Christian Novak, Frontier Markets Advisors Inc. Women Investing for Impact / Femmes - Investissement - Impact March 27 th, 2013
Introduction The microfinance industry aims to provide financial services for low-income entrepreneurs who have no or limited access to the traditional financial system. Services include loans, savings, insurance, and remittances Clients are typically self-employed, of which about 2/3 are women Clients are located both in rural and urban areas The basic working units of the industry are microfinance institutions ( MFIs ). An MFI can be broadly defined as any organization licensed financial institution, financial NGO, non-banking financial institution, credit cooperative, or down-scaled commercial bank that provides financial services for low-income entrepreneurs Microfinance serves around 100 million low-income individuals located in over 100 countries Microfinance is a rapidly growing industry that has helped to reduce poverty 2
The virtuous spiraling effect of microloans Microloans fund the start-up and the rapid growth of lowscaled businesses, deriving in a virtuous spiraling effect Cambodia: At 40 years old, Pin Phi, a mother of four, first joined a group of five people in order to obtain a loan from a Cambodian MFI ten years ago. Starting with her first loan of 30,000 KHR (US$7), she bought a few sacks of fertilizer for rice and palm tree sugar cultivation and bamboo for making ladders to climb the palm trees. After 11 cycles of loans, she now owns two motorbikes, two cows, two pigs and one more plot of land. She also supports one of her sons to attend a university in Phnom Penh Peru: Mrs. Pachamango and her husband have been selling fruits and vegetables for several years. They started as peddlers selling their wares from a bicycle and have moved to a market stall. CMAC Trujillo has been supporting the businesses in this market for nearly ten years; this includes a loan to the market's business association to make improvements to the market. Mrs. Pachamango's first loan was for 200 Soles, or about US$60; the most recent loan she was offered was for an amount of 10,000 Soles, or about US$2,860, to be used for working capital purposes. Thanks to these loans, the business has expanded to four stands in the market and three bicycles for itinerant trading, and hired five additional employees Source: Blue Orchard and Morgan Stanley press release (May 2007) 3
Microfinance Institutions MFIs usually start as subsidized NGOs and several evolve to financially sustainable entities, some becoming regulated MFIs are different from traditional commercial banks Tier 1 Tier 2 Tier 3 Tier 1 10% of all MFIs Mature MFIs with strong financial/operating track record Successful and at profitability Regulated or considering conversion to regulated status Tier 2 20% of all MFIs Approaching profitability Limited capital, operations need improvements, management needs training Some will progress to Tier 1 Tier 3 70% of all MFIs Unprofitable MIFs, mainly start-ups, some problematic Few will progress to Tier 2/1 Source: Based on Jennifer Meehan (2004) Tapping Financial Markets for Microfinance, Grameen Foundation USA MFIs are the only source of consistent and market-based financing for low income entrepreneurs in emerging economies Microfinance institutions are adaptable institutions with local knowledge and specific technology to manage large pools of atomized borrowers with limited default rates 4
Microlending Methodologies Microlending methodologies: - Group Lending - Individual Lending Group Lending Loans are given to individuals via groups Group members guarantee the repayment of each other s loans Peer pressure and collective responsibilities take its place MFIs perform less analysis of the borrowers and their businesses to be funded than in the case of Individual Lending Methodology variation among group lending: Solidarity Group: The most practiced model is the Grameen Bank model, which has been adopted, sometimes with modifications, by MFIs all around the world Community-Based Organizations: The most practiced model is the Village Banking model. A Village Bank is initially financed through external funding, and over time, member savings, share capital and accumulated earnings grow enough to become financially autonomous, as well as administratively autonomous Individual Lending Loans are given to individual borrowers MFIs perform analysis of borrower s past performance and their businesses to be funded Collateral and/or co-signers may be requested 5
Microlending Methodologies (cont d) Worldwide, group lending is provided by 63% of total MFIs, which are lending to 65% of total borrowers. The remaining is represented by MFIs providing individual loans only Microloans individual amounts are higher in group lending than in individual lending, hence affecting the distribution in terms of total microloan portfolio Lending Methodology Used: % of Total MFIs % of Total Borrowers Average Loan Balance per Borrower per MFI (US$) Individual-only 37% 37% 35% 35% 2,626 Individual + Solidarity 44% 49% 806 Solidarity-only 10% 9% 235 Village Banking-only 9% 63% 6% 65% 484 Total 100% 100% 100% 100% 1,438 Note: Solidarity and Village Banking are types of Group Lending Source: The Microfinance Information Exchange, based on 1,019 MFIs reporting to the MIX Market (2009 data) 6
Microfinance by Region The different average size of individual microloans per region leads to marked differences in the global distribution of portfolio volume vs. number of borrowers Gross Loan Portfolio Outstanding 1 MENA, 4% SSA, 9% East Asia, 9% Median of MFIs Average Microloan Balance1 US$-equivalent 1,450 1,258 LAC, 50% South Asia, 20% 309 276 141 594 Note: SSA = Sub-Saharan Africa ECA = Eastern Europe & Central Asia LAC = Latin America & the Caribbean MENA = Middle East & North Africa ECA, 10% SSA East Asia South Asia Active Number of Borrowers 1 Number of MFIs 1 ECA LAC MENA LAC, 15% ECA, 2% MENA, 3% SSA, 5% East Asia, 10% MENA, 9% SSA, 14% East Asia, 12% LAC, 32% 1 Source: The Microfinance Information Exchange, based on the 460 MFIs with >1,000 active borrowers reporting to the MIX Market all of the above data as of the end of March, June, September, or December 2012 South Asia, 65% ECA, 10% South Asia, 23% 7
Microfinance Market Potential 1 Microfinance penetration is low MM of People % Penetration The untapped demand is estimated at ten times the current market size 5 500 440 100% Based on certain assumptions, AFIs 2 would be actively serving only 1 of every 6 potential clients 6 400 300 308 350 295 52% 80% 60% 200 269 142 190 40% 100 0 132 30% 81 23% 153 20% 171 55 60 10% 53 48 19 4% 12 23% 22% 40 45 31 35 20 19 5% 20% 0% Reached by AFIs 2 Not Reached by AFIs 2 Penetration 1 Source: World Bank, United Nations, and CGAP Occasional Paper #8 (July 2004), via McKinsey`s, Optimizing Capital Supply in Support of Microfinance Industry Growth, October 2006 2 Alternative Financial Institutions (AFIs) target clients not served by traditional commercial banks. AFIs include MFIs (inc. microfinance programs of commercial banks), co-ops, credit unions, rural banks, and state/agricultural/development banks, postal banks 3 Excludes India and China 4 Excludes Brazil 5 Source: Deutsche Bank Research, December 2007 6 Source: Occasional Paper #8, CGAP, July 2004 8
Microfinance in Canada 1 Relevant demand from entrepreneurs: a 2010 study noted that 63% of ventures cite financial obstacles as one of their main obstacles to creating business Almost 900 credit unions/caisses populaires (with one of the highest penetrations in the world), some with special microfinance programs, like Alterna, VanCity and Desjardins Important Federal and Provincial Governments support to community lending and loan guarantee schemes/funds Payday lending (mainly in Ontario) In Québec: Community Economic Development Corporations (CDECs) and Centres Locaux de Développement (CLDs): support and train local entrepreneurs, and facilitate access to finance Fonds de Solidarité FTQ, Fonds Local d Investissement, Fonds Jeunes Promoteurs, Fonds de Développement des Entreprises d économie sociale, RISQ, etc. Réseau Québécois du Crédit Communautaire (RQCC): a network of local community loan funds ACEM, Companies F, Circles d Emprunt de Montréal, etc. Other: Créavenir, Filaction Challenges: limited business vision, limited clarity of the target clientele, low density of demand, high operating expenses, interest rates caps, relatively more complex businesses, highly subsidized sector (with the poorest segment mostly unattended) 1 Source: Low Income Entrepreneurs and their Access to Financing in Canada, especially in the Province of Quebec/City of Montreal, Chantelle Reynolds and Christian Novak, May 2011 9
Impact Investing in Microfinance 10
Impact investing means directing investments in organizations that are related to impact sectors, such as: microfinance, affordable housing, sustainable agriculture, clean energy, clean water, waste management, healthcare, and education, established in both developing and developed countries Total impact investments are estimated to total US$50 billion 3, and have the potential to reach US$400 billion to US$1 trillion over the next 10 years 5 Impact Investments Investors, both institutional and individual investors, are increasingly investing in businesses with high economic, social and/or environmental impact, resulting in the development of Impact Investments Impact investing represents a small but growing stake of total global managed assets and also of Socially Responsible Investments; approx. 15% 3 4 of impact investments is represented by investments in microfinance (microfinance funds only) Global Managed Assets US$53 trillion 1 SRI US$10.4 trillion 2 Impact Investments US$50 billion 3 Note: The ovals are not proportionally scaled 1 Source: Cerulli Associates, June 2011 (data as of December 2010) 2 Source: European SRI Study 2010, Eurosif, based on data from (year): U.S. (2010), Canada (2008), Australia & New Zealand (2010), Japan (2009), Europe (2009) - US$ fx rates as of December 31, 2010 3 Source: International Financial Services, London Investing for Social & Environmental Impact - A Design for Catalyzing an Emerging Industry, Monitor Institute, January 2009 (estimated data based on various sources presenting 2007-2008 data) 4 Source: 2012 Symbiotics MIV Survey (estimated data as of December 2011), Symbiotics Research & Advisory, July 2012 5 Source: Impact Investments: An Emerging Asset Class, J.P. Morgan, The Rockefeller Foundation and the Global Impact Investing Network, November 2010 Microfinance Investments (microfinance funds only) US$7.5 billion 4 11
Growing Microfinance Investments 1 Estimated amount of assets under management by Microfinance Investment Vehicles ( MIVs ) was U$7.5 billion as of Dec-2011, having grown at an impressive rate MIVs Total Assets Growth 86% 34% 25% 10% 15% 19% 2007 2008 2009 2010 2011 2012 (E) 1 Source: 2012 Symbiotics MIV Survey (estimated data as of December 2011), Symbiotics Research & Advisory, July 2012 12
Microfinance Debt Investment Returns Debt investments represented 85% of MIVs total investments as of Dec-2011 1 Declining returns of microfinance debt funds, while now stabilized and still attractive Source: 2012 Symbiotics MIV Survey (estimated data as of December 2011), Symbiotics Research & Advisory, July 2012 1 Source: 2012 Symbiotics MIV Survey (estimated data as of December 2011), Symbiotics Research & Advisory, July 2012 13
Overall Low Correlation and Default Rates Overall low correlation to both the global capital markets and the corresponding domestic economy & market, mainly due to the following: - Microloans fund businesses that are usually not affected by global or domestic turmoil - MFIs clients have higher capacity to adapt to such circumstances - Microloans represent the only resource for low-income entrepreneurs to continue running their businesses - MFIs can anticipate and take actions at a very early stage of any increase in delinquencies since loans are monitored in the weekly, bi-weekly, or monthly payments Overall low correlation Main non-correlated risks: Damaging government interference (e.g. interest rates caps, encouraging nonpayment of microloans) MFI s social mission drift (e.g. encouraging over-indebtedness of borrowers) Inflation Domestic Economy/Market EM Market Global Market Stock Euro Stoxx GDP Growth MSCI EM S&P 500 Market 50 MSCI World Write-off Ratio 1-0.19-0.26-0.17 0.08 0.17 0.06 Loans Past Due 30 days 1-0.23-0.03-0.16 0.18 0.26 0.15 Loans Past Due 90 days 1-0.15-0.04-0.20 0.13 0.24 0.11 Profit Margin 1 0.05 0.11-0.04 0.12 0.15 0.11 Operat. Self-sufficiency 1 2 0.03 0.09-0.01 0.15 0.18 0.14 Source: Imran Sulemankhil and Christian Novak, (calculations), The Microfinance Information Exchange, Bloomberg. Based on 2004-2010 year-end data from up to 777 MFIs located in 30 selected developing countries with relevant development of microfinance. 11 countries in the sample are excluded in the correlation analysis to the local stock markets given lack of information. There is no assurance that the above correlation will provide similar results in the future 1 Median data 2 Operating Revenue / Financial Expense + Loan-loss Provisions + Operating Expense Overall low default rates Average default rate of matured MFIs ~0.0% Median of MFIs Portfolio Past Due > 90 days 3.33% (>30 days = 3.90%) 1 1 Source: The Microfinance Information Exchange, based on the 460 MFIs with >1,000 active borrowers reporting the referenced data to the MIX Market as of the end of March, June, September, or December 2012 14