trend of MFIs Portfolio yields. Source: Syminvest website 4. Microfinance crisis in Andhra Pradesh The Microfinance sector in Andhra Pradesh (a state in India) witnessed series of unfortunate events in fall After the news of number of micro borrowers committing suicide due to over indebtedness and bad recovery mechanism used by the field staff of MFIs, the local government in Andhra Pradesh introduced stringent regulations for the microfinance sector. This resulted in immediate reaction by commercial banks in turning off the funding tap for MFIs and by micro borrowers by abandoning the repayments to MFIs. Local commercial banks are one of the major sources of funding for MFIs in India. The Reserve Bank (Central Bank) requires that public and private-sector banks provide as much as 40% of their net credit to so-called priority sectors, which include micro-enterprises and excluded sections of society. Of that, 18% must go to agricultural sectors. This has been hard for banks to deliver on, but pushing their own loans through microfinance institutions could help them reach those targets. This approach of local commercial banks encouraged MFIs to exponential growths leading to over indebtedness in several regions. 8

9 Subsequent to the Andhra Pradesh ordinance, in January 2011 the Reserve Bank of India (RBI) - Malegam Committee came out with a recommendation list which gave a positive direction to resolve this issue. In May 2011, RBI issued the much awaited guidelines 1 - based on the Malegam Committee s recommendations - on the Microfinance sector. The guidelines have come positively in favour of MFIs and have given the much needed legitimacy to the MFI sector. An analysis of the Indian Microfinance industry was conducted by MIX (2011), which presents data on over 90 Indian MFIs in order to understand the impact of the crisis on the whole sector. The overall result is that there was portfolio quality deterioration in the Microfinance market through March 2011, and a decline for a smaller group of institutions reporting data through June Moreover, MIX forecasts that growth in the region will remain slow or in decline for some time. The impact of the Andhra crisis is clearly evident as the positive growth, experienced until March 2011 in states outside AP, turns into a decline during the following quarter. The following chart shows the LuxFLAG labelled MIVs which do invest in India. MIV Amount invested As of Azure Global Microfinance Fund (FoF) Indirectly investing Dexia Micro Credit Fund Dec 2011 responsability Global Microfinance Dec 2011 responsability Microfinance Leaders Jun 2011 responsability Mikrofinanz Fonds Jun 2011 Rural Impulse Fund Dec 2011 Rural Impulse Fund II Dec 2011 Triodos Microfinance Fund Jun 2011 Note: all figures are expressed in USD Source: LuxFLAG applications + MIX Market 1 All bank loans to MFIs would be treated as priority sector lending, if the requirements to be considered qualifying assets are fulfilled (household income limit, loan amount cap, total indebtedness, loan term, repayment frequency, interest rate cap, margin cap, etc.). 9

10 II. Performance of LuxFLAG labelled MIVs 1. Financial section 1.1 Introduction The following section of the survey focuses more on LuxFLAG labelled MIVs. Thus we analyse a total of 24 MIVs through the period December December 2011, considering figures at six-month intervals in order to offer a more detailed insight. In particular we report the evolution of Total Assets, Microfinance Portfolio, Liquidity and Net Asset Value. It is important to notice that, given the lack of standardisation in MIV reporting, cross comparison of fund figures are difficult. Hence we limit our analysis to the trend of each fund, without cross evaluation. 1.2 Regional distribution As it is evident from the following chart, continuing the trend from previous years Eastern Europe & Central Asia (40%), and Latin America & Caribbean (35%) regions cover significant part of the Microfinance Portfolio of MIVs. Compared to our past year survey, there has been no substantial change in the distribution: Europe & Central Asia (38%), Latin America & Caribbean (35%), East Asia & Pacific (8%), South Asia (7%), North America (excluding Mexico) & Others (6%), Sub-Saharan Africa (5%), Middle East & North Africa (1%). 2% 5% 9% Eastern Europe & Central Asia 9% 40% Latin America & Caribbean East Asia & Pacific South Asia Middle East and North Africa 35% Sub Saharan Africa Source: Syminvest website (data as of 2011) 10

11 Whereas, the MFIs regional breakdown is shown in the following chart. 2% 2% 8% 6% 42% Eastern Europe & Central Asia Latin America & Caribbean East Asia & Pacific Sub Saharan Africa 40% South Asia Middle East and North Africa Source: Syminvest website (chart as of 2011) 1.3 Total Assets and Microfinance Portfolio The following chart shows the growth trends in amount of Total Assets and Microfinance Portfolio for the MIVs domiciled in Luxembourg. As we can observe, there are some turning points. The rapid growth of Microfinance investment seen in the past years took a hit in 2008 as the financial crisis started ramping up and investors became cautious, questioning the resilience of Microfinance against the global financial market; in 2009 there was a new negative trend, that can be explained by two main factors: MIVs had to build loan loss provisions to cover potential defaults in distressed markets, and currency volatility increased MIVs costs of hedging foreign exchange risk; in 2010 another negative event left its mark on the Microfinance sector: the crisis in Andhra Pradesh (India). Nonetheless, according to CGAP, this negative tendency has been counteracted thanks to new investment approaches, such as expanding to new markets (in particular Africa and Asia), funding in local currency, taking equity positions, reaching beyond the top tier of MFIs (MicroCapital Monitor, 2001) and improved risk management processes. Indeed the chart shows a quite stable growth from 2011 onwards. 11

12 Source: Syminvest website The two following tables depict the evolution of Total Asset and Microfinance Portfolio of LuxFLAG labelled MIVs for the period Dec Jun Dec Jun Dec Jun Dec MIV Access Africa Fund 2,8 6,7 Dexia Micro Credit Fund 428,6 510,7 524,4 481,3 528,5 516,1 394,4 Dual Return - Vision Microfinance 113,7 123,3 119,4 99,3 132,3 119,7 113,1 Dual Return Fund Vision Microfinance Local Currency 16,0 30,1 32,2 Etimos Fund 4,8 European Fund for Southeast Europe 790,5 870,8 912,0 748,2 911, , ,7 FEFISOL 8,0 Finethic Microfinance 51,3 67,0 68,1 68,0 KCD Mikrofinanzfonds I 27,9 26,6 47,3 51,0 KCD Mikrofinanzfonds II 15,6 17,9 22,0 22,3 Luxembourg Microfinance and Development Fund 7,8 8,0 9,0 11,7 12,6 Microfinance Enhancement Facility 56,0 123,6 131,1 134,9 163,3 222,0 Regional MSME Investment Fund 22,4 26,1 60,8 responsability Global Microfinance Fund 377,9 423,3 489,4 469,2 498,3 532,9 542,0 responsability Microfinance Leaders 200,8 176,2 166,6 145,8 170,8 158,7 147,1 responsability Mikrofinanz Fonds 74,5 148,6 146,7 141,1 136,6 167,9 165,5 Rural Impulse Fund 33,4 34,0 36,2 38,0 38,3 40,2 Rural Impulse Fund II 19,4 53,3 Selectum Microfinance 36,3 46,2 Triodos Microfinance Fund 36,9 52,7 56,8 82,4 82,

13 Wallberg Global Microfinance Fund 12,0 20,7 40,6 49,6 52,1 40,9 33,4 Sep Mar Sept Mar Sept Mar Advans 13,1 13,1 22,4 23,5 31,30 33,3 Azure Global Microfinance Fund Sept ,1(Oct) responsability Financial Inclusion 42,0 Note: all figures are expressed in USD Source: LuxFLAG applications + Syminvest MIV Dec Jun Dec Jun Dec Jun Dec Access Africa Fund 2,5 5,3 Dexia Micro Credit Fund 352,9 367,7 384,5 375,4 439,0 464,5 355,5 Dual Return - Vision Microfinance 82,4 98,9 101,4 84,1 99,0 86,3 93,7 Dual Return Fund Vision Microfinance Local Currency 9,6 23,2 25,0 Etimos Fund 4,5 European Fund for Southeast Europe 403,5 435,7 429,8 336,2 484,3 455,8 568,2 FEFISOL 4,4 Finethic Microfinance 61,3 62,3 KCD Mikrofinanzfonds I 21,8 42,9 46,7 KCD Mikrofinanzfonds II 15,6 18,1 19,6 Luxembourg Microfinance and Development Fund 1,2 3,1 5,5 5,7 8,7 Microfinance Enhancement Facility 30,3 87,5 85,0 90,2 130,1 Regional MSME Investment Fund 16,2 22,6 43,4 responsability Global Microfinance Fund 285,9 317,8 338,5 349,3 385,3 429,8 436,1 responsability Microfinance Leaders 157,9 149,7 138,3 115,5 131,9 134,8 121,5 responsability Mikrofinanz Fonds 62,1 89,6 102,9 106,8 123,3 124,3 122,1 Rural Impulse Fund 32,9 32,7 33,8 34,2 33,3 38,8 Rural Impulse Fund II 13 46,2 Selectum Microfinance 42,0 Triodos Microfinance Fund 12,5 31,7 51,2 67,9 83,7 92,1 Wallberg Global Microfinance Fund 10,4 17,5 29,8 39,4 44,6 32,6 31,1 Sep Mar Sept Mar Sept Mar Advans 8,9 9,6 13,9 19,4 24,4 29,3 Azure Global Microfinance Fund 2,7(Oct) responsability Financial Inclusion 27,7 Note: all figures are expressed in USD Source: LuxFLAG applications + Syminvest Sept

14 1.4 Liquidity Investors earlier concerns with liquidity and funding have eased with the passing of the crisis 2. Ranked as the second biggest risk in 2010, liquidity risk appears at the 16 th rank in 2011 according to the Microfinance Banana Skins Two years ago, the main threat posed by excessive liquidity was that it could push some MIVs into relaxing lending standards. Fortunately, more MIVs are now increasingly demanding with the Social Performance of MFIs. A company's liquidity is its ability to meet its near-term obligations, and it is a major benchmark of financial health. Liquidity can be measured through several ratios, the most used ones are current and quick ratio. The current ratio is the most commonly used. It estimates a company's ability to meet its short-term liabilities with its shortterm assets. A current ratio greater than or equal to one signifies that current assets should be able to satisfy near-term obligations. A current ratio of less than one means that the firm might have liquidity issues. The quick ratio is a more valid instrument to test liquidity. It eliminates certain current assets such as inventory and prepaid expenses that may be more difficult to convert into cash. Like the current ratio, having a quick ratio above one means that a company should have no or little problem with liquidity. The higher the ratio, the more liquid it is, and the better able the company will be to ride out any downturn in its business. It is, nonetheless, important to underline that excess of liquidity can be tricky as well. Liquidity is no longer a concern in the Microfinance industry as it used to be in the wake of the financial crisis. However, even today, availability of liquidity depends on region and maturity of the financial institutions. As well, many markets were flooded with high liquidity and availability of funding which some experts say led into over indebted MFIs resulting in over indebted clients. In general current and quick (excluding share capital and retained earnings) ratios are helpful. 2 CSFI (2011). Microfinance Banana Skins. The CSFI Survey of Microfinance Risk. 14

15 Additionally, in LuxFLAG labelled MIVs since 2008 the cash buffer is stable - if not reduced - over the years. It will also justify the growth in number of investees or volume of investments. Liquidity risk is diminishing. There is enough liquidity in the market after the crisis (capital generating from several sources), not all MFIs have access to this liquidity, but just the most efficient and mature ones. In several jurisdictions, the regulatory requirements of cash reserves at the central bank result in reducing the percentage of Microfinance Portfolio with respect to Total Assets. As described in the 2010 report: liquidity constraints increased drastically in 2009 due to the effects of the global financial and economic crises on the Microfinance environment. Indeed, small and medium MFIs were struggling a lot with liquidity issues, especially those which didn t mobilize savings; in 2010 liquidity levels in the Microfinance industry reached new highs. Indeed most funds increased their provisions to protect themselves against a potential liquidity risk. Even though this measure was taken on a temporary basis, it had a real impact on the whole industry. In 2011 the proportion of liquidity in Total Assets decreases thanks to better forecasts on the future economic context. 15

16 1.5 Foreign Exchange Risk Within the frame of financial risks, particular attention is given to exchange rate fluctuations and to issues dealing with measurement and analysis of qualitative as well as quantitative aspects of foreign exchange risks affecting nonfinancial firms and chiefly those extensively involved in international activities. The focus then shifts to the assessment of foreign currency risk exposure by the firm as well as to managing foreign exchange risks and to the instruments and techniques involved 3. As there is substantial demand from the market, several Microfinance Investment Vehicles (MIVs) have started offering loans to MFIs in local currencies in many jurisdictions. This results in creating the so-called foreign exchange risk for them, defined as the potential loss - or gain - due to exchange rate variations between two currencies. If not properly managed, this risk can result in losses. In addition to the risk of rate changing, foreign exchange risk includes also the danger that carrying the currency transactions becomes unfeasible because of market disruptions or government interventions. To overcome the foreign exchange risks, hedging options are available in the market, however often as an expensive option with limited choice. It appears to be consensus that foreign exchange risk represents a potential threat to the sustainability of MIVs. Experiences with foreign exchange crises have highlighted the vulnerability and potential for disruption in operations in un-hedged local currency. Foreign exchange risk is an issue that needs to be addressed in order to guarantee the stability of the Microfinance sector. 3 Mauri, A. & Baicu, C.G. (2007). General Remarks on the Assessment of Foreign Exchange Risk Exposure of Firms. Analele Universităţii Spiru Haret, Seria Economie (7). 16

17 1.6 Portfolio at Risk (PAR) Portfolio at Risk is the most important and popular performance indicator widely used by Microfinance practitioners. It is The value of all loans outstanding that have one or more instalments of principal past due more than a certain number of days. This item includes the entire unpaid principal balance, including both past-due and future instalments, but not accrued interest. It also does not include loans that have been restructured or rescheduled. Portfolio at Risk is usually divided into categories according to the amount of time passed since the first missing principle 4. PAR > 30 is a the most commonly used indicator. As we can see from the chart below, PAR 30 (the portion of the portfolio whose payments are more than 30 days past due - note that PAR 30 above 5 or 10% is a sign of trouble in Microfinance) does remain at acceptable levels, and it is most of the times well below that of classic banks. This means that MFIs remain selfsufficient from an operational and financial point of view and their profitability remains positive. Thanks to amelioration in governance systems, they have been able to face the crisis and adapt their activities. They are tightening their loan policies, focusing on less risky products and reviewing their business plan in order to optimise the management of their liquidities. 4 CGAP (2003). Microfinance Consensus Guidelines. Definitions of Selected Financial Terms, Ratios, and Adjustments for Microfinance. 17

18 Source: Syminvest website (February 2012) 1.7 Net Asset Value (NAV) The Net Asset Value (NAV) correspond to the per-share amount of the fund, calculated by dividing the total value of all the securities in its portfolio, less any liabilities, by the number of fund shares outstanding. In the table hereafter we show the NAV evolution of LuxFLAG labelled MIVs. Funds may have several share classes, depending on the number of sub-funds, minimum investment amount and currency. MIV Access Africa Fund Sub-fund Dec 2008 Jun 2009 Dec 2009 Jun 2010 Dec 2010 Jun 2011 Dec 2011 Advans Azure Global Microfinance Fund A ($) B (CHF) 983 C ( ) Dexia Micro Credit Fund CHF Cap (CHF) EUR Cap ( ) USD Cap ($) Dual Return - Vision Microfinance A EUR Dis ( ) B EUR Dis ( ) I CHF Cap ( ) I EUR Cap ( ) I USD Cap ($) 100 P CHF Cap P EUR Cap ( ) P USD Cap ($) Dual Return Fund Vision A D ( ) 97 Microfinance Local Currency B D ( ) I $C ($) I C ( ) P C ( ) P CHF Cap (CHF) P EUR Cap ( ) Etimos Fund ( ) European Fund for Southeast Europe Class A ( ) Class B ( ) Class C ( ) 100,000 25,000 vv. 100,000 25,000 vv. FEFISOL ( ) 93 Finethic Microfinance C1 ($) H3 (CHF) S1 ($) KCD Mikrofinanzfonds I ( )

19 KCD Mikrofinanzfonds II ($) Luxembourg Microfinance and Class A ( ) Development Fund Class B ( ) Class C ( ) Microfinance Enhancement Facility ($) Regional MSME Investment Fund A Dis B Dis C Dis responsability Financial Inclusion responsability Global Microfinance Fund CHF Cap (CHF) EUR Cap ( ) USD Cap ($) responsability Microfinance Leaders I USD C ($) S CHF C (CHF) S EUR C ( ) responsability Mikrofinanz Fonds A Dis ( ) Rural Impulse Fund ($) Rural Impulse Fund II A Dis ( ) B Dis ( ) Selectum Microfinance B1 ( ) B2 ( ) Triodos Microfinance Fund B Cap ( ) B Dis ( ) I Cap ( ) I Dis ( ) KB Cap ( ) KB Dis (GBP) KI Cap (GBP) KI Dis (GBP) KR Cap (GBP) KR Dis (GBP) R Cap ( ) R Dis ( ) Wallberg Global Microfinance Fund I Dis ( ) P Cap ( ) Source: LuxFLAG applications + Finesti 19

20 1.8 Conclusion This analysis shows some clear elements: Eastern Europe & Central Asia together with Latin America & Caribbean regions cover a significant part of the Microfinance Portfolio of MIVs; the negative tendency experienced in particular in 2010 has been counteracted thanks to new investment approaches, funding in local currency, taking equity positions, reaching beyond the top tier of MFIs, and improved risk management processes; liquidity is no longer a concern in Microfinance industry; foreign exchange risk is an issue that needs to be addressed in order to guarantee the stability of the Microfinance sector; MFIs remain self-sufficient from an operational and financial point of view and their profitability remains positive (as shown by PAR 30); NAV evolution for LuXFLAG labelled MIVs is quite constant over time. 20

21 2. Social section 2.1 Importance of Social Performance from the investors perspective While Microfinance Institutions (MFIs) continue their crusade for more accessible and affordable financing, little information is freely available to the public regarding the due diligence required when evaluating Microfinance Investment Vehicles (MIVs). The main challenge in this sense is to design a common model allowing all types of investors (institutional, private, other MIVs, etc.) to standardise the level of due diligence, thus being able to make informed investment decisions in meeting both social and financial goals while achieving rational and sustainable industry growth. When examining an MIV from an investor s perspective, the main issues are: management and ownership structure investment strategy, philosophy and process risk management process and controls operations investment returns structural issues Thus, the first investigation has to do with the people who are involved in the MIV. Essentially, this means looking at all the key actors: general partners, owners (with their backing and reputation), fund managers (with their experience in the sector and track record within the asset class), investment committee members. Afterwards, it is important to consider the investment strategy, philosophy and process in order to assess whether the MIV s due diligence process is solid and extensive. In particular, the things which matter are the portfolio (structure, management and goals), the geographic diversification and the due diligence process - as mentioned above. As well, risk management processes and controls, credit evaluation process, country risk, regulatory risk, Foreign Exchange Risk management and liquidity management are all of fundamental importance. Moreover, it is substantial to look at the operations of an MIV, at the kind of back office support it has, at the accounting and reporting procedures, at who is 21

22 responsible for valuing the portfolio, by what method they are valuing the portfolio, the regularity of reports sent to investors (and their contents). Doubtlessly, potential investors consider returns, the historical performance of the MIV and the robustness of the return model behind the fund. It is important to underline that they do not take return forecasts at face value, but at the fair value. Of course, there are also structural issues that come up with an MIV: namely conflicts of interest, fee structures and other related aspects. 2.2 Industry initiatives There are several initiatives encouraging responsible practices in Microfinance. The main ones can be listed as it follows. Smart Campaign Client Protection Principles: appropriate product design and delivery, prevention of over-indebtedness, transparency, responsible pricing, fair and respectful treatment of clients, privacy of client data, mechanisms for complaint resolution Social Performance Task Force: engaged with microfinance stakeholders to develop, disseminate and promote standards and good practices for social performance management and reporting GIIN Impact Reporting and Investment Standards: it developed a standard set of performance measures for describing social and environmental performance that facilitates comparisons of impact data across investments. Principles for Investors in Inclusive Finance: to ensure that financial access is provided in a healthy and responsible manner (range of services, client protection, fair treatment, responsible investment, transparency, balanced returns, standards) CERISE Social Performance Indicator: to target the poor and the excluded, adapt services and products to the target clientele, improving clients social and political capital, maximizing the MFI s social responsibility This kind of initiatives also makes it possible to implement rating systems which assess the social performance of MFIs. It is, therefore, possible to make an investment choice based on social criteria as well. 22

23 In this context, it is worth to underline that the majority of LuxFLAG labelled MIVs have developed their own Due Diligence Tools, based on the recommendations provided by the initiatives mentioned above. The most interesting ones are listed here below. Access Africa Fund: CARE'S Consumer Protection Code of Conduct in Microfinance, meant to protect the rights of clients and partners, ensuring that they are treated with dignity and respect, and that they are provided with the best quality products and services. The principles are: to promote empowerment, to work with partners, to ensure accountability and promote responsibility, to address discrimination, to promote the nonviolent resolution of conflicts, to seek sustainable results. Dexia Micro-Credit Fund: SPIRIT (Social Performance, Impact Reporting & Intelligence Tool). It differentiates between SP and Social Impact, and SP management at the MIV and MFI level. It measures MFIs Social Performance along 5 dimensions (look at the box below). Using the information collected through it, the staff also conducts some econometric analysis to explore the relationship between financial and social performance. Dual Return - Vision Microfinance (both funds): Symbiotics MFI Social Responsibility Report. It shows the extent to which an MFI contributes to sustainable socio-economic development and acts responsibly towards all its various stakeholders. It considers 7 dimensions (social governance, labour climate, financial inclusion, client protection, product quality, community engagement, environmental policy). Finethic Microfinance: Symbiotics MFI Social Responsibility Report (see above). Fonds Européen de Financement Solidaire: Social and Environmental Management System (SEMS), which includes 4 approaches (transparent reporting to governance bodies and to microfinance networks, and being signatory to leading microfinance consumer protection and S&E initiatives; monitoring the company s strategic objectives; target entities S&E risk assessment; target entities S&E monitoring). Microfinance Enhancement Facility: SPIRIT (see above). 23

24 Regional MSME Investment Fund for Sub-Saharan Africa: Symbiotics MFI Social Responsibility Report (see above). responsability (all funds): responsability Development Effectiveness Rating (rader), enabling the development-related aspects of their activities to be evaluated, monitored and managed at the portfolio level. It takes into account 5 dimensions (empowerment, efficiency, financial inclusion, poverty and outreach). Rural Impulse Fund (both funds): Incofin s ECHOS, a methodology not depending on the input of third parties (such as the MFI itself), since applied directly via an investment officer. Triodos Microfinance Fund: Sustainability Management System to apply a Triple Bottom Line approach (people, planet and profit). It considers: number of clients with loans or savings, average loan amount, percentage of female clients and percentage of rural clients. Wallberg Global Microfinance Fund: Symbiotics MFI Social Responsibility Report (see above). Dexia Micro-Credit Fund s social scorecard 24

25 All of this represents a priceless contribution to the development of Microfinance as a socially responsible asset that judiciously combines financial and social objectives. Social Performance matrix 25

26 2.3 MFIs Social Performance Social performance can be defined as the way in which the social objectives of an institution are put into practice, following commonly-shared social values. Especially in Microfinance, the social values concern the process of enhancing the lives of the clients and their families, as well broadening the spectrum of opportunities for communities through financial services. To create these values, the social objectives of a Microfinance Institution (MFI) should incorporate: offering financial services to an increasing number of traditionally-nonmarketable people in an on-going and sustainable way, both by broadening and by deepening outreach; bettering the quality and adequacy of these services in order to target clients through the systematic assessment of their specific needs; creating benefits for microfinance clients, their families and communities that are related to social capital and social links, assets, reduced vulnerability, income, access to services and the fulfilment of basic needs; ensuring the social responsibility of the MFI towards its employees, clients and the community it serves. Social Performance is not simply focusing on the estimation of objectives and outcomes, but also - and mainly - on the actions and corrective measures undertaken by an MFI to generate such outcomes. Social Performance concerns the extent of their success in meeting these goals, but it cannot only concentrate on the ultimate result: it also provides a framework to analyse the process by which social objectives are achieved. The aim is to state if the institution has the necessary tools to accomplish its mission, by giving a constant close look to the improvements made in that direction and seizing how to use the information collected in order to take a step forward in the activities. There is a wide range of methods that can be used to address various Social Performance issues. They differ from each other because of the kind of information they provide. The main categories are: 26

27 quantitative information on individuals, generally obtained via surveys. These produce data points to be analysed using a statistical approach, in order to assess the outreach and the impact performance of the activity; qualitative information on individuals, generally extracted via in-depth interviews or case studies. Such techniques generate descriptive information, that offers an accurate overview about the way clients use the services and how different dimensions of impact may be occurring; information on groups, generally collected via Participatory Rapid Appraisal (involving participants to generate information, but not to analyse and use it) or Participatory Learning and Action (meant to expand skills and ownership among participants and increase their ability of planning, implementing, monitoring and evaluating their own initiatives). 2.4 Initiatives pursued by LuxFLAG In this context, LuxFLAG would like to emphasise the importance of monitoring the social impact from Microfinance investments. It is important to consider the social impact on clients life on two levels: first at the level of the micro entrepreneur s business and second at the level of the clients personal well-being and that of his family. LuxFLAG believes that the prime objective of Microfinance programmes should be to improve the lives of the rural poor by facilitating sustainable access to a variety of financial services (e.g. credit, savings, insurance, remittances). In this framework, assessing the social performance of Microfinance programmes is a key priority for LuxFLAG. With this idea in mind, LuxFLAG integrated a social criterion to its Microfinance Label eligibility criteria. The objective is to be sure that LuxFLAG labelled MIVs pursue a double bottom line approach by achieving both financial as well as social returns. Moreover LuxFLAG - together with the US based MFI rating agency MicroRate - launched Luminis in May It is a web-based analytical service that provides professional investors and researchers with the necessary tools to identify, assess and monitor MIVs that meet their individual requirements. The vision of Luminis is to promote the flow of funds from capital markets to Microfinance by increasing 27

28 transparency and growth in the global Microfinance community. Nowadays Luminis is perfectly operating, providing access to more than 80 Microfinance fund profiles, making side-by-side comparisons of key fund data, and offering a preview of PRSM fund profiles on Performance, Risk, Social and Management. Subscribers can benefit from additional services. To learn more about Luminis, visit or contact luminis@microrate.com. III. Conclusion Even though the financial and economic crisis left its sign worldwide, in 2011 the total assets of the 10 largest MIVs increased, reaching 4 USD bn (showing a growth rate of 7.2%). This figure is encouraging if compared to the 4.1% of 2010, but it is still below pre-crisis levels (31% in 2008 and 23% in 2009). This increase in growth rates is primarily due to the increased demand for capital - in particular for local currency loans - coming from MFIs. Throughout the year, MIVs continued to face several challenges, including a grown credit risk in some countries and lower returns. Nonetheless, the overall investment market was more active than in the previous year, showing a renewed capital appetite from Microfinance services providers and a bigger focus on underserved markets. New microfinance funds were created in 2011, including four which were granted the LuxFLAG Microfinance Label: Azure, Etimos, FEFISOL, responsability Financial Inclusion. Most of the new funds are managed by existing Microfinance investment managers. They are invested mainly in debt instruments, even if the interest in equity investments is growing. MIVs are focusing more and more on underserved regions, such as Sub-Saharan Africa, Asia and rural markets. Usually these efforts are supported by Development Finance Institutions (DFIs). LuxFLAG labelled MIVs viz. FEFISOL and Rural Impulse II, were created specifically with a purpose to focus on financial access in rural markets. 28

29 On the other hand, fund managers are increasing their focus on Social Performance and end-client issues, to ensure more responsible placement of their capital. The industry is putting effort in order to promote transparency and accountability, and to avoid contributing to overheated markets. This is witnessed by the increasing number of MIVs which joined the several initiatives encouraging responsible practices in Microfinance, some of them have developed their own Social Performance measurement tools- and by the constantly growing amount of institutions publically sharing transparent information (e.g. through MIX, Syminvest, Luminis, etc.). Just to mention one example, in 2011, 162 institutions provided confidential information to Micro Banking Bulletin compared to 28 in For over 2000 MFIs basic profiles and data is now available on the MIX Market s website. 29

30 Disclaimer This document was prepared with the greatest possible care. Neither the author nor LuxFLAG offers any guarantee with regard to content and completeness and does not accept any liability for losses which might arise from the use of this information. The opinions expressed in this document are those held at the time of writing and may be changed at any time without notice. This document is for information purposes only. No part of this document constitutes either an offer or a recommendation to acquire or sell financial instruments or banking services, nor does it relieve the recipient from the responsibility of making his or her own assessment. No reliance should be placed on this document for the purpose of subscribing to any MIVs described herein. In particular, the recipient is advised to assess the information in respect of its compatibility with his or her own circumstances as well as its legal, regulatory, tax and other implications. The present document may not be reproduced in whole or in part without the written consent of LuxFLAG. Acknowledgements LuxFLAG would like to express its gratitude towards the labelled MIVs for their assistance in providing the data and for their valuable inputs. Contributors Chiara Cariddi, Intern - LuxFLAG Sachin Vankalas, Operations Officer- LuxFLAG 30

31 IV. Bibliography Arunachalam, R.S. (2011). Journey of Indian Micro-Finance. CGAP - El-Zoghbi, M. & Gahwiler, B. & Lauer, K. (2011). Cross-border Funding of Microfinance. CGAP - El-Zoghbi, M. & Martinez, M. (2011). Measuring Changes in Client Lives through Microfinance: Contributions of Different Approaches. CGAP - Glisovic, J. & González, H. & Saltuk, Y. & Rozeira de Mariz, F. (2012). Volume Growth and Valuation Contraction. Global Microfinance Equity Valuation Survey. CGAP - Glisovic, J. and Moretto, L. (2012). How Have Market Challenges Affected Microfinance Investment Funds? Highlights from the CGAP Market Scan CGAP - Hashemi, S.M. & de Montesquiou, A. (2011). Reaching the Poorest: Lessons from the Graduation Model. CGAP - Reille, X. & Forster, S. & Rozas, D. (2011). Foreign Capital Investment in Microfinance: Reassessing Financial and Social Returns. CGAP (2003). Microfinance Consensus Guidelines. Definitions of Selected Financial Terms, Ratios, and Adjustments for Microfinance. CGAP (2010). Do MIVs need a new investment strategy?. CGAP (2010). Microfinance Investment Vehicle Disclosure Guidelines. CSFI (2011). Microfinance Banana Skins. The CSFI Survey of Microfinance Risk. Governance Across Borders (2011). Andra Pradesh Microfinance Crisis. IAMFI - Trant, J. (2011). Microfinance Investment: Dual Diligence for Financial and Social Returns. IFAD (2006). Assessing and Managing Social Performance in Microfinance. IMF (2011). World Economic Outlook. Tensions from the Two-Speed Recovery. Mauri, A. & Baicu, C.G. (2007). General Remarks on the Assessment of Foreign Exchange Risk Exposure of Firms. Analele Universităţii Spiru Haret, Seria Economie (7). 31

32 MicroCapital - Stanisljevic, Z. (2009). Successful Due Diligence When Evaluating Microfinance Investment Vehicles. MicroRate - von Stauffenberg, D. & Rozas, D. (2011). Role Reversal Revisited. Are Public Development Institutions Still Crowing Out Private Investment in Microfinance?. MicroRate (2011). The State of Microfinance Investment. 6th Annual Survey & Analysis of MIVs. MIX MicroBanking Bulletin - Gaul, S. (2012). Diamonds no Longer Forever. MIX MicroBanking Bulletin - González, A. (2011). Defining Responsible Financial Performance: How to Think About Social Performance?. MIX MicroBanking Bulletin - González, A. (2011). Sacrificing Microcredit for Unrealistic Goals. MIX MicroBanking Bulletin - Krell, M.W. & Pistelli, M. (2012). Field Staff Compensation at Indian MFIs: a New Perspective on the Crisis in Andhra Pradesh. MIX MicroBanking Bulletin - Tulchin, D. & Sassman, R. & Wolkomir, E. (2009). New Financial Ratios for Microfinance Reporting. MIX MicroBanking Bulletin - Viada, L.A. & Gaul, S. (2012). The Tipping Point: Over-indebtedness and Investment in Microfinance. MIX Microfinance World - Gaul, S. (2010). How Has the Growth of Indian Microfinance Been Funded?. MIX Microfinance World - Shyamsukha, R. (2011). India: Post-crisis Results. Symbiotics - Audran, J. & Berthouzoz (2009). Microfinance, an Opportunity for Socially Responsible Investment. What Balance Between Financial Sustainability and Social Issues in the Microfinance Sector? (3). Symbiotics (2011). MIV Survey Report. Vision Microfinance (2011). Situation der Microfinanz in Indien. Women s World Banking (2004). Foreign Exchange Risk in Microfinance. World Bank (2011). Global Economic Prospects. 32

33 V. Information sources Centre for Study of Financial Innovation: a forum for well-informed debate and research about the future of the financial services sector. Its main activities are: written research, live discussion groups and networks, all focused on the latest developments in international finance. Consultative Group to Assist the Poor: an independent policy and research centre dedicated to advancing financial access for the world's poor. CGAP provides market intelligence, promotes standards, develops innovative solutions and offers advisory services to governments, financial service providers, donors, and investors. Finesti: a subsidiary of the Luxembourg Stock Exchange and a global hub for the collection, management and dissemination of investment fund data and documents. International Association of Microfinance Investors: it helps commercially oriented Microfinance investors achieve their goals by collecting and disseminating data, establishing industry best practices, and working with stakeholders to promote sustainable investment. International Fund for Agricultural Development: an international financial institution and specialised UN agency, working with poor rural people to enable them to grow and sell more food, increase their incomes and determine the direction of their own lives. International Monetary Fund: an organisation of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. Luminis: a web-based analytical service of MicroRate and LuxFLAG that provides professional investors and researchers with the necessary tools to identify, assess and monitor MIVs that meet their individual requirements (see page 38: Luminis press release - May 10, 2012 ). Microfinance Information Exchange: a source for objective, qualified and relevant Microfinance performance data and analysis. Committed to 33

34 strengthening financial inclusion and the Microfinance sector by promoting transparency, it provides performance information on MFIs, funders, networks and service providers dedicated to serving the financial sector needs for lowincome clients. MIX fulfils its mission through its online platform (MIX Market) and its publications (MicroBanking Bulletin and MIX Microfinance World). Syminvest: Symbiotics online platform for Microfinance and small enterprise impact investments. At the moment the biggest online research and brokerage platform in the whole Microfinance industry. World Bank Institute: a global connector of knowledge, learning and innovation for poverty reduction. It connects practitioners and institutions to help them find suitable solutions to their development challenges. With a focus on the "how" of reform, it links knowledge from around the world and scale up innovations. VI.Acronyms CGAP: Consultative Group to Assist the Poor CSFI: Centre for Study of Financial Innovation EMBI: Emerging Markets Bond Index IAMFI: International Association of MicroFinance Investors IFAD: International Fund for Agricultural Development IMF: International Monetary Fund MFI: Microfinance Institution MFPF: MicroFinance PortFolio MIV: Microfinance Investment Vehicle MIX: Microfinance Information exchange NAV: Net Asset Value PAR: Portfolio At Risk SICAR: Société d Investissement en CApital à Risque SICAV: Société d Investissement à CApital Variable SIF: Specialised Investment Fund SMX: Symbiotics Microfinance index 34