Microfinance Investment After Hours Seminar T ransparency and - PowerPoint PPT Presentation

J uly 20, 2011 Microfinance Investment After Hours Seminar T ransparency and Evaluation microlinks.kdid. org/afterhours Sebastian von Stauffenberg MicroRate Participate during the seminar #MLevents Chuck Waterfield MFTransparency Follow us on T witter twitter.com/microlinks Like us on Facebook facebook.com/microlinks

Transparency in microfinance evaluation Afterhours Seminar July 20, 2011

Growth through private capital “ Virtually any mature industry that has grown to scale and has attracted private capital has in place the following elements: ” 1. Common terminology 2. Transparency 3. Adherence to standard accounting practices 4. Regulation by third parties 5. Investment rating services 6. Fund comparison data 7. Insurance 8. Liquidity through secondary markets Blended Value Investing, World Economic Forum. March 2006

About MicroRate • First specialized microfinance rating agency • Over 600 performance ratings of 250 MFIs • 100 social ratings • Pioneering achievements: • First microfinance rating in 1996 (Investment rating services) • Standardized financial indicators for MFIs (Common terminology ) • Conducted the first rating of a microfinance CDO (Investment rating services) • Initiated the standardization of microfinance fund indicators (Fund comparison data) • Evaluations of Microfinance Investment Vehicles (MIVs) (Fund comparison data) 4

MicroRate Vision Investor / Micro MIV MFI capital Entrepreneur markets Vision Promote the flow of funds from capital markets to microfinance by increasing transparency and growth in the global microfinance community.

General MFI Indicators Micro MIV MFI Investor Entrep r. Portfolio Growth Rates Portfolio Quality 35.0% 8.0% 30.8% 7.0% 30.0% 31.2% 26.6% 24.8% 5.5% 6.0% 25.0% 5.2% 4.6% 5.0% 20.0% 4.0% 15.0% 15.2% 3.0% 14.3% 10.0% 2.0% 5.0% 1.0% 0.0% 0.0% 2008 2009 2010 2008 2009 2010 Annual portfolio growth PAR 30 + Write-offs PAR30 Write-offs Annual Growth of Borrowers 6 Based on a sample of 30 leading MFIs in Latin American

General MFI Indicators Micro MIV MFI Investor Entrep r. Profitability 25.0% 4.0 21.0% 20.9% 20.2% 20.0% 3.5 3.5 3.2 15.0% 3.0 3.0 13.7% 10.0% 2.5 11.0% 7.8% 5.0% 2.0 2008 2009 2010 Operating Efficiency (%) Average ROE (%) Based on a sample of 30 leading MFIs in Latin America

MicroRate Performance Micro Rating Methodology MIV MFI Investor Entrep r. Microfinance Operations Governance Financial Microfinance & Strategic Situation Sector, Positioning Social Performance & Country Risk Portfolio Organization Quality 8

Rating Distribution Micro MIV MFI Investor Entrep r. 29% 27% 21% 18% 17% 15% 15% 13% 11% 11% 7% 6% 6% 0% 1% 3% 2% 0% 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 γ γ+ β - β β+ α - α α+ Performance Ratings Social Ratings (Stars) 9

MIV Landscape Micro MIV MFI Investor Entrep r. • As of December 2011: 102 MIVs identified globally • MicroRate (6 th ) Annual MIV Survey – 80 (95% of total assets) • $13 billion of total cross border funding • Private funding to microfinance (foundation, NGOs, investors): $6.7 billion 10

MIV Asset Growth Micro MIV MFI Investor Entrep r. $6,395 $6,001 $5,045 $4,769 $4,220 $3,737 $3,147 $2,482 $1,453 $1,079 $633 $453 2005 2006 2007 2008 2009 2010 Total MIV Assets (millions) Total Microfinance Assets (millions) 11 MicroRate 2011 MIV Survey

MIV Regional distribution Micro MIV MFI Investor Entrep r. 2% 1% 4% 5% Europe & Central Asia 7% Latin America & Caribbean 37% East Asia & Pacific 9% South Asia Sub-Saharan Africa North America Middle East & North Africa Other 35% 12

MIV Regional distribution Micro MIV MFI Investor Entrep r. $6,000 Other $5,000 Middle East & North Africa North America $4,000 Sub-Saharan Africa $3,000 East Asia & Pacific $2,000 South Asia $1,000 Latin America & Caribbean $- Europe & Central Asia 2005 2006 2007 2008 2009 2010 13

Fund Comparison Micro MIV MFI Investor Entrep r. • Rural Impulse Fund II S.A. • Luxembourg Microfinance Development Fund • Impulse Microfinance Investment Fund • Alterfin cvba • Global Partnerships Microfinance Fund 2008, LLC • • BlueOrchard Microfinance Growth Facility Microvest I, LP • • Dexia Micro-Credit Fund Incofin cvso • • ASN-Novib Fund Rural Impulse Fund • Calvert Social Investment Foundation • Stichting Hivos-Triodos Fonds • • Deutsche Bank Micro Credit Development Fund Stichting Triodos-Doen • • MicroCredit Enterprises Microvest I, LP • Opportunity International • Grameen Foundation USA • • Solidarite Internationale pour le Developpement et Global Partnerships Social Investment Fund 2010, LLC l ’ Investissement • Triodos Fair Share Fund • Gawa Microfinance Fund I • Triodos Microfinance Fund

Origin and Purpose The Luxembourg Government, LuxFLAG, and MicroRate are developing the LUMINIS investor service to provide critical information on Microfinance Investment Vehicles (MIVs) in order to facilitate growth and investment in microfinance. Because of its long experience in the industry, MicroRate will manage and direct this new investor information service with the support of the Luxembourg Government and the Luxembourg Fund Labeling Agency “LuxFLAG”. The goal of LUMINIS is to create widespread transparency in the universe of MIVs. It will collect and analyze critical performance data, and disseminate it throughout the industry via a web-based platform. The data and accompanying analyses will allow investors to compare MIVs’ relative performance and trends, and ultimately make informed investment decisions.

Analytical Methodology Managemen Performance Risk Social t • Targets • Concentration • Target Market • MF Expertise • NAV • W/A Ratings • ESG • Track Record • Yield • FX Exposure • Objectives • Governance • Indexes • Regulatory • Surveillance • Invest Process • Exit • Sovereign • Effectiveness • Style/Strategy

Social Continuum Do No Harm Do Good Do-no-harm – Corporate Social Responsibility • Responsible finance – (balance) • Reputation/headline risks – truth in lending • Client Protection Principles (SMART Campaign) • Principles for Investors in Inclusive Finance (PIIF) Do-good – Outcomes and Impact • Who should be doing this? 17

Promoting Transparent Pricing in the Microfinance Industry Transparency: Finding our way through the Complete Confusion in Pricing of Micro-credit July 2011

PROPOSITION: Social Businesses, with Social Investors should behave socially. ISSUE: We don’t always succeed. Why not? What can we do to resolve this?

Lack of Transparent Pricing The way we communicate prices to our clients is far from transparent

Which loan would you pick? Zero Interest Interest and And Savings Interest Loan Fees Only Loan amount: R1,000 R1,000 R1,000 R1,000 Loan term: 10 weeks 10 weeks 10 weeks 10 weeks Interest Rate: 0% 15% “flat” 12% “flat” 40% decl Upfront fee: 5% 2% 1% 0% Security 0% 0% 20% 0% deposit: APR 49% 47% 49% 40% Transparency 0 32 25 100 Index

How did microfinance end up with non-transparent pricing?

The Downward Spiral • How did prices get so confusing and non- transparent? • It is a combination of: – Lack of transparent pricing regulation – Initial motivation of a small minority to mask the true price • The result is a downward spiral drawing in nearly all MFIs

The Downward Spiral • All MFIs have transparent • MFI 1: prices – Interest: 2.5% decl. • MFI 2: – Interest: 3.0% decl.

The Downward Spiral • All MFIs have transparent • MFI 1: prices – Interest: 2.5% decl. • Some MFIs shift to flat interest • MFI 2: – Interest: 2.0% flat

The Downward Spiral • All MFIs have transparent • MFI 1: prices – Interest: 1.75% flat • Some MFIs shift to flat interest • MFI 2: • All MFIs shift to non- – Interest: 2.0% flat transparent pricing

The Downward Spiral • All MFIs have transparent • MFI 1: prices – Interest: 1.75% flat • Some MFIs shift to flat interest • MFI 2: • All MFIs shift to non- – Interest: 1.6% flat, 2% transparent pricing.. And it upfront fee continues

The Downward Spiral • All MFIs have transparent • MFI 1: prices – Interest: 1.75% flat • Some MFIs shift to flat interest • MFI 2: • All MFIs shift to non- – Interest: 1.6% flat, 2% transparent pricing upfront fee • Consumers struggle to choose…. Which would YOU choose?

The Downward Spiral • All MFIs have transparent • MFI 1: prices – Interest: 1.75% flat • Some MFIs shift to flat – APR: 37% interest • All MFIs shift to non- • MFI 2: transparent pricing – Interest: 1.6% flat, 2% • Consumers struggle to upfront fee choose… Because the – APR: 57% prices are far from clear

The Downward Spiral • All MFIs have transparent • MFI 1: prices – Interest: 1.75% flat • Some MFIs shift to flat – APR: 37% interest – ROE: 10% • All MFIs shift to non- transparent pricing • Consumers struggle to • MFI 2: choose – Interest: 1.6% flat, 2% • Profits are correlated upfront fee to price – APR: 57% – ROE: 40%