University meets Microfinance Do our clients grow? - Microfinance vs. SME Finance July 2012
Definition(s) of MSME Definitions vary greatly between countries, financial regulators and financial institutions. Often, the definition relies on multiple criteria and depends on the industry. Number of employees and sales volume seem to be the most widely used criteria. Loan size is also a widely used criterion. However: Lack of clear und especially standardised definition 2
Micro loans & Microfinance A very small, often short-term loan made to an impoverished entrepreneur, as in an underdeveloped country. A very small, short-term loan at low interest, especially to a startup company or self-employed person. A small loan made to poverty-stricken individuals seeking to start their own business.. Microfinance offers poor people access to basic financial services such as loans, savings, money transfer services and microinsurance. People living in poverty, like everyone else, need a diverse range of financial services to run their businesses, build assets, smooth consumption, and manage risks. (CGAP) 3
Our development goals Access to finance Institution building (governance, value driven code of conduct, etc.) Creation of financial partnerships ( empowerment, customer protection, etc.) Socially responsible economic agent Economic sustainability Support for entrepreneurship, the backbone for economies but also for societies 4
IPC is committed to supporting entrepreneurial activities, and in doing so, it invariably seeks to implement sustainable structures. We focus on assisting financial institutions to providing loans and other banking services to sustainable very small and small businesses that promote development policy aims, such as job creation, the formalisation of the economy, the substitution of imports, the promotion of export products, of energy efficiency, and the improvement of food production (incl. primary production). This is also what we promote in our own institutions, the ProCredit banks. 5
Characteristics of MSMEs (Slide 1 of 2) MICRO SMALL Enterprise registered 68% > 5 employees 62% 16% 29% 31% Financial records available 70% Employees registered 43% 14% 54% 25% 68% External employees 80% Fixed Assets CGAP 2012 6
Characteristics of MSMEs (Slide 2 of 2) 7
Anecdotic evidence from the field suggests Many, if not most micro clients are survivor type of businesses. As a result the risk profile of micro clients is oftentimes characterised by a lack of entrepreneurship, hence business management capacity. They grow with the first loan; repeated loans don t trigger further business growth but can improve the living standard of the household. The small size of the business makes them resilient in informal, difficult environments but fragile with regards to external shocks. Few grow such that they become small businesses. The ones that do, achieve this thanks to temporary opportunity and many times also because of entrepreneurial skills. Their risk profile is characterised by a higher resilience with regards to external shocks. The risk profile is however also characterised by real entrepreneurial behavior = unpredictability that is difficult for a FI to deal with. 8
Growth from micro to small enterprises 40% % of enterprises that grow from micro to small 28% 18% 7% 8% Less than 10% 10-20% 20-50% Over 50% Don't know 40% of MFIs said that a very small number of their microenterprise clients (less than 10%) grow to become small Survey by CGAP, 2012 9
MSME characteristics Micro enterprises SME Corporate Employees < 3 (family members) >3 (partially specialised) 250 Trade Trade (International) trade Typical sectors Services (repairs) Services Services Manufacturing Manufacturing Capital intensity Low fixed assets Significant fixed assets Important fixed assets Economic efficiency Increasing with size Growth potential Low High High Owenership and scale Entrepreneurs Growing family business Regional / national footprint Might have several shareholders Ownership / management separation Management structure & Non-specialised / flexible staff Existence of management structures Structured management HR No external employees External employment High number of external employees Decision-making Short-term horizon Opportunity driven Planning Informal Partially formalised Formalised No records Partial accounting Official financial statements Degree of formalisation Cash-based Partial use of current account and paperless means of payment Current account utilisation and paperless means of payment Financial literacy Very low Medium High Instalment loans More than micro enterprises: More than small enterprises: Savings Overdraft International transfers Transfers and payment transactions Trade finance Financial needs Current account Payroll services Debit card Adapted bank approach Internet banking Electronic payment terminal > Support growth > Support growth projects > Support growth projects > Basic financial education > Financial education > Professional financial partner > Service quality and proximity > Increasing range of products > Service quality > Formalisation > Service quality 10
Financial services for MSMEs Financial services for micro finance Different types of financial services providers for poor people have emerged - non-government organisations (NGOs); cooperatives; community-based development institutions like self-help groups and credit unions; commercial and state banks; insurance and credit card companies; telecommunications and wire services; post offices; and other points of sale. (CGAP) Financial services for SMEs Mostly commercial banks cater their services to SMEs. However in many cases these are mainly non-loan products. Many MFIs have extended their target group to grown-up micros, hence small businesses but without tailored products or processes. 11
A critical look at Microfinance Competitive environments led to an extension of target groups to people who were not and will never be entrepreneurs. In many markets it is no longer necessarily progressive to empower ordinary people with micro loans. When calculating repayment capacity (if at all), often salary income from employed family members as well as international remittances are included which justifies the loan. High number of borrowers, or their family members are already in debt to MFIs, banks or to NGOs (multiple loans). Write-offs on loans often signifies financial ruin and social exclusion. Customers in many countries are able to play providers off against one another but are being served in a manner that is incompatible with a responsible approach. Many of the loans flow not into small businesses, but more likely into small-scale consumption. 12
A critical look at SME Finance Various approaches to SME finance exist: liability approach, corporate lending approach, retail lending approach, leasing, SME finance through overdrafts and revolving credit lines. Obviously serving small business clients is inherently more difficult to do well than serving micro clients. Very few FIs tailor products, processes and people to SMEs. Very high NPLs in the SME sector in many markets show that many banks have sent a lot of SME s into bankruptcy. Access to finance for SMEs is still an issue in many markets although SMEs have in general access to banks and have bank accounts. Funding (liquidity or equity) is not the major issue but FIs are too risk adverse to work with informal or semi-informal SMEs. Still too few FIs have committed to a responsible SME banking approach because of low cross-selling opportunities, a labour-intensive lending process and the necessary institutional learning process. 13
The ProCredit group worldwide ProCredit Group Presentation May 2012 14
Key figures of the ProCredit group 2007 2008 2009 2010 2011 May-12 Loan portfolio Volume (in EUR million)* 2,820 3,380 3,341 3,653 4,029 4,236 Number (in '000) 926 1,053 921 641 556 554 Total assets (in EUR million) 4,147 4,784 4,949 5,188 5,494 5,778 Customer deposits Volume (in EUR million)** 2,489 2,756 2,998 3,227 3,419 3,504 Number (in '000) 2,822 3,509 3,777 3,728 3,652 3,586 Total borrowings (in EUR million) 900 1,275 1,269 1,260 1,320 1,489 Borrowings from IFIs*** 534 878 954 912 862 939 Other borrowings 366 397 314 349 458 550 Bonds issued 376 320 240 216 233 206 Equity (in EUR million) 333 387 388 429 469 511 of which attributable to ProCredit 288 329 328 359 392 434 Profit for the year (in EUR million) 44.2 30.0 11.5 12.5 46.8 23.1 of which attributable to ProCredit 34.3 26.0 12.4 13.0 38.9 19.3 Number of staff 16,876 21,407 19,616 15,600 16,183 16,007 Number of branches 622 814 831 740 775 769 (*) incl. accrued interest; net of deferred fees (**) incl. accrued interest and pending client transfers (***) incl. subordinated debt ProCredit Group Presentation May 2012 15
The ProCredit strategy is built on working with specific target clients in a specific way House bank for very small and small business Focussed on very small and small enterprises Understanding needs Broad-based, long-term client relationships Professional Savings and banking services for ordinary people Focussed on owners, employees and social circle of business clients Efficient, good, transparent service with transparent fees Responsible lending products aimed at building family assets Strong, responsible institutions Well trained, professional staff Committed to transparency, financial literacy and financial sector deepening 16
Lower limit of EUR/USD 2,000 for micro-micro enterprise lending: rationale Overindebtedness is high in this segment due to consumer lending from other banks/mfis particularly in markets where growth was strongest and the supervising environment weakest (e.g. Bosnia, Nicaragua and Ukraine) Enterprises are less sustainable in this segment in rapidly formalising transition economies (for example in Eastern Europe) interest rates on our micro-micro loan technology are also then too high to bring enough benefit or to compete with no questions asked consumer finance models Enables a focus on quality not quantity and Very Small and Small enterprise clients: Housebank for Very Small and Small businesses positioning, working with sustainable enterprise clients who value a long-term relationship and which have good capacity to create sustainable, good quality employment a whole customer approach incorporating credit, savings, liquidity management, transaction brings greater benefit to Very Small and Small businesses The higher lower limit for micro lending resulted in significant institutional reorientation and: a strong reduction in the number of loan clients, but little impact on loan volume a positive focus on savings rather than loans for our micro-micro enterprise clients 17
Outstanding loan portfolio: Breakdown into loan size categories (by initial amount) Volume (in EUR million) Number of loans (in '000) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 May-12 EUR/USD 10,001 to 50,000 EUR/USD 50,001 to 100,000 EUR/USD 100,001 to 150,000 up to EUR/USD 10,000 EUR/USD 10,001 to 30,000 EUR/USD 30,001 to 150,000 0 more than EUR/USD 150,000 Number of loans ProCredit Group Presentation May 2012 18
Breakdown of the combined portfolio into 4 loan size categories Distribution by volume Distribution by number of loans % 6.2% 0.8% 23.5% 21.1% 16.5% 23.1% 32.3% 76.5% up to EUR/USD 10,000 EUR/USD 10,001 to 30,000 EUR/USD 30,001 to 150,000 more than EUR/USD 150,000 oan volume (in EUR) Average outstanding loan volume (in EUR) 2,093 (up to EUR/USD 10,000) 10,638 (EUR/USD 10,001 to 30,000) 39,399 (EUR/USD 30,001 to 150,000) 237,551 (more than EUR/USD 150,000) ProCredit Group Presentation May 2012 2,093 (up to EUR/USD 10,638 (EUR/USD 10,00 39,399 (EUR/USD 30,00 237,551 (more than EUR 19
Loan portfolio Distribution by type of loan 4.9% 1.1%1.7%0.2% 12.1% Business loans Agricultural loans Housing loans Employee loans Consumer loans Other loans 79.9% Source ProCredit Holding 20
Business loan portfolio Distribution by sector 1.7% 16.9% 2.9% 9.5% 43.9% Trade Industry and other production Construction Transport Tourism Other Services Mixed 6.2% Source ProCredit Holding 19.0% 21
Number of loans outstanding Number of loans 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 ProCredit Group Presentation May 2012 2007 2008 2009 2010 2011 May-12 22
Contacts IPC - Internationale Projekt Consult GmbH in Beijing, China in Moscow, Russia in Kiev, Ukraine Frontier Finance International, INC. (FFI) (affiliated company) Tel.: Fax: Email: Web: Tel.: Fax: Email: Web: Tel.: Fax: Email: Web: Tel.: Fax: Email: Web: Tel.: Fax: Email: Web: Falkensteiner Str. 77 60322 Frankfurt am Main Deutschland + 49 69 90 50 188 0 + 49 69 90 50 188 25 ipc@ipcgmbh.com www. ipcgmbh.com Jingguanyuan Bldg.6, Unit2, No. 301 Xinhua Lane 16, Western District 100044 Beijing, China +86 10 88 35 92 50 +86 10 88 35 92 25 ipc@microfinance.com.cn www.ipcgmbh.com/china Offices 540-544, 43 Lesnaya Street, Moscow 127055, Russia +7-495-799-55-77 +7-495-799-55-88 main@microcredit.ru www.microcredit.ru 34 Shota Rustaveli Street Office 19-20 Kiev 01033 +380 44 289 10 37 +380 44 289 09 61 kyiv@microcredit.com.ua www.microcredit.com.ua 1821 18th Street, N.W. Washington, D.C. 20009 USA +1 20 26 67 34 30 +1 20 26 67 34 60 ffi@frontierfinance.com www.frontierfinance.com 23