Annual Report 2007

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Annual Report 2007

Annual Report 2007


A n n u a l R e p o r t 2 0 0 7

Key Figures

USD ’000 2007 2006* Change

Balance Sheet Data

Total Assets 218,315 132,535 65%

Gross Loan Portfolio 184,375 110,772 66%

Business Loan Portfolio 162,369 99,006 64%

USD < 10,000 76,365 50,780 50%

USD > 10,000 < 50,000 62,501 38,290 63%

USD > 50,000 < 150,000 18,136 8,508 113%

USD > 150,000 5,367 1,428 276%

Agricultural Loan Portfolio 19,508 10,846 80%

Housing Improvement Loan Portfolio 1,932 636 204%

Other 566 284 99%

Allowance for Impairment on Loans 5,493 3,853 43%

Net Loan Portfolio 178,882 106,919 67%

Liabilities to Customers 78,216 45,125 73%

Liabilities to Banks and Financial Institutions 76,714 35,185 118%

Shareholders’ Equity 18,191 8,843 106%

Income Statement

Operating Income 21,502 13,078 64%

Operating Expenses 18,329 10,968 67%

Operating Profit Before Tax 3,173 2,110 50%

Net Profit 2,850 1,546 84%

Key Ratios

Cost/Income Ratio 74.52% 70.64% 5%

ROE 21.08% 18.11% 16%

Capital Ratio 13.30% 12.46% 7%

Operational Statistics

Number of Loans Outstanding 57,581 39,350 46%

Number of Loans Disbursed within the Year 54,990 40,808 35%

Number of Business and Agricultural Loans Outstanding 57,163 39,170 46%

Number of Deposit Accounts 100,952 42,945 135%

Number of Staff 813 555 46%

Number of Branches and Outlets 25 18 39%

* Some figures differ from those in the 2006 annual report

as they have been adjusted to reflect new calculation

methods.


Mission Statement 4

Letter from the Board of Directors 5

The Bank and its Shareholders 6

The ProCredit Group – Neighbourhood Banks for Ordinary People 8

ProCredit in Latin America 11

Highlights in 2007 14

Management Business Review 16

Special Feature 26

Risk Management 28

Branch Network 30

Organisation, Staff and Staff Development 32

Business Ethics and Environmental Standards 35

Our Clients 36

Financial Statements 40

Contact Addresses 66

C o n t e n t s


M i s s i o n S tat e m e n t

Mission Statement

Banco ProCredit Ecuador is a development-oriented full-service bank. We offer excellent

customer service and a wide range of banking products. In our credit operations, we

focus on lending to very small, small and medium-sized enterprises, as we are con-

vinced that these businesses create the largest number of jobs and make a vital contri-

bution to the economies in which they operate.

Unlike other banks, our bank does not promote consumer loans. Instead we focus on

responsible banking, by building a savings culture and long-term partnerships with our

customers.

Our shareholders expect a sustainable return on investment, but are not primarily inter-

ested in short-term profit maximisation. We invest extensively in the training of our staff

in order to create an enjoyable and efficient working atmosphere, and to provide the

friendliest and most competent service possible for our customers.


Letter from the Board of Directors

The bank’s business developed favourably in 2007, as indicated by a 66% increase in the volume of its loan portfolio

and a 46% rise in the number of loans outstanding. The year also saw a 73% increase in deposits from local customers

and an impressive 135% rise in the number of accounts. The bank’s deposit accounts are mainly held by small savers,

underscoring its progress in promoting a savings culture among low- and middle-income segments of society – an

important mission for the institution.

This growth occurred within the context of changes to the institutional and legal framework for business, and adjust-

ments to the Ecuadorian financial regulatory system, which were introduced by the new government. As a result of

these changes, the banking system as a whole reduced the scope of its lending, creating opportunities that allowed

Banco ProCredit to expand its market share.

Although Banco ProCredit is a small bank, accounting for only 1.6% of total assets in the country’s banking system, it

ranked fourth in terms of overall portfolio growth, outperforming several major banks. Even more importantly, it was

the leader in terms of growth in business lending, since other financial institutions concentrated primarily on con-

sumer and housing loans. Our bank has shown itself to be a major player in the provision of loans to small businesses

in Ecuador, accounting in 2007 for around 20% of the growth in the total volume of loans outstanding to very small

businesses, and increasing its share of this market segment to 12%.

Banco ProCredit’s solid performance was recognised by the risk rating firm BankWatch Ratings (affiliated with

FitchRatings), which in June 2007 decided to upgrade the bank’s institutional rating to “AA+” and the rating of its com-

mercial paper programmes to “AAA-”, making us one of the best rated banks in the country. These ratings were based,

among other factors, on Banco ProCredit’s ability to compete in its target segment, its strength as an institution, the

solid reputation of its shareholders, the high quality of its assets and its loan portfolio, its access to external fund-

ing, and the fact that it uses a lending methodology whose soundness has been demonstrated in Ecuador and other

countries. Another important factor in this context was the willingness of the bank’s majority shareholder, ProCredit

Holding AG, to provide financial backing for its operations and for those of the other institutions around the world

which belong to the ProCredit group.

In addition to achieving favourable results in its business operations, the bank also made considerable progress in

meeting qualitative goals, such as strengthening its organisational structure, at both the head office and branch

levels. This helped create a foundation for the bank’s sustainable growth and the continued high quality of its cus-

tomer service, positioning it as a financial institution that provides an integrated range of services in all regions of

the country.

We also focused on further strengthening the commitment of all members of the bank’s staff to the “neighbourhood

bank” philosophy, which sets us apart from other institutions in the Ecuadorian banking system. This approach

underscores our dedication to promoting a culture of saving based on accessibility, security and high-quality service

as defining characteristics of our institution.

To promote and support the training and development of its staff, the bank undertook major investments in training as

a key element of its strategy. In 2007, expenditures in this area exceeded one million dollars. The bank strengthened

its local training capabilities, and employees continued to participate in the programmes at the ProCredit Academy in

Germany and the ProCredit Regional Academy for Latin America in Nicaragua. In addition, we increased the number

of options available to our staff to improve their English language skills, and maintained staff exchange programmes

with other banks in the group. Staff exchanges are an excellent way of recognising, training and motivating those staff

members at all levels of the organisation who demonstrate exceptional performance and an outstanding attitude.

In 2007 it was particularly gratifying for Banco ProCredit Ecuador to help provide training and advice to support the

establishment of ProCredit operations in neighbouring Colombia, both by hosting staff from Colombia and by sending

some of our own staff to that country.

In line with our vision as an institution, we seek to become the country’s leading bank in the provision of financial

services to very small, small and medium-sized enterprises, and to private individuals in the low- and middle-in-

come brackets. Our business model is based on the principles of socially responsible banking, which focus on

building long-term relationships with customers. Our performance to date and Ecuadorians’ growing awareness

of Banco ProCredit and its services provide the basis for planned rapid growth during 2008. We believe that we

have the resources and capacity to substantially expand our business in the coming year, and we will make every

effort to ensure that we succeed in achieving these goals.

Gabriel Schor

Chairman of the Board of Directors

L e t t e r f r o m t h e B o a r d o f D i r e c t o r s

Members of the

Board of Directors as at

December 31, 2007:

Directors

Gabriel Schor (Chairman)

Mariano Larena

Barbara van Oven

Helen Alexander

Gabriele Heber

Alternate Directors

Pablo González

Rochus Mommartz

Claus-Peter Zeitinger

Anja Lepp

Manuel Buriticá

Management Board

as at December 31, 2007:

Pedro Arriola

Janet Pacheco

Edwin Andrade

Alexandra Carvajal

Jana Donath

Mónica Flores

Ligia Sandoval

Oscar Villaseca


A n n u a l R e p o r t 2 0 0 7

The Bank and its Shareholders

Banco ProCredit Ecuador is part of the ProCredit

group, which is led by its Frankfurt-based parent

company, ProCredit Holding. ProCredit Holding

is the majority owner of Banco ProCredit

Ecuador and holds 87.9% of the shares. In 2007

ProCredit Holding acquired the shares owned

by IPC, slightly increasing its holding in Banco

ProCredit Ecuador and reconfirming its commitment

to the institution. IPC was one of the bank’s

founding shareholders and will retain its involvement

in the bank’s future development through

its shareholding in ProCredit Holding.

Banco ProCredit Ecuador was founded in October

2001, under the name Sociedad Financiera Ecuatorial,

by an alliance of international developmentoriented

investors. Their goal was to establish a

new kind of financial institution that would serve

the demand of small and very small businesses in

Shareholder

(as of Dec. 31, 2007)

ProCredit Holding

DOEN

Total Capital

Sector

Investment

Investment

ProCredit Holding is the

parent company of a global

group of 22 ProCredit banks. ProCredit Holding

was founded as Internationale Micro Investitionen

AG (IMI) in 1998 by the pioneering development

finance consultancy company IPC.

ProCredit Holding is committed to expanding

access to financial services in developing countries

and transition economies by building a

group of banks that are the leading providers of

fair, transparent financial services for very small,

small and medium-sized businesses as well as

the general population in their countries of operation.

In addition to meeting the equity needs of its

subsidiaries, ProCredit Holding guides the development

of the ProCredit banks, provides their

senior management, and supports the banks in

all key areas of activity, including banking operations,

human resources and risk management. It

ensures that ProCredit corporate values, bestpractice

banking operations and Basle II risk

management principles are implemented groupwide.

a socially responsible way. The primary aim was

not short-term profit maximisation but rather to

deepen the financial sector and contribute to longterm

economic development while also achieving

a sustainable return on their investment.

The founding shareholders of Banco ProCredit

Ecuador were ProCredit Holding, DOEN Foundation

and IPC, with IPC providing the bank’s executive

management. Over the years, ProCredit

Holding, working closely with IPC, has consolidated

the ownership and management structure

of all the ProCredit banks to create a truly global

group with a clear shareholder structure and to

bring to each of the ProCredit institutions all the

synergies and benefits that this implies. Today’s

shareholder structure of Banco ProCredit Ecuador

is outlined below. The bank’s share capital as

of December 2007 was USD 17.125 million.

Headquarters

Germany

The Netherlands

Share

87.9%

12.1%

100%

Paid-in Capital

(in USD)

15,045,000

2,080,000

17,125,000

IPC is the leading shareholder and strategic

investor in ProCredit Holding. IPC has been

the driving entrepreneurial force behind the

ProCredit group since the foundation of the

banks. Historically, IPC provided the senior managers

of the ProCredit banks. At the end of 2007,

IPC staff were integrated into ProCredit Holding,

significantly strengthening the company’s ability

to support the ProCredit group.

ProCredit Holding is a public-private partnership.

In addition to IPC and IPC Invest (the

investment vehicle of the staff of IPC and

ProCredit), the other private shareholders of

ProCredit Holding include the Dutch DOEN Foundation,

the US pension fund TIAA-CREF, the US

Omidyar-Tufts Microfinance Fund, the Swiss investment

fund responsAbility and the Salvadoran

company Fundasal. The public shareholders of

ProCredit Holding include KfW (the AAA-rated

German promotional bank), IFC (the AAA-rated

private sector arm of the World Bank), FMO (the

Dutch development bank) and BIO (the Belgian

development fund).


ProCredit Holding has an investment grade rating

(BBB-) from Fitch Ratings Agency. As of the end

of 2007, the equity base of the ProCredit group

is EUR 333.2 million. The total assets of the

ProCredit group are EUR 4.1 billion.

Stichting DOEN – Postcode

Loterij/Sponsor Loterij/Bank-

Giro Loterij was set up in 1991 to promote a liveable

world in which everyone can play a part. To

that end DOEN invests in and subsidises initiatives

in the fields of sustainable development,

culture, welfare and social cohesion. DOEN funds

its activities from annual contributions received

under long-term contracts from its founder, the

Nationale Postcode Loterij, and two other Dutch

charity lotteries, the BankGiro Lottery and the

Sponsor Bingo Lottery.

Th e B a n k a n d i t s S h a r e h o l d e r s

Since 1994 DOEN Foundation finances entrepreneurial

and sustainable initiatives that improve

access to the financial sector in countries in

transition and developing countries. DOEN has a

preference for long-term strategic partnerships.

In 1998 it started working with ProCredit Holding

and has since been a strategic investor.


A n n u a l R e p o r t 2 0 0 7

The ProCredit Group – Neighbourhood Banks for Ordinary People

The ProCredit group currently comprises 22 target

group-oriented banks operating in as many

countries. We focus on developing countries and

transition economies in three regions: Eastern Europe,

Latin America and Africa. The group has 622

branches staffed by 16,800 employees. Currently,

ProCredit banks disburse more than 75,000

loans totalling more than EUR 236 million every

month. By the end of 2007, the number of loans

outstanding had grown to 926,000 (amounting

to EUR 2.8 billion, an increase of 34% over the

year). The average loan amount outstanding is

EUR 3,045, and the loan portfolio quality remains

excellent, with a ratio of loans in arrears (>30 days)

to total loan portfolio of only 1.4%. Over 2007,

the group’s deposit base increased from EUR 1.8

billion to EUR 2.5 billion, an increase of 37%. The

number of accounts increased by 900,000.

But what do these facts and figures mean and

what is ProCredit trying to achieve? ProCredit is

building a global group of neighbourhood banks.

But what is a neighbourhood bank? Wherever we

are, we aim to be the accessible, trusted, socially

responsible bank for local small businesses and

“ordinary” people who live and work in the area.

In our lending business, we focus on very small,

small and medium-sized enterprises. At the same

time ProCredit provides retail banking services

to ordinary people, with a focus on low-income

families. In this way we aim to be the long-term

banking partner for target groups which most

conventional commercial banks neglect. By providing

socially responsible products, we aim to

contribute to the economic development of the

countries in which we work.

In the developing countries and transition economies

in which the ProCredit group operates,

conventional commercial banks tend to neglect

small and very small businesses because they

are thought to keep inadequate records, have

insufficient collateral and generate high administrative

costs. However, these businesses are

the main engine of economic growth and job creation.

Over the years, the ProCredit group and

IPC, which developed the lending methodology

used by the ProCredit group, have gained a profound

understanding of both the problems faced

by small businesses and the opportunities available

to them, and have tailored the credit technology

to reflect the realities of their operating envi-

ronment. Thanks to this credit technology, which

combines careful analysis of all credit risks with

a high degree of standardisation and efficiency,

ProCredit institutions are able to reach a large

number of small borrowers.

In contrast to ProCredit, other commercial banks

give priority in their lending operations to corporate

finance and consumer lending, especially

the latter. Consumer finance is attractive to those

banks because it usually does not require skilled

staff or much financial analysis of the client,

allowing banks focused on market share to grow

quickly. However, this quest for market share can

lead to irresponsible lending and over-indebtedness

on the part of the client. ProCredit never forgets

that a loan is also a debt. The recent events

around the US subprime mortgage crisis are an

important reminder of the social and economic

consequences of inappropriate lending behaviour.

In contrast, we place great emphasis on the

careful evaluation of a borrower’s debt capacity

and on building lasting relationships. In this way,

ProCredit is characterised by a responsible, longterm

attitude towards business development and

client relationships.

Furthermore, ProCredit institutions strive to foster

a savings culture. We aim to build public confidence

in banks by setting new standards in customer

service, transparency and business ethics.

ProCredit deposit facilities are appropriate for a

broad range of customers, especially low-income

groups. We offer simple savings products with no

minimum deposit requirement. Eighty percent of

all deposit accounts have a balance of less than

EUR 100. This illustrates our target-group orientation

and highlights the challenge of serving

this target group of small savers who account for

only 1% of our total deposit volume. In the spirit

of a neighbourhood bank, ProCredit banks place

great emphasis on children’s savings products

and education campaigns as well as on sponsoring

local community events. In addition to deposit

facilities, clients are offered a full range of

standard non-credit banking services.

The shareholders of the group aim to strike the

right balance between their prime developmental

goals: reaching as many small enterprises and

small savers as possible, and achieving commercial

success. For 2007, the return on equity for


the group as a whole, expressed in hard currency

after deduction of profit taxes, is 12.6%.

And who are the shareholders behind the

ProCredit group? The ProCredit group is led by the

Frankfurt-basedProCreditHoldingAG,foundedby

the consulting firm IPC in 1998. In Eastern Europe,

EBRD and Commerzbank, and in Latin America,

the IDB, also participate as minority shareholders.

ProCredit Holding is a public-private partnership,

led by IPC and by IPC Invest, the investment

vehicle of the staff of IPC and ProCredit. The other

private shareholders of ProCredit Holding include

the Dutch DOEN Foundation, the US pension fund

TIAA-CREF, the US Omidyar-Tufts Microfinance

Fund and the Swiss investment fund respons-

Ability. The public shareholders include KfW, IFC,

FMO and BIO.

ProCredit

Mexico

Banco ProCredit

Honduras

Banco ProCredit

El Salvador

Banco ProCredit

Nicaragua

ProCredit Services

Colombia

Banco ProCredit

Ecuador

Banco Los Andes

ProCredit Bolivia

P r o C r e d i t G r o u p – N e i g h b o u r h o o d B a n k s f o r O r d i n a r y P e o p l e

ProCredit Holding not only provides equity to its

subsidiaries, but also guides the development of

the ProCredit banks, provides their senior management,

and supports the banks in all key areas

of activity. Historically, IPC staff managed the

ProCredit institutions, building them to what they

are today. At the end of 2007, IPC staff were integrated

into ProCredit Holding, greatly strengthening

its ability to support the group. The holding

company ensures that ProCredit corporate values,

best-practice banking operations and Basle

II risk management principles are implemented

group-wide. Plans are underway to bring the

ProCredit group under the supervision of the

German federal banking supervisory authority

(BaFin) in 2008.

ProCredit Bank Serbia

ProCredit Bank

Bosnia and Herzegovina

ProCredit Bank Kosovo

ProCredit Bank Albania

ProCredit Bank Macedonia

ProCredit Bank

Sierra Leone

ProCredit

Savings and Loans Ghana

ProCredit Bank

Democratic Republic of Congo

Banco ProCredit Mozambique

ProCredit Bank Ukraine

ProCredit Moldova

ProCredit Bank Romania

ProCredit Bank Kyrgyzstan

(planned)

ProCredit Bank Georgia

ProCredit Bank Armenia

ProCredit Bank Bulgaria


10

A n n u a l R e p o r t 2 0 0 7

ProCredit Holding is deeply involved in human

resource management. The neighbourhood bank

concept is not limited to our target customers

and how we reach them, it is also about our staff:

how we work with one another and how we work

with our customers. The neighbourhood bank

approach requires a high degree of decentralised

decision-making and therefore judgement and

creativity from all staff, especially our branch

managers. Our corporate values embed principles

such as honest communication, transparency

and professionalism into our day-to-day

business. Key to our success is therefore the right

selection and training of staff. We maintain a corporate

culture that harnesses the creativity and

entrepreneurial spirit of our staff, while fostering

their deep sense of personal and social responsibility.

This entails not only intensive training in

technical and management skills, but also a continuous

exchange of personnel among our member

institutions in order to take full advantage

of the opportunities for staff development that

are created by their participation in a truly international

group.

A central plank in our approach to training is the

group’sProCreditAcademyinGermany,whichprovides

a three-year, part-time “ProCredit Banker”

training programme for high-potential personnel

from each of the ProCredit institutions. The programme

includes intensive technical training and

also exposes participants to a very multicultural

learning environment and to subjects such as

anthropologyandthehumanities.Theprogramme

provides an opportunity for our future leaders to

develop their views of the world, as well as their

communication and staff management skills. The

professional development of local middle managers

is further supported by three regional academies

in Latin America, Africa and Eastern Europe,

which provide similar off-site training for a larger

number of people.

The group’s strategy is to continue its very rapid

growth in order to meet the large unmet demand

for financial services from its target groups. The

continued success of ProCredit relies on a selfconfident

team of people who share a personal

commitment to the target group, to fast growth

and to the neighbourhood way of doing things.


ProCredit in Latin America

Microfinance is reaching a critical point in its

development in Latin America. It has a twentyyear

history in the region, which is a relatively

long period of time. And yet financial services

are still failing to meet the demands of the vast

majority of ordinary people. There is widespread

disaffection about the benefits that the liberalisation

of the trade and financial sectors has

really brought. Today “banking the un-banked” is

a high-profile political priority across the region.

Yet, there are relatively few players that are meeting

this challenge in a responsible way. The result

is a trend toward government intervention

in microfinance. This is understandable in a situation

where banking sectors are not seen to be

meeting the needs of the majority. However, history

has shown this usually to be an unsuccessful

approach which undermines sustainable target

group-oriented institutions.

Commercial banks are aggressively entering

Latin American markets. However, all too often

they are doing so by engaging in aggressive consumer

lending. Typically this is based on little

or no analysis of a customer’s ability to repay a

loan, and therefore comes with an inherent risk of

widespread over-indebtedness and default.

On the other hand, most NGOs have found it difficult

to scale up their efforts or to create truly

sustainable institutions with strong owners

and managers. Most therefore remain small,

inefficient and uncertain about their long-term

future. Others are being targeted for acquisition

by consumer finance-oriented banks or even

state-owned banks. However, acquisitions of this

kind are unlikely to support a sustainable commitment

to the target group.

In this context, the challenge for the ProCredit

group is to be the standard bearer that demonstrates

that responsible commercial banking

can bring real benefits for very small and small

businesses and ordinary people on a large scale.

ProCredit is quite clearly different from other “microfinance”

players. ProCredit banks are significantly

more efficient and more dynamic than

the weak NGOs. And as fully fledged banks, able

to gather deposits, we can reach larger scale.

In 2007, the loan portfolio volume of ProCredit

banks in Latin America grew by over 44%, well

P r o C r e d i t i n L at i n A m e r i c a 11

ahead of the rate at which the region’s banking

sectors are growing.

We have significantly more experience in extending

small loans and serving the target group than

conventional commercial banks. ProCredit banks

specialise in lending to enterprises – very small,

small and medium-sized enterprises – which

are being neglected in the battle for consumer

finance customers. At ProCredit, we place great

emphasis on the careful evaluation of a borrower’s

debt capacity and on building lasting relationships

– we never forget that a loan is also a

debt. The very high quality of our loan portfolio

testifies that ProCredit is characterised by a responsible,

long-term attitude towards business

development.

ProCredit is establishing itself as the “neighbourhood

bank” for small entrepreneurs, small

businesses, and low-income families. We aim to

set new standards in terms of accessibility and

transparency for our banks’ customers.

Given our unique positioning, our strategy has

been to strengthen our presence across the region.

In 2007 alone we began operations in three

new countries: Honduras, Mexico and Colombia.

These countries have a combined population of

some 160 million and a level of loans and deposits

to GDP of below 30%, indicating a very low level

of access to financial services. The ProCredit

group is currently present in seven countries and

has 340,000 outstanding loans in the region.

Across Latin America we operate as an integrated

group of banks with the same products and high

quality of services. This means that we can serve

our business customers wherever they are, since

many operate across borders.

We are proud that 2007 saw a dramatic increase

not only in our lending activities and our regional

presence, but also in the number of people who

have chosen to open a savings account with a

ProCredit bank – the number of accounts almost

doubled over the year and now stands at 643,000.

We are also working with families receiving remittances

to put their regular cash flows to more productive

use, for example in the form of savings or

housing improvement loans.


1

A n n u a l R e p o r t 2 0 0 7

Mexico

Belize

Honduras

Guatemala

El Salvador

Costa Rica

Haiti

Dominican Republic

Jamaica Puerto Rico

Nicaragua

Panama

Cuba

Ecuador

Our staff is the key to our institutions’ success in

their role as responsible neighbourhood banks

for enterprises and ordinary people across the

region. Investment in training, regional staff exchange

programmes and building a strong sense

of corporate identity based on our shared corporate

values is a priority for ProCredit in Latin

America. Investment in our staff not only means

developing technical skills. It also means developing

the communication culture and management

skills needed to underpin a truly ethical

approach to business development across the

region. A target group-oriented bank requires devolved

decision-making and strong managers at

every level. A high degree of internal and external

transparency, in terms of the way we communicate

with one another and with our customers, is

central to our strategy of scaling up our approach

Peru

Colombia

Chile

Venezuela

Bolivia

Argentina

Guyana

Suriname

Paraguay

Uruguay

French Guyana

Brazil

and expanding our outreach. These demands on

staff mean we put a strong emphasis on training.

The ProCredit Regional Academy in Nicaragua,

established in 2006, has proved to be very successful.

Already, 114 local managers from across

the region are participating in the twelve-week

programme, which takes place over the course of

two years. In autumn 2007, the Academy celebrated

the graduation of its first class of 40 students.

Our strategy going forward is to continue to build

our institutions and significantly increase outreach

in the seven countries in which we operate.

In so doing we can bring much-needed responsible

banking to a larger number of people and

firmly establish ourselves as the regional bank of

choice for small businesses and ordinary people

across Latin America.


Name

Banco Los Andes ProCredit

Bolivia

ProCredit Services

Colombia

Banco ProCredit

Ecuador

Banco ProCredit

El Salvador

Banco ProCredit

Honduras

ProCredit

Mexico

Banco ProCredit

Nicaragua

Highlights*

Founded in July 1995

(bank since January 2005)

42 branches

105,032 loans / USD 272.7 million in loans

204,990 deposit accounts / USD 206.5 million

1,340 employees

Founded in December 2006

(operational since September 2007)

9 branches

1,246 loans / USD 2.4 million in loans

173 employees

Founded in October 2001

(bank since September 2004)

25 branches

57,581 loans / USD 184.4 million in loans

87,214 deposit accounts / USD 78.2 million

807 employees

Founded in March 1995

(bank since June 2004)

37 branches

87,117 loans / USD 165.6 million in loans

184,005 deposit accounts / USD 154.5 million

956 employees

Founded in June 2007

(operational since June 2007)

5 branches

3,156 loans / USD 4.4 million in loans

8,087 deposit accounts / USD 2.5 million

168 employees

Founded in November 2006

(operational since June 2007)

6 branches

2,334 loans / USD 4.7 million in loans

156 employees

Founded in August 2000

(bank since October 2005)

29 branches

84,240 loans / USD 128.5 million in loans

158,318 deposit accounts / USD 56.9 million

790 employees

* The figures in this section have been compiled on the basis of the financial and operational reporting performed in accordance with group-

wide standards; they may differ from the figures reported in the bank’s local GAAP statements.

Contact

P r o C r e d i t i n L at i n A m e r i c a 1

Av. Cristo Redentor nro. 3730

(entre cuarto y quinto anillo)

Santa Cruz

Tel.: +591 3 341-2901

Fax: +591 3 341-2719

contactanos@losandesprocredit.com.bo

www.losandesprocredit.com.bo

Av. Calle 39 N. 13 A-16

Bogotá

Tel.: +57 1 5978480 / 5954040

Fax: +57 1 2450738

informacion@procredit.com.co

Av. Amazonas y Atahualpa esquina

Quito

Tel.: +593 2 600 38 20

Fax: +593 2 600 38 19

info@bancoprocredit.com.ec

www.bancoprocredit.com.ec

Boulevard Constitución y 1a.

Calle Poniente # 3538 (Col. Escalón)

San Salvador

Tel.: +503 2267 4400

Fax: +503 2267 4500

info@bancoprocredit.com.sv

www.bancoprocredit.com.sv

Colonia Tepeyac, Av. Las Minitas

Edificio ProCredit, Apartado Postal 3576

Tegucigalpa M.D.C.

Tel.: +504 290 10 10

Fax: +504 290 10 99

procredit@procredit.com.hn

www.procredit.com.hn

Boulevard García de León No. 1707

Colonia Chapultepec Oriente, Morelia

C.P. 58260 Morelia Michoacán

Tel.: +52 443 232 73 00

Fax: +52 443 204 19 00

procredit@procredit.com.mx

Rotonda El Güegüense

75 vrs. al sur

Managua

Tel.: +505 255 76 76

Fax: +505 268 16 30

procredit@procredit.com.ni

www.procredit.com.ni


1

A n n u a l R e p o r t 2 0 0 7

Highlights in 2007

• The bank’s institutional risk rating was upgraded

to “AA+”, and its commercial paper

programme was given an “AAA-” rating.

• Banco ProCredit Ecuador organised and implemented

various regional seminars for all

of the ProCredit institutions in Latin America.

The topics covered included deposits and

banking services, auditing, the prevention of

money laundering, SME lending, accounting

and finance, and IT departments.

• The bank carried out a savings campaign,

leading to a 100% increase in the number of

new accounts opened per month.

• The bank established new divisions and departments

at the head office and strengthened

its organisational structure at the branch

level.

• Geographical outreach was expanded, with

seven branches being opened.


• The bank’s paid-in capital increased by USD

8.5 million.

• Banco ProCredit Ecuador signed agreements

to become a member of the MasterCard and

SWIFT systems.

• An agreement was signed with Citibank/OPIC

regarding the provision of a credit line to the

bank.

• The bank provided training and advisory support

to help ProCredit Services, Colombia,

launch its operations.

H i g h l i g h t s i n 2 0 0 7 1


1

A n n u a l R e p o r t 2 0 0 7

Management Business Review

Management

from left to right:

Ligia Sandoval

Retail Division Manager

Oscar Villaseca

Credit Consultant

Jana Donath

Finance Division Manager

Janet Pacheco

Deputy General Manager

Pedro Arriola

General Manager

Monica Flores

IT Manager

Edwin Andrade

Risk Manager

Alexandra Carvajal

Operations Division Manager


Political and Economic Environment

2007 saw significant changes in Ecuador’s key

macroeconomic indicators, due in large measure

to the fact that a new government came to power

and made proposals for far-reaching changes,

creating considerable uncertainty.

The GDP growth rate, estimated at less than 3%,

was one of the lowest in Latin America and well

below the 3.9% recorded in 2006, providing clear

evidence of an economic slowdown that was attributable

to the highly unstable political environment,

and to the effects of significant changes

made to the legal and regulatory framework for

business.

Oil prices remained high throughout the year, allowing

the new government to maintain its policy

of increasing subsidies as part of its overall political

and economic strategy. The government

expanded subsidies to cover a range of sectors,

despite the lack of any firm basis for this in the

medium term. Oil exports accounted for 55% of

the country’s total exports and provided more

than 30% of the national budget.

Despite rising international prices, the volume

of oil production fell, due primarily to a lack of

investment as a result of changing government

policies towards this sector. However, other productive

activities made an important contribution

to the economy, together with the flow of

remittances from migrants, which continues to

grow every year and amounted to almost USD 3

billion in 2007.

The performance of key macroeconomic indicators

in 2007 can be summarised as follows:

• There was a significant increase in the price

of some basic goods towards the end of year,

but the annual inflation rate was 3.3%, an

acceptable level for a dollarised economy.

• Tax receipts grew steadily, exceeding projections.

• The country risk indicator (EMBI 1 ) remained

at high levels – around 600 points. However,

the government kept all of the commitments it

1 EMBI = JP Morgan Emerging Markets Bond Index

M a n a g e m e n t B u s i n e s s R e v i e w 1

had made in terms of economic-policy measures,

and this contributed to stability.

• The export sector is expected to face certain

problems given that negotiations with the

United States on a free trade treaty were

broken off, and because the programme of

preferential tariffs for exports to the US was

not renewed.

This latter point, together with instability resulting

from signficaint changes to the legal framework

and the process of drawing up a new political

constitution, made businesspeople reluctant

to invest.

The political situation continued to be characterised

by instability, since 2007 was a year of transition.

Capitalising on the failures of the traditional

parties and the advantages of a favourable

political environment in Latin America in

which the majority of the countries in the region

have left-of-centre governments, a new political

movement assumed power in Ecuador. As a result,

more power was concentrated in the hands

of the new president, who is promoting significant

state intervention in the economy.

A Constituent Assembly was convened, and the

members took their seats at the end of November,

with supporters of the government clearly in

the majority. This assembly, assuming “full powers”,

took control of the legislative process and

annulled the actions of the National Congress,

the country’s parliament.

In 2008, the government will likely seek to consolidate

its position and implement its political

and economic strategy, which will probably

lead to conflict at many levels arising from the

passage of controversial legislation such as the

planned reforms of the tax code and the financial

system.


1

A n n u a l R e p o r t 2 0 0 7

Financial Sector Developments

2007 was a year of political transition, in which

a number of initiatives and issues – including

legislation setting maximum interest rates, laws

aimed at providing greater transparency, and

tax reforms – had an impact on the activities of

financial-sector institutions. Although it remained

sound, the financial sector was undoubtedly

affected by the instability described above,

and this is reflected in the figures on its performance

for the year.

The pressure brought to bear by the government

took the form of frequent changes to the regulations

governing the maximum permissible interest

rates, and the government finally imposed its

own standards by using the Central Bank to put

limits on interest rates. In the process by which

the new ceilings were established, decisions

were guided primarily by political considerations

rather than an assessment of prevailing market

conditions.

Financial institutions responded to the political

and regulatory uncertainty by reducing the

volume and maturities of loans issued, increasing

interest rates, maintaining higher levels of

liquidity, and focusing on consumer and housing

loans at the expense of business lending. This

extremely conservative approach had an adverse

impact on the growth of the loan portfolio: the

portfolio for the financial system as a whole grew

Loan Portfolio Development

Volume (in USD million)

200

180

160

140

120

100

80

60

40

20

0

< USD 10,000 > USD 150,000

Number (in ’000)

Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec

03 04 05 06 07

USD 10,001 – USD 50,000 Total number outstanding

USD 50,001 – USD 150,000

70

63

56

49

42

35

28

21

14

7

0

by 13.5%, compared with an increase of 24.4%

in the preceding year. Customer deposits grew by

18%, the same rate as for 2006.

One positive aspect was the quality of the loan

portfolio, which remained at acceptable levels

thanks to sound management of the risks involved

in financing activities. Financial institutions enhanced

their operational efficiency through various

internal improvements and as a result of the

efforts they had made to respond to the changes

in the legal and regulatory framework. Effective

risk management has become a key priority in the

banking sector over the last few years, thanks to

the national regulatory authority’s focus on this

issue.

2008 seems likely to be a challenging year for the

financial sector, given that the government will

continue to exert pressure on the sector, through

the Central Bank and the National Constituent

Assembly, with the aim of reducing interest rates

based on its political priorities rather than an

assessment of market conditions and requirements.

Lending Performance

During 2007, Banco ProCredit’s loan portfolio

continued to grow very rapidly; the total loan portfolio

volume grew by 66% to USD 184.38 million.

The bank is a leader in the provision of loans to

Number of Loans Outstanding – Breakdown by Loan Size*

5.8% o.04%

53.3%

o.3%

40.6%

< USD 1,000 USD 50,001 – USD 150,000

USD 1,001 – USD 10,000 > USD 150,000

USD 10,001 – USD 50,000 * 31 Dec 2007


small and very small businesses. Despite the fact

that it is a relatively new player in the country’s

financial system, Banco ProCredit accounted for

approximately 20% of the annual growth in the

volume of loans outstanding to very small businesses

in Ecuador, achieving a 12% market share

in this sector.

In 2007 Banco ProCredit ranked fourth in the

financial system in terms of its total loan portfolio

growth, outperforming several of the country’s

major banks. More importantly, Banco ProCredit

was the leader in terms of growth in business

lending, a significant achievement considering

that it ranks as the 11th largest bank and has a

market share of only 2.5% by total loan portfolio

volume.

While these results were satisfactory, they were

not sufficient to allow the bank to achieve the targets

it had set itself for 2007. The loan portfolio

growth for the small and medium-sized enterprise

segment was lower than had been forecast,

as it took longer than planned to recruit business

client officers with the required skills and to give

them the necessary training. The bank’s decision

during the first half of the year to temporarily

postpone the opening of branches due to the uncertainty

generated by the changes being made

to the regulatory framework for the financial system

was another factor that affected its ability to

achieve its targets.

Business Loan Portfolio – Breakdown by Maturity

in %

100

90

80

70

60

50

40

30

20

10

0

Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec

03 04 05 06 07

< 12 months 12 – 24 months > 24 months

Loan Portfolio Quality (arrears >30 days)

in % of loan portfolio

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0

Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec

03 04 05 06 07

Net write-offs:

in 2003: USD 50,908

in 2004: USD 105,052

in 2005: USD 365,489

M a n a g e m e n t B u s i n e s s R e v i e w 1

The bank resumed the process of opening branches

during the second half of the year, and by the

end of 2007 it had assembled a full team of business

client officers specialised in serving small

and medium-sized enterprises.

The bank ended the year with 57,581 loans outstanding

(growth of 46% with respect to 2006).

The average loan amount rose from USD 2,986 to

USD 3,255 due to the increasing share of the loan

portfolio accounted for by lending to small and

medium-sized enterprises (SMEs). Loans to this

segment accounted for 31% of the total portfolio

volume, demonstrating the bank’s commitment

to promoting development in Ecuador by providing

financing to the business sector and helping

local companies to generate employment.

The growth in the SME segment did not mean that

thebankdevotedlessattentiontoverysmallloans

(up to USD 1,000), however. It continued to place

great emphasis on loans in this size range, and the

share of the number of loans outstanding accounted

for by very small loans rose from 22% to 24%.

The sectoral breakdown of the portfolio remained

almost unchanged throughout the year: at yearend,

the largest share (40% of the outstanding

volume) was accounted for by trade, followed by

transport services (16%) and production (15%).

Lending to the agricultural sector (13%) continued

to be concentrated in the mountainous areas

of the country.

in 2006: USD 724,299

in 2007: USD 889,895


0

A n n u a l R e p o r t 2 0 0 7

The quality of the bank’s portfolio continued to

be one of its major strengths. At the end of 2007,

total arrears – all loans in arrears by one day or

more – stood at 2.7%, while arrears greater than

30 days came to 1.5%. These indicators remained

almost unchanged with respect to the previous

year. The bank has been able to maintain its arrears

at such low levels thanks to the quality of

the comprehensive credit analysis which it performs

for all loan applications. This analysis is an

integral part of the specific lending methodology

that is used by the banks in the ProCredit group.

As applied in each of the individual countries, the

credit technology is based on a thorough knowledge

of the customers whom the local institution

serves and the markets in which it operates. At

the same time, the level of net loan losses as a

proportion of the average portfolio fell from

0.76% to 0.58%, due primarily to the increased

effectiveness of legal measures undertaken to recover

delinquent loans and the creation of a team

of loan recovery managers as a permanent feature

of the bank’s organisational structure.

The bank introduced a credit line for SMEs in

response to this segment’s demand for faster

access to liquidity and for a more flexible source

of financing, giving Banco ProCredit a competitive

advantage in this market. The bank also introduced

payment protection insurance, which,

although not compulsory for small loans, was

well received, with 96% of all borrowers taking

advantage of this service. The institution continued

its review of processes and internal policies,

making modifications wherever necessary in order

to ensure that its products remain straightforward

and easy to understand and to minimise

transaction costs for its customers.

Finally, it should be noted that in 2007 there was

an important change with regard to the structure

and organisation of lending operations: the bank

strengthened the credit division by recruiting two

new co-ordinators, one for loans to very small

businesses and the other for agricultural loans,

together with a loan recovery supervisor.


Deposits and Other Banking Services

Deposits from local customers rose by 73% (USD

33.09 million) in 2007, and this increase was sufficient

to provide 46% of the funding required

to finance the growth of the bank’s outstanding

portfolio. Fifty percent of the growth in the deposit

volume came from term deposits, which

had an average maturity period of 180 days, considerably

longer than the 90 days that was the

average for the rest of the financial system.

The increase in the number of deposit accounts

represented the most significant achievement in

this area of operations in 2007. The number of

accounts rose by 58,000 during the year, an increase

of 135%. As a result, the bank was easily

able to exceed its targets for 2007 for the number

of savings accounts.

In line with its “neighbourhood bank” philosophy,

Banco ProCredit continued to set itself apart from

other institutions within the Ecuadorian financial

system by promoting a culture of saving based on

the accessibility, security, high-quality service

and financial soundness backed by international

support which are the bank’s distinguishing features.

The bank’s positioning as a responsible

neighbourhood bank became particularly important

in the context of the change in the country’s

government, which created uncertainty among

savers, and the bank placed particular emphasis

Customer Deposits

Volume (in USD million)

80

70

60

50

40

30

20

10

0

Number (in ’000)

Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec

03 04 05 06 07

Term Savings Sight Total number

112

98

84

70

56

42

28

14

0

Number of Customer Deposits – Breakdown by Size*

0.5%

4.4%

16.5%

0.11%

o.09%

< USD 100 USD 10,001 – USD 50,000

78.4%

USD 101 – USD 1,000 USD 50,001 – USD 100,000

USD 1,001 – USD 10,000 > USD 100,000

M a n a g e m e n t B u s i n e s s R e v i e w 1

on explaining its mission, approach to banking,

and corporate values to the public.

During the year, management’s major focus was

on creating a structure that would enable the bank

toachievesustainablegrowthbyfurtherstrengthening

the competitive advantage it derives from

providing high-quality service and expanding

its coverage of market sectors with the greatest

potential. By implementing this new structure at

the branch level, the bank provided greater support

to branch and regional managers in the management

of liabilities. This issue is discussed in

detail below in the Special Feature.

With regard to the bank’s market positioning,

management worked closely with the marketing

department to develop and implement more effective

promotional measures at the branches,

where staff participated enthusiastically in targeted

events designed to provide information

about Banco ProCredit’s financial services and

its activities to support local communities. This

approach was supported by two advertising campaigns

that aimed to make the public more aware

of the bank’s soundness and the accessibility of

its savings accounts to everyone.

To expand its outreach, the bank decided to place

greater emphasis on smaller branches, through

which it can manage its operations more efficiently

and achieve faster branch network ex-

* 31 Dec 2007


A n n u a l R e p o r t 2 0 0 7

pansion. During the year, seven branches were

opened, three at locations in important coastal

cities where the bank had previously not had a

presence. In addition, the existing offices were

renovated and refurbished to ensure that all

branches conformed to the bank’s corporate design

standards and to make them more attractive

and easier to use for customers.

The bank expanded its current account services,

introducing international transfers using the

SWIFT system, facilities for the payment of utility

bills, and arrangements providing for the payment

of customers’ salaries directly into their

accounts. As an added benefit for holders of

savings and term deposit accounts, accident insurance

and life insurance were introduced, with

these services being offered to customers free of

charge. The bank also developed a joint Banco

ProCredit-MasterCard debit card which was being

tested at the end of the year, and made preparations

for the introduction of ATMs and an Internet

banking service.

Through these measures, the bank created a foundation

that will enable it to achieve rapid growth

in its deposit portfolio next year. This will in turn

enable it to continue to contribute to the development

of the country by offering a broad range of

products and services that are accessible to all

segments of the population.

Financial Results

As in previous years, the bank achieved rapid

growth in the scale of its operations and in other

key measures of its institutional development, as

is shown by the following figures:

• The bank opened seven branches, ending the

year with 25 branches nationwide.

• The number of staff rose from 555 to 813

(+46%).

• Total assets grew by USD 85.780 million

(+65%).

• Paid-in capital increased by USD 8.487 million

(+98.3%).

The growth in total assets was accounted for primarily

by the increase in the loan portfolio, which

represented 82.6% of the bank’s assets. The

remaining assets consisted of cash (2.5%),

investments (10.3%), fixed assets (3.8%) and

other assets (0.8%). Asset growth was financed

by a combination of funding from external and local

sources, each of which accounted for 44.6%

of the total, with the remaining funds coming

from the capital increase undertaken by the

shareholders.

Borrowings from external sources rose by

USD 41.53 million (+118%). The main foreign

institutions which lent funds to the bank were

ProCreditHoldingandotherbanksbelongingtothe

ProCreditgroup;Europeaninvestmentfundsmanaged

by responsAbility and Blue Orchard; multilateral

institutions such as the Inter-American

Investment Corporation; and commercial banks

such as Citibank, which issued a funding line in

the amount of USD 20 million to Banco ProCredit

Ecuador that was partially underwritten by OPIC

and through which USD 6 million had been disbursed

to the bank by the end of December 2007.

The bank aims to further increase the proportion

of its lending activities that is funded from customer

deposits, which grew by 73% or USD 33

million during 2007.

In view of the bank’s strong asset growth,

ProCredit Holding provided additional capital in

the amount of USD 6.5 million, and the shareholders

decided to reinvest the entire net profit

for 2006, which amounted to USD 2 million.

These additions to the bank’s capital ensured

that it maintained a healthy capital adequacy

ratio (13.3%), substantially exceeding the 9% required

by Ecuadorian regulations.

The bank reported a profit of USD 2.85 million,

representing a return on equity after tax of

21.08%. As in previous years, the main source of

the bank’s operating income was interest on the

loan portfolio, which accounted for 98.98% of

the total operating income.

From August 2007 onwards, disbursement fees

were eliminated due to a new law regulating

maximum interest rates. As a result of the new

arrangement, income was generated in the form

of interest income, rather than commissions, but

effective interest rates did not change.


M a n a g e m e n t B u s i n e s s R e v i e w


A n n u a l R e p o r t 2 0 0 7


In the bank’s Local Financial Statements, the

change resulted in a temporary decrease in

financial income, as commission income had

previously been recognised when the loan was

issued. However, in the Financial Statements

prepared in accordance with International Financial

Reporting Standards (IFRS), the commission

income had always been recorded on a deferred

basis. Under IFRS, the ratio of portfolio interest

income to the average loan portfolio remained

virtually unchanged, with 23.13% reported in

December 2007, compared to 23.04% in December

2006.

The cost-income ratio rose from 70.64% to

74.52%,primarily due to investments in expansion

and staff training. The ratio of operating

expenses to average assets fell from 10.78% in

2006 to 10.01% in 2007. This figure is very satisfactory

in comparison with that reported by other

financial institutions with similar characteristics

and given the bank’s focus on small and very

small businesses and small savers.

The increase in operating expenses reported in

2007 was due to investments made as part of the

bank’s programme to expand its geographical

coverage and to support the continued growth of

its business:

• Staff costs rose by USD 2.65 million (60%) due

to growth in the number of staff at head office

and in the branches.

• Administrative costs – covering leases for

premises, communication, office supplies,

transport, IT systems, security services, maintenance,insuranceandutilitiesandotherbasic

services – rose by USD 3.13 million (55.03 %),

due primarily to the opening of additional

branches.

• Marketing costs rose by USD 1.08 million

(176.71%), mainly due to implementation of

the savings campaign and the campaign to

increase the public’s awareness of the bank

and its range of services.

• Training costs increased by USD 488,000

(192.13%) due to the rise in staff numbers and

theneedforhighlytrainedpersonnelwhomeet

the standards set by the ProCredit group.

Outlook

M a n a g e m e n t B u s i n e s s R e v i e w

In view of the bank’s performance to date and its

growing reputation as a sound financial institution

that is worthy of people’s trust, we believe

it can continue to grow rapidly. Our vision is to

become the country’s leading bank in the provision

of financial services to very small, small and

medium-sized enterprises, and to private individuals

in the low and medium income ranges.

To make this vision a reality, our goals for Banco

ProCredit for the coming year are as follows:

• To extend our geographical coverage of the

country,openingbranchesbothincitieswhere

we already have a presence, such as Quito,

Guayaquil and Cuenca, and in places which we

donotcurrentlyserve,suchasPortoviejo,Milagro

and Quevedo.

• To promote saving among people in the low

and middle income ranges by developing new

products that are more closely attuned to the

requirements of each individual segment of

this target group.

• To make the bank more efficient, investing in

the latest technology to automate an increasing

share of our operations.

• To consistently provide high-quality, personalised

service to all of our customers, ensuring

that our service is both fast and friendly at

all times.


A n n u a l R e p o r t 2 0 0 7

Special Feature

Strengthening institutional structures

to provide a foundation for balanced

growth

One of the major challenges facing Banco

ProCredit Ecuador is that of ensuring that its business

develops in a sustainable, balanced manner,

based on an integrated strategy that places

sufficient emphasis on deposit mobilisation and

non-credit services. The bank’s loan portfolio

has grown rapidly since the outset, but it has not

achieved the same high level of performance in

its savings and banking services business.

The bank is aware that balanced development is

essential if the institution is to be successful in

realising its long-term goals in both quantitative

and qualitative terms. Therefore, during 2007 it

made a special effort to create the kinds of institutional

and organisational structures necessary

to help the bank meet its growth targets in

all areas of its business in the coming years. To

achieve this, the bank designed a project involving

the active participation of all of its departments,

drawing on IPC to provide advisory assistance

and support in key areas.

The most important change to the bank’s organisational

structure was the decision to strengthen

the middle management team at the branch level

by creating two new positions: the deposits and

banking services co-ordinator and the operations

supervisor. Working with the credit co-ordinator,

these staff members support the branch managers

and ensure that they have sufficient resources

and operational capacity to facilitate the bank’s

balanced growth strategy. These organisational

changes have created new professional development

opportunities for qualified staff members in

savings, banking services and operations.

In addition, the deposit business was divided into

two segments: individuals and institutions. This

has allowed the bank to design the right products

and strategies for each segment, and has made

service in this area more efficient. The job title of

“loan officer” was changed to “business client

officer”, and the job description was expanded

to cover deposits and banking services. The posi-


tions of “client advisor” and “client relationship

manager” were created to provide a team at the

branch level with the capabilities required to develop

both credit and deposit operations for the

bank’s customers in line with the institution’s

long-term goals.

At head office level, the bank strengthened its

Deposits and Banking Services Division by creating

co-ordination units for the individual and

institutional client segments as well as for the

project to introduce debit cards and ATMs. To

make processes more efficient, shorten response

times, and enhance the quality of customer service,

the bank reallocated responsibility for various

tasks between the branch-level operations

and banking services units. To ensure that the

bank’s organisational structures provided a suitable

basis for the expansion of the deposit portfolio,

it improved the relevant processes and selected

and trained staff to work in the Business

Client Division. In addition, the bank redesigned

the training programme for new and existing staff

and held refresher workshops focusing on deposits

and banking services for middle managers.

To facilitate the development of its business, the

bankcreatedaQualityandProcessesDepartment,

which is responsible for monitoring the quality

of service provided to customers and for developing

and improving products and processes.

The implementation of the new strategy sends

a clear message about the importance the bank

places upon the integrated development of its

business. The bank will continue to focus on developing

its deposit business, given the challenge

which this represents for an institution that has a

long and successful track record as a lender, but

which has devoted less attention to developing its

savings facilities and other non-credit services.

Initial results from the fourth quarter of 2007

show signs of a real breakthrough in the growth

of deposits and provide grounds for optimism

with regard to the bank’s ability to meet this challenge,

particularly since the staff’s commitment

to improving the institution’s performance in this

area has been so clearly demonstrated.

S p e c i a l F e at u r e


A n n u a l R e p o r t 2 0 0 7

Risk Management

To create value through their business operations,

all banking institutions must be able to manage

efficiently the risks associated with the size

and complexity of their operations. This means

they must perform a technical analysis based on

robust models designed to ensure compliance

with rigorous standards. Banco ProCredit Ecuador’s

risk management policy, which was developed

on the basis of ProCredit Holding’s groupwide

risk management policy, aims to assess

the bank’s exposure to risk, to raise employees’

awareness of risk and their ability to identify specific

risks, and to use appropriate tools to mitigate

the risks inherent in the bank’s activities.

In line with its overall philosophy and approach

to banking, Banco ProCredit avoids speculative

activities and takes a prudent approach to the

business activities in which it is involved. The

bank promotes, and indeed requires, ethical behaviour

on the part of its staff. Adherence to this

key aspect of its corporate values is supported

by the open and respectful attitude shown by its

senior management in dealing with employees

and the high-quality professional training provided

to staff at all levels. In this context, Banco

ProCredit Ecuador applies national and international

industry standards to ensure that it complies

with the requirements for prudent risk man-


agement. As a result, although it operated in an

environment characterised by economic and political

uncertainty in 2007, the bank’s risk rating

was upgraded to “AA+” by BankWatch Ratings

(affiliated with FitchRatings).

The following overview summarises the bank’s

performance in 2007 with regard to the different

types of risk to which it was exposed.

Credit Risk

The lending methodology used by the bank has

shown itself to be sound, even under conditions

of uncertainty. Banco ProCredit’s portfolio at risk

(PAR) ratio was one of the lowest reported by any

institution in the financial system, despite significant

growth in its loan portfolio volume, which

rose by USD 70 million to reach a total of USD

184 million at the end of 2007. Provisions were

more than sufficient to cover the portfolio at risk

and were formed on the basis of technical criteria

regarding anticipated and unanticipated losses,

an analysis of significant credit exposures, the

degree of concentration in the portfolio, and other

factors. In addition, the financial condition of

the institutions at which the bank had placed its

excess liquidity was reviewed in detail at regular

intervals.

Market and Liquidity Risk

The bank’s market and liquidity risk remained

very low despite the changes in interest rates.

Special attention was given to assessing the

ways in which the evolving regulatory environment

and its impact on the lending rate could affect

the sustainability of the bank’s business, in

order to take the measures required to offset any

adverse impacts. The bank maintained sufficient

liquidity given the volatility and concentration of

its funding sources, ensuring that it had ample

resources available at all times to meet the funding

requirements created by its operations.

Operational Risk

In 2007, management focused on measures to

further enhance the evaluation and control of

operational risk. The Risk Management Committee

and the Board of Directors took steps to

improve the identification and analysis of loss

events in order to develop strategies to reduce

the likelihood of their recurrence, and the bank

established policies and procedures to ensure

the secure management of information within the

institution.

R i s k M a n a g e m e n t


0

A n n u a l R e p o r t 2 0 0 7

Pacific Ocean

Branch Network

One of the bank’s objectives for the year was

to expand its branch network, particularly in

Ecuador’s coastal region, an area of the country in

which it had only one branch – in the city of Guayaquil

– at the end of 2006. We opened branches

in Durán, Manta and Machala, and increased our

presence in Guayaquil by opening a branch in the

Mapasingue district of that city.

Manta

Guayaquil (5)

Santo Domingo (2)

Otavalo

Quito (6)

Durán

Machala

Latacunga

Cuenca

In the central region of Ecuador, we opened our

second branch in Santo Domingo de los Colorados

and also expanded our presence by opening

a branch in Sangolquí, which will serve the Valle

de los Chillos district. In the mountainous region

in the southern part of the country, we opened a

second branch in Ambato to improve the quality

of service to our customers in that city.

Ambato (2)

Riobamba

Ibarra

Cayambe

Sangolquí

Colombia

Ecuador

Peru


B r a n c h N e t w o r k 1


A n n u a l R e p o r t 2 0 0 7

Organisation, Staff and Staff Development

The continuing increase in the bank’s staffing requirements

posed a real challenge for the institution

in terms of recruiting and human resource

management. In 2007, the number of employees

rose by 258, an increase of 46% compared to the

previous year. Despite the high level of official

unemployment in Ecuador, the bank continues to

find it difficult to identify candidates who have

the right skills and work ethic, and who, most importantly,

share the values of our institution.

If we were to give a name to 2007, it would be the

“Year of Institutional Transformation”, as almost

all departments underwent a series of positive but

demanding changes, a process which required a

substantial input of time and effort from everyone

at the bank. The most important measures taken

can be summarised as follows:

• The bank made changes to the organisational

structure of all of its offices nationwide, supported

by targeted measures to ensure that all

staff understood the objectives and implications

of the new structure for workflows

and processes. The specific steps taken included

a review of salary scales for all mem-

bers of staff, a reallocation of staff in accordance

with their qualifications and skills profiles,

and a reorientation of operations based

on a more integrated approach to lending and

deposits/banking services.

• Thebankdesignedanewinductionprogramme

forstaffbyincorporatingdirectparticipationof

senior management and the heads of departments,

and by introducing workshops to explain

the institutional values that provide the

ethical basis for our approach to banking.

• Based on their individual qualifications and

skills profiles, staff members were reallocated

to fill newly created positions, and the manual

which defines employees’ tasks and responsibilities

in all positions within the institution

was updated in collaboration with team leaders.

• The bank redesigned its staff recruitment process,

increasing objectivity and efficiency by

creating selection committees charged with

ensuring that candidates have the required

skills.Inaddition,itintroducedanewstructure

for interviews providing for a more detailed

assessment of candidates, and involving the

use of role-playing where necessary.


• Staff training programmes were improved to

enable the bank to better prepare employees

to take on new responsibilities, and training

was launched to enhance middle and senior

managers’ human resource management

skills.

• The bank established a Quality and Processes

Department. This new department supports

training and quality control and ensures that

employees correctly apply the bank’s policies,

thereby helping to improve efficiency

and the quality of service.

• The bank restructured head office divisions

and departments and hired and trained new

staff to meet the challenges created by the

increased volume and complexity of its

operations.

• A series of strategic planning workshops was

held for all staff at the head office to ensure

that they are committed to a set of clear, measurable

and achievable targets, and that they

understand that they must all work together

as members of a team.

• High-potential staff were selected for participation

in programmes at the ProCredit Academies

and began attending the courses conducted

at these facilities. Subsequently they

were involved in activities to support the next

group of staff members who will begin the respective

programmes in 2008.

O r g a n i s at i o n , S ta f f a n d S ta f f D e v e l o p m e n t

• An ongoing exchange of knowledge and experience

with other ProCredit banks took

place in 2007 through workshops, seminars,

internships and staff exchanges. ProCredit

colleagues from other countries spent time

at our bank, and staff from Banco ProCredit

Ecuador made visits to these colleagues’

home institutions. One important initiative

that our staff undertook in this area involved

providing support to help launch the operations

of new ProCredit institutions in Colombia

and Sierra Leone.

• We carried out various community activities

reflecting our “neighbourhood bank” philosophy,

with all branch and head office staff

taking part. These activities helped to demonstrate

to both staff and clients what makes

our bank different from other financial institutions.

At the beginning of 2008 we plan to review our

human resource management policies and tools,

making improvements where necessary. Given

the dynamic nature of our institution and the

changes it is undergoing as it grows and evolves,

we need to continuously update and improve our

management procedures, and nowhere is this

process more important than in the area of human

resource management.


A n n u a l R e p o r t 2 0 0 7


Business Ethics and Environmental Standards

Part of the overall mission of the ProCredit group

is to set standards in the financial sectors in

which we operate. We want to make a difference

not only in terms of the target groups we serve

and the quality of the financial services we provide,

but also with regard to business ethics. Our

strong corporate values play a key role in this

respect. We have established six essential principles

which guide the operations of ProCredit

institutions:

• Transparency: We adhere to the principle of

providing transparent information both to our

customers and the general public and to our

employees, and our conduct is straightforward

and open;

• A culture of open communication: We are open,

fair and constructive in our communication

with each other, and deal with conflicts at

work in a professional manner, working

together to find solutions;

• Social responsibility and tolerance: We give

our clients sound advice; their economic and

financial situation, their potential and their

capacities are assessed so that they can benefit

from appropriate “products”; promoting a

culture of savings is important to us; we are

committed to treating all customers and employees

respectfully and fairly, regardless of

their origin, colour, language, gender or religious

or political beliefs;

• Service orientation: Every client is served in

a friendly, competent and courteous manner.

Our employees are committed to providing

excellent service to all customers, regardless

of their background or the size of their business;

• High professional standards: Every employee

takes responsibility for the quality of his/her

work and strives to do his/her job even better;

• A high degree of personal commitment: This

goes hand-in-hand with personal integrity

and honesty – traits which are required of all

employees in all ProCredit institutions.

These ProCredit values represent the backbone

of our corporate culture and are discussed and

actively applied in our day-to-day operations.

Moreover, they are reflected in the Code of Conduct,

which transforms the ProCredit group’s

ethical principles into practical guidelines for all

ProCredit staff. To make sure that new staff fully

B u s i n e s s E t h i c s a n d E n v i r o n m e n ta l S ta n d a r d s

understand all of the principles that have been

defined, the induction training for new employees

includes dedicated sessions dealing exclusively

with the Code of Conduct and its significance

for all members of our team. And to ensure that

employees remain committed to our high ethical

standards and are made aware of new issues and

developments which have an ethical dimension

for our institution, refresher training sessions

– at which case studies are presented and grey

areas discussed – are regularly conducted for

existing staff.

Another aspect of ensuring that our institution

adheres to the highest ethical standards is our

consistent application of international bestpractice

methods and procedures to protect ourselves

from being used as a vehicle for money

laundering or other illegal activities such as the

financing of terrorist activities. The important

focus here is to “know your customer”, and, in

line with this principle, to carry out sound reporting

and comply with the applicable regulations.

We also set standards regarding the impact of our

lending operations on the environment. Banco

ProCredit Ecuador has implemented an environmental

management system based

on continuous assessment of the

loan portfolio according to environmental

criteria, an in-depth

analysis of all economic activities

which potentially involve

environmental risks, and the

rejection of loan applications

from enterprises engaged in

activities which are deemed environmentally

hazardous and

appear on our institution’s exclusion

list. By incorporating

environmental issues into the

loan approval process, Banco

ProCredit Ecuador is also able

to raise its clients’ overall level of

environmental awareness. We ensure that when

loan applications are evaluated, compliance with

ethical business practices is a key consideration.

No loans are issued to enterprises or individuals

if it is suspected that they are making use of unsafe

or morally objectionable forms of labour, in

particular child labour.


36

A n n u a l R e p o r t 2 0 0 7

Our Clients

Eduardo Epifanio

Espinoza García,

Street Vendor

Eduardo Epifanio Espinoza García – or “Don

Eduardo”, as he is known at the Parque California

branch of Banco ProCredit in Guayaquil – opened

a savings account with the bank in December

2006, making an initial deposit of USD 20. Since

then this street vendor has become a frequent

visitor to the branch, usually carrying his “shop”

with him: a tray of cigarettes and sweets which

he takes with him everywhere he goes.

“I wanted to start saving money because I realised

that if I had it in my pocket, then I spent it,”

recalls Mr. Espinoza.

So he decided to look for a bank where he could

open a savings account:

“I went to lots of banks, but they had all sorts

of requirements and asked for things I couldn’t

provide, and sometimes for things which I didn’t

even know about. At one place they just

went by my appearance, because I had my tray

with me, and they raised the requirements.”

He first heard about Banco ProCredit through

an advertisement in the street, and that made

him curious. When he visited the bank the staff

told him about the requirements for opening the

account he had dreamed of having for so long, and

he liked what they told him and how they treated

him. Above all, he felt that these were people he

could trust. So he opened his account.

Six months later, Mr. Espinoza decided to apply

for a loan to purchase merchandise for his business,

and a few months later he took out a second

loan, this time to finance repairs to his house.

Now he has introduced his entire family to Banco

ProCredit: each of his children has a savings

account, and one of them has a term deposit.

Mr. Espinoza has remained loyal to the bank, not

least because the staff have always made him

feel welcome and treated him as a valued customer

whose business is important to them:

“They’ve been polite to me, and they

haven’t refused to serve me just because of what

I do for a living.”


Luis Enrique Fueres has a small workshop for

the production of woollen goods in the parish of

Quichinche, in Otavalo canton. About three years

ago he decided that he wanted to upgrade the

equipment in his workshop, and he approached

Banco ProCredit about a loan. The bank had been

recommended to him by his brother, who was already

a customer.

His business was very small, and at the time

all his machines were old-fashioned, domestic

models. He started out with a loan for

USD 1,000. Mr. Fueres was pleasantly surprised

by the personal attention he received and the

speed with which his loan was issued.

He showed that he took his financial obligations

seriously by ensuring that he repaid the loan within

the established period, and that all the instalments

were paid on time. His second loan from the

bank was for double the amount of the first one,

and once again, he made all of his payments punctually,

thereby becoming one of Banco ProCredit’s

preferred customers, with access to a credit line.

He went through a difficult spell when, after receiving

his second loan, he was the victim of

Luis Enrique Fueres,

Producer of Woollen Goods

a robbery and all his merchandise was stolen.

However, Mr. Fueres refused to give up and was

slowly able to rebuild his business. The bank’s

faith in him was essential: without it, he probably

would have been just one more of the many small

entrepreneurs in Ecuador whose businesses

eventually fail due to a lack of capital.

Mr. Fueres has become one of the bank’s most

loyal customers, and greatly appreciates the support

it has given him and his business over the

last three years:

“Thanks to the help I received from Banco

ProCredit I have gradually been able to modernise

my equipment, and this has

increased my output and given me more income.”

Today, Mr. Fueres has a workshop equipped with

eight machines where he employs eight people.

Thus, by making his own small business grow

and prosper, he has also contributed to the development

of the community as a whole.

O u r C l i e n t s 37


A n n u a l R e p o r t 2 0 0 7

In telling Carmen Méndez Moina’s story, we

have to go back eight years, to when she operated

a stand selling a range of food items in the

evening. Such small food stands are a traditional

feature of life in the residential districts of Ecuador’s

cities, and hers was located on the pavement

opposite her house, near a sports field.

As Ms. Méndez recalled when talking to us

about her situation back then,

“At that time my house was made from cane,

and the street was unsurfaced, so that when it

rained a huge puddle formed.”

She took out her first loan from the bank in

August 2005 to make repairs to her house, as

she had moved her business there and had to

refurbish the hallway. Not long thereafter, she

took out a second loan and used the borrowed

funds, together with some savings and the

Carmen Méndez Moina,

Food Vendor

profit from her business, to improve her house:

She rebuilt it using cement instead of cane, creating

separate premises for her business and also

installing a shop. She used her most recent loan

to expand and improve the business premises,

installing a roof and various security features

and decorating the walls. In addition, she used

the loan to increase her working capital to support

her business’s growth.

Thanks to her excellent repayment record, Ms.

Méndez has become one of Banco ProCredit’s

preferred customers. Her financial situation and

standard of living have improved dramatically,

due in no small measure to the investments she

has been able to make with her loans.

Her husband helps her run the business. Both he

and Ms. Méndez have been very satisfied with the

quality of the service they have received from the

bank, and they are grateful for the financing supportithasgiventhem–whichtheyhaveclearlyput

to good use. Today when you visit their premises,

walk down the surfaced road, see the repairs they

have made to the pavement – and above all, go inside

– it is hard to imagine what things were like

eight years ago, when she started the business.


Segundo

Mesías Atapuma,

Restaurant Owner

Segundo Mesías Atapuma is a restaurant owner

with around 15 years of experience in his field,

and he has been a customer of Banco ProCredit

since 2002.

Mr. Mesías heard about the bank through a relative,

who brought him in to see us when he was

interested in taking out a loan. He was immediately

struck by the friendly manner of the bank’s

staff and their genuine interest in him and his

business. As he explains,

“What I most like about the bank is the friendly,

personal treatment I receive. That’s

what made me a ProCredit customer five years

ago, and since then I have taken

out a number of loans from the bank.”

Mr. Mesías obtained his first loan when the bank

was still a finance company and was known as Sociedad

Financiera Ecuatorial. He used the money

– less than USD 1,000 – to expand his business,

which was struggling to survive in a highly competitive

sector. The loan made it possible for him

to buy more tables, chairs and cooking equipment,

enabling him to improve the service he

offered his customers.

Mr. Mesías owns his own

home. He invested his

second loan in refurbishing

and remodelling the

first floor of his house

to create a more attractive

and comfortable

home for himself and

his family, and he used

the next loan from the

bank to buy a vehicle to

transport supplies for

his business. Although he started out borrowing

small amounts, his business has gradually

grown, as have his financing requirements. And

thanks to his excellent repayment record, he has

become a preferred customer of Banco ProCredit,

with access to substantially larger amounts than

he would have been able to borrow initially. He

used his most recent loan to add a second floor

to his house. Mr. Mesías is grateful to the bank

for helping his business to develop and grow, and

for enabling him to improve his family’s standard

of living.

O u r C l i e n t s


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A n n u a l R e p o r t 2 0 0 7

Financial Statements

Independent auditor’s report and financial statements

December 31, 2007 and 2006


F i n a n c i a l S tat e m e n t s 1


A n n u a l R e p o r t 2 0 0 7


F i n a n c i a l S tat e m e n t s


A n n u a l R e p o r t 2 0 0 7


F i n a n c i a l S tat e m e n t s


A n n u a l R e p o r t 2 0 0 7


F i n a n c i a l S tat e m e n t s


A n n u a l R e p o r t 2 0 0 7

Notes to the Financial Statements

For the years ended December 31, 2007 and 2006

1. Operations

Banco ProCredit S.A. (the “Bank”) provides banking services to

very small, small and medium-sized businesses in Ecuador. The

bank is part of a global network of 21 banks in Latin America,

Eastern Europe and Africa that share the same business model;

the main shareholder of all ProCredit banks is ProCredit Holding

A.G., based in Frankfurt, Germany. The address is ProCredit Holding

A.G., Kirschwaldstrasse 19, 60435 Frankfurt am Main Federal

Republic of Germany, and the web page is www.procredit-holding.

com/front_content.php. The group views itself as a global leader

in providing credit, savings and supporting services to households

and enterprises that have not previously had access to formal credit

or that would not be a target group for mainstream banks. Long-

term trustful relationships are built by providing financial services

on fair terms and conditions and supporting non-profit, non-political

projects in the neighborhood. The group is committed to both

social and commercial objectives.

ProCredit Holding A.G. (then named IMI Internationale Micro

Investitionen A.G.), acquired on May 10, 2001 a 100% shareholding

in Alterfinsa Financiera S.A. Through Resolution No.

SN-2001-0478 of October 11, 2001, issued by the Ecuadorian

Superintendency of Banks and Insurance, the institution changed

its name to Sociedad Financiera Ecuatorial S.A. Subsequently,

through Resolution No. SBS-2004-0753 of September 23, 2004,

the Ecuadorian Superintendency of Banks and Insurance authorized

the transformation of Sociedad Financiera Ecuatorial S.A.

into a bank and the change of name to Banco ProCredit S.A. This

change was registered in the Mercantile Registry on November 24,

2004 and the entity began operations as Banco ProCredit on January

1, 2005.

The operations and activities undertaken by the Bank are governed

by the General Law for Financial System Institutions and

regulations issued by the Banking Board and the Board of the

Central Bank of Ecuador and are regulated by the Ecuadorian

Superintendency of Banks and Insurance. Such regulations enable

the Bank, among others, to receive sight and fixed-term deposits

from the public, assume obligations on behalf of third parties, issue

bonds, receive loans from Ecuadorian and overseas financial

institutions, grant various types of loans, undertake foreign trading

operations and provide cash and treasury services, principally.

Pursuant to dispositions of the Superintendency, financial sector

entities must be assessed by a risk rating agency authorized by the

Superintendency and file quarterly assessment reports provided

by such evaluators with the Superintendency. In the case of the

Bank, reports submitted during year 2007 provided by the risk rating

agency indicates an AA rating for the first two quarters. In the

fourth quarter the rating was increased to AA+. According to the

agency, this rating indicates that the institution’s financial situation

is very sound, its performance history is good, and it appears

to have no notable weaknesses. The general risk profile, although

low, is not as favorable as other institutions that are rated with the

highest category.

2. Adoption of new and revised standards

2.1 Amendments to published standards which were effective in

the current period

In the current year, the Bank has adopted IFRS 7 Financial Instruments:

Disclosures which is effective for annual reporting peri-

ods beginning on or after 1 January 2007, and the consequential

amendments to IAS 1 Presentation of Financial Statements.

The impact of adoption of IFRS 7 and the changes to IAS 1 has been

to expand the disclosures provided in these financial statements

regarding the Bank’s financial instruments and management of

capital.

2.2 Standards, amendments and interpretations effective in 2007

but not relevant

Four Interpretations issued by the International Financial Reporting

Interpretations Committee are effective for the current period.

These are:

IFRIC 7 Applying the Restatement Approach under IAS 29, Financial

Reporting in Hyperinflationary Economies;

IFRIC 8 Scope of IFRS 2 Group and Treasury Share Transactions;

IFRIC 9 Reassessment of Embedded Derivatives;

and IFRIC 10 Interim Financial Reporting and Impairment.

The adoption of these Interpretations has not led to any changes in

the Bank’s accounting policies.

2.3 Interpretations to existing standards and standards that are

not yet effective and have not been early adopted by the Bank

• IFRS 8 – Operating Segments requires an entity to report financial

and descriptive information about its reportable segments,

which are operating segments or aggregations of

operating segments that meet specified criteria. The Bank will

apply IFRS 8 from January 1, 2009, but it is not expected to

have any impact on the Bank’s policies.

• IAS 23 – (Amendment) Borrowing Costs eliminates the option

available under the previous version of the Standard to recognize

all borrowing costs immediately as an expense. To the

extent that borrowing costs relate to the acquisition, construction

or production of a qualifying asset, the revised Standard

requires that they be capitalized as part of the cost of that

asset. All other borrowing costs should be expensed as

incurred. The Bank will apply this amendment from January 1,

2009, but it is not expected to have significant impact on the

Bank’s policies.

• IAS 1 – (Amendment) Presentation of Financial Statements,

includes many textual changes, and the main impacts are: a

new requirement to include a statement of financial position

as at the beginning of the earliest comparative period whenever

an entity retrospectively applies a change in its financial

statements, new requirements for a statement of comprehensive

income, and a new detailed requirement regarding

the presentation of items of other comprehensive income. The

Bank will apply this amendment from January 1, 2009.

• IFRIC 12 – Service Concession Arrangements (effective for

annual periods beginning on or after January 1, 2008 with

earlier application permitted). IFRS 12 gives guidance on the

accounting by operators for public-to-private service concession

arrangements, but it is not expected to have any impact on

the Bank’s policies.

2.4 Interpretations to existing standards that are not yet effective

and not relevant for the Bank’s operations

The following interpretations to existing standards have been published

that are mandatory for the Bank’s accounting periods beginning

on or after May 1, 2006 or later periods but are not relevant for

the Bank’s operations:

• IFRIC 11, IFRS 2 – Group and Treasury Share Transactions

(effective for annual periods beginning on or after March 2007

with earlier application permitted). IFRC 11 provides guidance

on the application of specific matters dealing with share based

payment schemes. IFRIC 11 is not relevant to the Bank’s operations

as it has no share based payments arrangements.


• IFRIC 13, Customer Loyalty Programs, (effective for annual

periods beginning on or after July 2008 with earlier application

permitted), this interpretation addresses the accounting by

entities that provide their customers with incentives to buy

goods or services by providing awards as part of sales transaction.

As the Bank’s operations have no customer loyalty programs,

IFRIC 13 is not relevant to the Bank’s operations.

• IFRIC 14, IAS 19 –The limit on a defined benefit asset, minimum

funding requirements and their interaction (effective for

annual periods beginning on or after January 2008 with earlier

application permitted). Addresses three issues: (i) when refunds

or reductions in future contributions should be regarded

as available in the context of paragraph 58 of IAS 19 Employee

Benefits; (ii) how a minimum funding requirement might affect

the availability of reductions in future contributions; and (iii)

when a minimum funding requirement might give rise to a liability.

IFRIC 14 is not relevant to the Bank’s operations.

3. Summary of significant accounting policies

The principal accounting policies applied in the preparation of

these financial statements are set out below. These policies have

been consistently applied to all the years presented, unless otherwise

stated.

In addition to the Income Statement and the Balance Sheet, the

Financial Statements also comprise, as additional components, the

Statement of Changes in Equity, the Cash Flow Statements and the

Notes.

The fiscal year of Banco ProCredit S.A. is the calendar year.

The financial statements are presented in conformity with the

accounting principles as defined by International Financial Reporting

Standards – IFRS.

All amounts are presented in thousands of dollars, unless otherwise

stated.

Basis of Presentation – The financial statements of Banco ProCredit

S.A. have been prepared in accordance with International Financial

Reporting Standards (IFRS). The presentation of the financial statements

as at December 31, 2007 in conformity with IFRS has been

undertaken on a voluntary basis.

Generally speaking, the financial statements have been prepared

under the amortized cost convention, unless IFRS require recognition

at fair value, e.g. financial assets and liabilities (including derivatives)

held at fair value through profit and loss.

Reporting and valuation are undertaken on the assumption that the

Bank will continue to operate.

All estimates and assumptions required for reporting and valuation

in conformity with IFRS are best estimates undertaken in

accordance with the applicable standard. Estimates and judgments

are evaluated on a continuous basis, and are based on past

experience and other factors, including expectations with regard

to future events and are considered appropriate under the given

circumstances.

Accounting policies and management’s judgment for certain items

are especially critical with respect to the determination of impairment

of loans.

To determine the rates to be applied for portfolio-based loan loss

provisions, the Bank used data from a group-level evaluation of the

quality of the loan portfolio, taking into account historical loss experiences.

As this migration analysis is based on statistical data up

to 2006, it reflects the average losses during a period of constant

growth and favorable economic environments in the countries of

operations. As the general economic conditions were worsening

in 2007 and also due to the fact that economic conditions in Ecuador

are worse than most of the other countries where ProCredit is

operating, management considers it appropriate to use the results

F i n a n c i a l S tat e m e n t s

of the group migration analysis with a confidence level of 95% to

cover all losses incurred in 2007.

At December 31, 2007 and 2006, for business loans, agricultural

loans, housing loans and consumer loans, the Bank constitutes

provisions based on the ageing of payments due from clients in accordance

with the following table established by the Bank’s head

office:

December 31, 2007 December 31, 2006

Amount (< 50k) Amount (< 50k)

Arrears in % in %

No Arrears 1.80 2.50

1 – 7 days 1.80 25.00

8 – 30 days 38.10 25.00

31 – 90 days 61.20 50.00

91 – 180 days 95.60 50.00

181 – 270 days 100.00 100.00

over 270 days 100.00 100.00

At December 31, 2007, the credit portfolio exceeding US$50,000

is not provisioned based on a percentage in accordance with group

policy since the loans in question have valid guarantees.

Financial Assets – The Bank classifies its financial assets in the

following categories: Loans and advances to customers, and available-for-sale

financial assets. The Bank does not use the categories

financial assets at fair value through profit or loss and held-tomaturity.

Management determines the classification of financial

assets at initial recognition.

• Loans and Advances to Customers – Loans and advances to

customers are non-derivative financial assets with fixed or

determinable payments that are not quoted in an active market.

They arise when the Bank provides money, goods or services

directly to a debtor with no intention of trading the receivable.

Loans and advances are initially recognized at fair value plus

transaction costs; subsequently they are measured at amortized

cost using the effective interest rate method. At each balance

sheet date and whenever there is evidence of potential impairment,

the bank assesses the value of its loans and advances.

Loans are advances when the principal is advanced to the borrowers.

Loans and advances are derecognized when the rights

to receive cash flows from the financial assets have expired or

where the Bank has transferred substantially all risks and rewards

of ownership.

• Available-for-Sale Financial Assets – Available-for-sale invest

ments are those intended to be held for an indefinite amount of

time, which may be sold in response to needs for liquidity or

changes in interest rates, exchange rates or equity prices.

At initial recognition, available-for-sale financial assets are recorded

at fair value plus transaction costs. Subsequently, they

are carried at fair value. The fair values reported are either observable

market prices or values calculated with a valuation

technique based on the current observable market. Gains and

losses arising from changes in fair value of available-for-sale

financial assets are recognized directly in equity under “revaluation

reserve from available-for-sale financial instruments”, until

the financial asset is derecognized or impaired. At this time,

the cumulative gain or loss previously recognized in equity is

recognized in the income statement as “gains and losses from

available-for-sale financial assets”. Based on the type of investments

handled by the Bank during 2007, no adjustments were

included in equity for the effect of fair value.

Purchases and sales of available-for-sale financial assets are

derecognized when the rights to receive cash flows from the

financial assets have expired or where the Bank has transferred

substantially all risks and rewards of ownership.


0

A n n u a l R e p o r t 2 0 0 7

Comparatives – Where necessary, comparative figures have been

adjusted to conform with changes in presentation.

Cash and Cash Equivalents – This item includes balances with less

than three months’ maturity when eligible for discounting with the

Central Bank of Ecuador (the “Central Bank”) and money market instruments

that are highly liquid and readily convertible to known

amounts of cash with insignificant risk of changes in value.

Generally, all cash and cash equivalent items appear at their nominal

value. Money market instruments that qualify as cash equivalents

are classified as available-for-sale financial assets and measured

at fair value.

Loans and Advances to Banks – The amounts reported under re-

ceivables from customers consist mainly of loans and advances

issued.

The amounts reported under advances to banks include current account

balances.

All loans and advances to banks as well as loans and receivables to

customers fall under the category “loans and receivables” and are

carried at amortized cost, using the effective interest method. Amortized

premiums and discounts are accounted for over the respective

terms in the income statement under net interest income. Impairment

of loans is recognized on separate allowance accounts.

Allowance for losses on loans and advances and impairment of

available-for-sale financial assets

• Assets Carried at Amortized Cost – The Bank assesses at each

balance sheet date whether there is objective evidence that a

financial asset or group of financial assets is impaired. A financial

asset or a group of financial assets is impaired and impairment

losses are incurred if, and only if, there is objective evidence

of impairment as a result of one or more events that

occurred after the initial recognition of the asset (a “loss event”)

and that loss event (or events) has an impact on the estimated

future cash flows of the financial asset or group of financial

assets that can be reliably estimated.

The Bank first assesses whether objective evidence of impairment

exists individually for financial assets that are individually

significant (specific impairment) and collectively for those financial

assets that are individually insignificant (impairment for

individual insignificant loans). If the Bank determines that no

objective evidence of impairment exists for an individually

assessed financial asset, whether individually significant or not,

it includes the asset in a group of financial assets with similar

credit risk characteristics and collectively assesses them for

impairment (impairment for collectively assessed loans). Assets

that are individually assessed for impairment and for which an

impairment loss is or continues to be recognized are not included

in a collective assessment of impairment.

If there is objective evidence that an impairment loss on loans

and receivables carried at amortized cost has been incurred,

the amount of the loss is measured as the difference between

the asset’s carrying amount and the present value of estimated

future cash flows (excluding future credit losses that have not

been incurred) discounted at the financial asset’s original effective

interest rate (specific impairment). The carrying amount of

the asset is reduced through the use of an allowance account and

the amount of the loss is recognized in the income statement.

The calculation of the present value of the estimated future cash

flows of a collateralized financial asset reflects the cash flows

that may result from foreclosure less costs for obtaining and selling

the collateral.

For the purposes of the evaluation of impairment for financial assets

consisting of individually insignificant loans, the loans are

grouped on the basis of similar credit risk characteristics. Those

characteristics are relevant to the estimation of future cash

flows for groups of such assets by being indicative of the

debtor’s ability to pay all amounts due according to the contractual

terms of the assets being evaluated.

Future cash flows in a group of financial assets that are collectively

evaluated for impairment are estimated on the basis of

the contractual cash flows of the assets in the group and historical

loss experience for assets with credit risk characteristics

similar to those in the group. Historical loss experience is adjusted

on the basis of current observable data to reflect the

effects of current conditions that did not affect the period on

which the historical loss experience is based and to remove the

effects of conditions in the historical period that do not exist

currently. The methodology and assumptions used for estimating

future cash flows are reviewed regularly by the Bank to reduce

any differences between loss estimates and actual loss experience.

• Renegotiated Loans – Loans that are either subject to collective

impairment assessment or individually significant and

whose terms have been renegotiated are no longer considered to

be past due but are treated as new loans.

• Assets Classified as Available-for-Sale – The Bank invests in

securities with fixed interest rates. Impairments on these investments

are recognized when objective evidence exists that

the issuer is unable or unwilling to service these obligations.

The Bank assesses at each balance sheet date whether there is

objective evidence that a financial asset or group of financial

assets is impaired. In determining whether an available-for-sale

financial asset is impaired the following criteria are considered:

• Deterioration of the ability or willingness of the debtor to

service the obligation;

• Political situations which may significantly impact the debtor’s

ability to repay the loan;

• Additionaleventsthatmakeitunlikelythatthecarryingamount

may be recovered.

Intangible Assets – Acquired computer software licenses are capitalized

on the basis of the costs incurred to acquire and/or to bring

to use the specific software. These costs are amortized on the

basis of the expected useful lives. Software has a maximum expected

useful life of 5 years.

Property and Equipment – Land and buildings comprise mainly the

Bank and its offices.

All property and equipment are stated at historical cost less scheduled

depreciation. Historical cost includes expenditure that is

directly attributable to the acquisition of the items.

Subsequent costs are included in the asset’s carrying amount or

are recognized as a separate asset, as appropriate, only when it

is probable that future economic benefits associated with the item

will flow to the Bank and the cost of the item can be measured reliably.

All other repairs and maintenance are charged to the income

statement during the financial period in which they are incurred.

Land is not depreciated. Depreciation on other assets is calculated

using the straight-line method to allocate their cost to their residual

values over their estimated useful lives, as follows:

Buildings 20 years

Leasehold improvements 5 years

Furniture and fixtures 7 years

IT and other equipment 3 years

The assets’ residual carrying values and useful lives are reviewed,

and adjusted if appropriate, at each balance sheet date.


Gains and losses on disposals are determined by comparing proceeds

with carrying amount and are included in the income statement.

Assets that are subject to amortization are reviewed for impairment

whenever events or changes in circumstances indicate that the carrying

amount may not be recoverable. An asset’s carrying amount

is written down immediately to its recoverable amount if the asset’s

carrying amount is greater that its estimated recoverable amount.

The recoverable amount is the higher of the asset’s fair value less

costs to sell and value in use.

The Resolutions Codification of the Ecuadorian Superintendency of

Banks and Insurance and the Banking Board require that land and

building values be adjusted every five years to market prices using

a technical valuation performed by independent experts appointed

by the Bank’s Directors and previously approved by the controlling

authority. The Bank has not performed an evaluation of its property

since it possesses no assets whose age exceeds five years. Also

the Bank has not identified any events or changes in circumstances

that indicate that the carrying amount may not be recoverable.

Contingent Assets and Liabilities – Contingent assets and liabilities

are not recognized in the financial statements, but are only disclosed

in a note to the financial statements, except in those cases

where the possibility of an outflow or inflow of resources corresponds

to loans. Any change in probabilities is recognized in the financial

statements, that is, if in the case of liabilities it is probable

or, in the case of assets, virtually certain that there will be either an

outflow or inflow of resources.

Income Tax

• Current Income Tax – Income tax payable on profits is calculated

on the basis of the Ecuadorian Tax Law and is recognized as an

expense in the period in which the profit arises. The applied income

tax rate for 2007 was 25%.

• Deferred Income Tax – Deferred income tax is provided in full,

using the liability method, on temporary differences arising

between the tax bases of assets and liabilities and their carrying

amounts in the financial statements prepared in conformity with

IFRS. Deferred tax assets and liabilities are determined using

tax rates (and laws) that have been enacted by the balance sheet

date and are expected to apply when the related deferred income

tax asset is realized or the deferred income tax liability is settled.

The principal temporary differences arise from deferred commission

income, depreciation of other equipment and from allowances

for impairment losses on loans to customers. However, the deferred

income tax is not accounted for if it arises from initial recognition

of an asset or a liability in a transaction other than a business

combination that at the time of the transaction affects neither the

profit (before tax) for the period according to IFRS, nor the taxable

profit or loss.

The tax effects of income tax losses available for carry forward are

recognized as a deferred tax asset when it is probable that future

taxable profits will be available against which these losses can be

utilized.

Deferred tax assets are recognized where it is probable that future

taxable profit will be available against which the temporary differences

can be utilized.

Deferred tax related to fair value re-measurement of available-forsale

investments, which is charged directly to equity, is also credited

or charged directly to equity and subsequently recognized in

the income statement together with the deferred gain or loss.

The income tax expense included in the accompanying financial

statements represents the total current and deferred income tax.

F i n a n c i a l S tat e m e n t s 1

Employee Profit-Sharing and Child and Family Tax (INNFA) – Current

employee profit-sharing and the Child and Family tax (INNFA) are

recognized in income based on taxable income for the year. Deferred

INNFA tax and the employee profit-sharing are recognized for the

effect of temporary differences arising as a consequence of the different

means of measuring assets and liabilities based on accounting

and tax criteria and unused tax credits deductible from future

taxable earnings, calculated in accordance with current tax rates.

The deferred tax liability for INNFA and the employee profit-sharing

is generally recognized for the temporary taxable differences,

and the deferred assets for INNFA and the employee profit-sharing

are generally recognized for the temporary deductible differences,

based on the existence of future taxable earnings, against which

such temporary deductible differences may be used.

Liabilities to Banks and Customers – Liabilities to banks and customers

are recognized initially at fair value net of transaction costs

incurred. Borrowings are subsequently stated at amortized cost;

any difference between proceeds net of transaction costs and the

redemption value is recognized in the income statement over the

period of the borrowings using the effective interest rate method.

All financial liabilities are derecognized when they are extinguished

– that is, when the obligation is discharged, cancelled or expires.

Debt Securities – The balance sheet item “debt securities” contains

commercial papers issued in the Ecuadorian bond market, recognized

initially at fair value, being their issue proceeds (fair value

of consideration received) net of transaction costs incurred. They

are subsequently stated at amortized cost and any difference between

proceeds net of transaction costs and the redemption value

is recognized in the income statement over the period of the debt

instruments using the effective interest method.

Provisions – Provisions for legal claims are recognized when:

• it is more likely than not that an outflow of resources will be required

to settle the obligation; and

• the amount has been reliably estimated.

Where there are a number of similar obligations, the likelihood that

an outflow of resources will be required in a settlement is determined

by considering the class of obligations as a whole.

Provisions are measured at the present value of the expenditures.

The increase in the present value of the obligation due to the passage

of time is recognized as an interest expense.

Post-Employment Benefits – It is mandatory to pay employees a

certain amount of post-employment benefits, which depend upon

several factors such as the number of years of service and compensation.

The liability recognized in the balance sheet is the present value

of the defined post-employment benefit obligation at the balance

sheet date, together with adjustments for unrecognized actuarial

gains or losses and past service costs. The obligation is calculated

annually by an independent actuary. The present value of the obligation

is determined by discounting the estimated future cash outflows,

taking into account mortality tables and salary increases

using an interest rate of 6.5%.

Subordinated Debt – Subordinated debt consists mainly of liabilities

to shareholders and other international financial institutions

which in the event of insolvency or liquidation are not repaid until

all non-subordinated creditors have been satisfied. There is no obligation

to repay early.

Following initial recognition at acquisition cost, the subordinated

debt is recognized at amortized cost. Premiums and discounts are

accounted for over the respective terms in the income statement

under net interest income.


A n n u a l R e p o r t 2 0 0 7

Subscribed Capital – Incremental costs directly attributable to the

issue of new shares are shown in equity as a deduction in the capital

reserve. Dividends on ordinary shares are recognized in equity in

the period in which they are approved by the Bank’s shareholders.

Interest Income and Expense – Interest income and expenses for

all interest-bearing financial instruments, except for those clas-

sified as held for trading, are recognized within “interest income”

and “interest expense” in the income statement using the effective

interest rate method. Interest income and expense are recognized

in the income statement in the period in which they arise.

Once a financial asset or a group of similar financial assets has

been written down as a result of an impairment loss, interest income

is recognized using the rate of interest used to discount the

future cash flows for the purpose of measuring the impairment loss.

For loans where there is objective evidence that an impairment loss

has been incurred, the accrual of interest income is terminated 5 to

90 days after the last payment depending on the type of loan. Payments

received in respect of written-off loans are not recognized in

net interest income.

Fee and Commission Income and Expenses – Fee and commission

income and expenses are recognized on an accrual basis when the

service has been provided.

Certificates of Deposit – Constitute, principally, certificates issued

by local financial institutions coming due up to May 2008 (May

2007 in 2006).

Mandatory Reserve, Central Bank – In accordance with legal provi-

sions, the Bank is obliged to maintain a reserve deposit of 4% of the

average weekly balance of daily deposits, including deposits held

with the Central Bank of Ecuador and the available balance held

in cash. As at December 31, 2007, the banking reserve deposits

totaled US$3 million (US$1.7 million in 2006).

5. Loans and advances to banks

A summary of loans and advances to banks is as follows:

(in thousands of U.S. dollars)

Loans and advances to domestic

Dec 31, 2007 Dec 31, 2006

and non-OECD (1) banks 8,291 –

Loans and advances to group

companies 3,000 –

Accrual of interest on loans and

advances to group companies 17 –

Total 11,308 –

(1) Organization for Economic Co-Operation and Development –

OECD.

4. Cash and cash equivalents

A summary of cash and cash equivalents is as follows:

Dec 31, Dec 31,

(in thousands of U.S. dollars) 2007 2006

Money market institutions public

and private 9,443 9,126

Mandatory reserve, central bank 3,085 1,781

Cash on hand 1,939 512

Other balances, central bank 416 152

Total 14,883 11,571

Money Market Institutions Public and Private – This item principally

consists of Certificates of Deposit from 1 to 90 days negotiable

from the private sector and available-for-sale securities from the

private sector issued by local financial institutions.

In 2006, it also constituted current accounts maintained, principally,

with local and overseas banks. In 2007, these Current Accounts

with Local Banks were classified as Loans and advances to banks.

A summary of money market institutions, public and private, classified

at December 31, 2007 and 2006 classified by security amount

is as follows:

Interest rate 2007 Interest rate 2006 Dec 31, 2007 Dec 31, 2006

(in %) (in thousands of U.S. dollars)

Certificates of deposit 5.64 to 8.16 5.25 to 7.95 8,566 2,298

Deposits in local banks 1.5 to 4 4,738

Deposits in overseas banks 5.2 to 5.3 1,496

Commercial paper 7.43 to 7.56 5.25 to 5.90 877 594

Total 9,443 9,126

Loans and Advances to Domestic and non-OECD Banks – Constitute

principally:

Dec 31, 2007 Dec 31, 2006

(in thousands of U.S. dollars)

Deposits in local banks 7,116 –

Deposits in overseas banks 1,175 –

Total 8,291 –

Deposits in Local Banks – Constitute freely-available deposits

maintained, principally, with two local banks and that generate

interest fluctuating between 1% and 4.2%.

Deposits in Overseas Banks – Correspond to freely-available

deposits held, which at December 31, 2007 generated a nominal

interest ranging between 4% and 5.18%.

Loans and Advances to Group Companies – Constitute certificates

in U.S. dollars issued by “Banco Los Andes ProCredit Bolivia” coming

due up to March 2008 with an annual interest rate of 7.30%.

6. Financial assets available for sale

This item primarily includes securities with fixed interest rates.

Dec 31, 2007 Dec 31, 2006

(in thousands of U.S. dollars)

Restricted Availability –

Liquidity Fund 814 431

Fixed interest rate securities 781 3,558

Others 189 53

Total 1,784 4,042


Restricted Availability – Liquidity Fund – Constitute obligatory pay-

ments made by the Bank equivalent to 1% of reserve deposits. This

fund is managed by Corporación Financiera Nacional – CFN and

generated a yield equivalent to 2.94% in 2007 (5.91% in 2006). In

accordance with dispositions established in the Resolutions Codi-

December 31, 2007 Gross Allowance for Net Share of total Number of Share of total

amounts impairment amount portfolio outstanding loans number

Business loans

in thousands of U.S. dollars in % in %

Loans up to US$10k 76,365 (2,724) 73,641 41.2% 43,306 75.2%

Loans US$10k – US$50 k 62,501 (2,283) 60,218 33.7% 4,820 8.4%

Loans US$50 k – US$150 k 18,136 – 18,136 10.1% 313 0.5%

Loans over US$150 k 5,367 – 5,367 3.0% 28 0.0%

Agricultural loans

Loans up to US$10 k 13,581 (256) 13,325 7.4% 8,217 14.3%

Loans US$10k – US$50 k 5,044 (124) 4,920 2.8% 464 0.8%

Loans US$50 k – US$150 k 722 – 722 0.4% – 0.0%

Loans over US$150 k 161 – 161 0.1% – 0.0%

Housing loans

Loans up to US$ 10 k 303 (9) 294 0.2% 55 0.1%

Loans US$10 k – US$50 k 1,529 (86) 1,443 0.8% 107 0.2%

Loans US$50 k – US$150 k 100 – 100 0.1% 2 0.0%

Consumer loans

Loans up to US$10 k 14 (10) 4 0.0% 16 0.0%

Loans US$10 k – US$50 k 12 (1) 11 0.0% 1 0.0%

Other loans

Loans up to US$10 k 524 – 524 0.3% 251 0.4%

Loans US$10 k – US$50 k 16 – 16 0.0% 1 0.0%

Total 184,375 (5,493) 178,882 100.0% 57,581 100.0%

December 31, 2006 Gross Allowance for Net Share of total Number of Share of total

amounts impairment amount portfolio outstanding loans number

Business loans

in thousands of U.S. dollars in % in %

Loans up to US$10 k 50,780 (2,461) 48,319 45.2% 30,902 77.6%

Loans US$10 k – US$50 k 38,290 (996) 37,294 34.9% 3,111 7.8%

Loans US$50 k – US$150 k 8,508 (123) 8,385 7.8% 137 0.3%

Loans over US$150 k 1,428 – 1,428 1.3% 7 0.0%

Agricultural loans

Loans up to US$10 k 8,150 (216) 7,934 7.4% 5,428 13.6%

Loans US$10 k – US$50 k 2,498 (40) 2,458 2.3% 226 0.6%

Loans US$50 k – US$150 k 198 – 198 0.2% 3 0.0%

Housing loans

Loans up to US$10 k 99 (2) 97 0.1% – 0.0%

Loans US$10 k – US$50 k 537 (10) 527 0.5% – 0.0%

Consumer loans

Loans up to US$10 k 10 (5) 5 0.0% – 0.0%

Loans US$10 k – US$ 50 k – – – 0.0% – 0.0%

Other loans

fication of the Ecuadorian Superintendency of Banks and Insurance

and the Banking Board, this Fund was created with the purpose of

preserving the normal functioning of financial institutions in the

event of liquidity shortages.

7. Loans and advances to customers

F i n a n c i a l S tat e m e n t s

A summary of loans and advances to customers is as follows:

Loans up to US$10 k 254 – 254 0.2% – 0.0%

Loans US$10 k – US$50 k 20 – 20 0.0% – 0.0%

Total 110,772 (3,853) 106,919 100.0% 39,814 100.0%


A n n u a l R e p o r t 2 0 0 7

Business Loans – Correspond to loans and granted to individuals

or legal entities for financing activities principally related to productive

activities.

Agricultural Loans – Are loans granted to individuals earmarked

principally to finance activities in small-scale production that is related

to a small service or production operation, in either the rural

or urban sector.

Housing Loans – Correspond to loans granted for the purchase,

construction, repair, remodeling and improvement of housing for

personal use by wage or salary earners, provided that such loans

are supported with a mortgage guarantee and that the user has

been granted final use of the property.

Interest Rate – At December 31, 2007, the annual average nominal

interest rate on loans was 17.85% (13.16% in 2006). In the first

quarter the weighted average rate was 13.64% and in the second

half of the year 25.75%; the significant difference in these rates

was attributable to the elimination of commissions on loans by the

Ecuadorian Superintendency of Banks and Insurance.

Allowance for Impairment Losses on Loans and Advances – Allow-

ance for impairment losses on loans and advances covers the risks

which arise from the category “loans and receivables”. In addition

to the allowance for specific impairment losses for receivables for

which there is objective evidence of impairment, lump-sum specific

provisions and a general allowance were formed to cover impairment

losses relating to the loan portfolio as a whole:

(in thousands of U.S. dollars)

Dec 31, 2007 Dec 31, 2006

Specific impairment (122)

Portfolio-based impairment (2,595) (2,870)

Lump-sum specific provisions (2,898) (861)

Total (5,493) (3,853)

Movements in the allowance for impairment losses on loans and

advances are as follows:

(in thousands of U.S. dollars)

Dec 31, 2007 Dec 31, 2006

Balances, beginning of the year (3,853) (2,250)

Provision (Note 20) (5,145) (2,865)

Use 1,905 994

Releases 1,600 268

Balances, end of year (5,493) (3,853)

8. Property and equipment

Movements in the property and equipment were as follows:

Land and Leasehold Furniture and IT and other Total

(in thousands of U.S. dollars) buildings improvements fixtures equipment

Balances at December 31, 2005 259 17 490 1,059 1,825

Acquisitions 4,800 120 223 776 5,919 (1)

Sales or/and withdrawals (14) (155) (169)

Depreciation (69) (18) (61) (400) (548)

Balances at December 31, 2006 4,990 119 638 1,280 7,027

Acquisitions 241 440 408 1,764 2,853 (2)

Sales or/and withdrawals (224) (224)

Depreciation (208) (44) (101) (656) (1,009)

Balances at December 31, 2007 5,023 515 945 2,164 8,647

(1) Corresponds principally to the construction of a new building

where the Bank Head Office in Quito operates.

(2) Corresponds principally to the acquisition of computer equip-

ment, as well as furniture and fittings for the offices in the main

building in Quito, and in new agencies throughout the country.

9. Deferred taxes

Employee Profit-Sharing – In accordance with local legislation,

employees are entitled to receive a 15% share of the Bank’s net

annual profits, used for calculating income tax, before income tax.

The employee profit-sharing has the same impact as income tax,

including the consequences of deferrals arising from differences

on the current bases.

Income Tax – In accordance with legal dispositions, income tax is

25% on distributed income and 15% on income reinvested in the

Bank. At December 31, 2007, the Bank decided to provision 25%

of net income for this item since the decision to reinvest or distribute

earnings will be taken at the General Stockholders’ Meeting to


e held in March 2008. Dividends declared in cash or distributed

to Ecuadorian or foreign shareholders are not subject to any additional

withholding.

Income Tax, Employee Profit-Sharing Deferred and INNFA Income

Deferred – The financial statements reflect the impact of prepaid

taxes and employee profit-sharing on taxable income or deductions

included in the balance sheet as temporary differences. These

temporary differences are generated by comparing the financial

statements prepared in accordance with the requirements of the

Ecuadorian Superintendency of Banks and Insurance with financial

statements prepared in accordance with International Financial

Reporting Standards. Further differences result from reconciliation

items determined following application of tax resolutions. Net tax

rates used to calculate the income tax, employee profit-sharing and

the INNFA provision for the year ended December 31, 2007 were

25%, 15% and 2% respectively, the combined nominal tax rate for

income tax, employee profit-sharing and INNFA income is 37.52%.

Details of the deferred tax are as follows:

(in thousands of U.S. dollars)

Deferred tax assets

Dec 31, 2007 Dec 31, 2006

Employee profit-sharing 199 539

INNFA 23 61

Income tax 1,459 1,671

Total 1,681 2,271

Deferred tax liabilities

Employee profit-sharing (213) (428)

INNFA (24) (50)

Income tax (971) (1,287)

Total (1,208) (1,765)

The effects of the deferred taxes resulting from the existence of

temporary differences for the years ended December 31, 2007 and

2006 are as follows.

Deferred tax assets

Employee profit-sharing INNFA Income tax

(in thousands of U.S. dollars) 2007 2006 2007 2006 2007 2006

Commission on loan portfolio (1) 97 516 11 59 1,236 1,559

Provision for retirement and severance 49 – 6 – 68 –

Provision for unused vacations 40 – 5 – 56 –

Other adjustments 13 23 1 2 99 112

Total deferred tax assets 199 539 23 61 1,459 1,671

Deferred tax liabilities

Employee profit-sharing INNFA Income tax

(in thousands of U.S. dollars) 2007 2006 2007 2006 2007 2006

Provision for loan portfolio (2) (187) (407) (21) (47) (927) (1,242)

Other adjustments (26) (21) (3) (3) (44) (45)

Total deferred tax liabilities (213) (428) (24) (50) (971) (1,287)

(1) Corresponds to the difference generated by the recognition of

loan commissions. In accordance with regulations of the Ecuadorian

Superintendency of Banks and Insurance, such income

is recorded at the time of granting the loan. However, in

accordance with International Financial Reporting Standards,

commissions are recorded based on the loan period.

(2) Corresponds to the difference in rules for the provisions

for the loan portfolio. In accordance with the Ecuadorian Superintendency

of Banks, such is recorded based on established

parameters. However, in accordance with International Finan-

F i n a n c i a l S tat e m e n t s

cial Reporting Standards, the provision for loans is based on the

probability of default taking into account real guarantees.


A n n u a l R e p o r t 2 0 0 7

A reconciliation between income according to the financial state-

ments and taxable income is as follows:

Dec 31, Dec 31,

(in thousands of U.S. dollars) 2007 2006

Income according to the financial

statements, net of employee

profit-sharing and current deferred

INNFA tax 3,173 2,114

Adjustments for International

Financial Reporting Standards (913) 613

Income according to local financial

statements, subject to income tax 2,260 2,727

Non-deductible 353 175

Other deductions, net (104) (29)

Taxable income 2,509 2,873

Current income tax 627 718

Adjustment to the prior year (198)

Deferred income tax (106) (154)

Income tax charged to income 323 564

Liabilities to Group – A summary of the liabilities to the group is as

follows.

Transfer Pricing – The transfer pricing study corresponding to the

year 2007, as required by current legal dispositions, must be presented

to the tax authorities in the month of October of the year

2008. This study constitutes a base to determine whether operations

with related parties have been performed at reasonable prices

approximating to the Arm’s Length Principle.

The transfer pricing study for the year 2006 must have been submitted

to the tax authorities by June of the following year.

As a result of the transfer pricing study for year 2006, no income

tax adjustments for the year were identified since transactions with

related companies were undertaken for amounts approximating to

the Arm’s Length Principle. At December 31, 2007, the Bank was in

the process of preparing this study and, according to Management,

the effects of such a study, if any, will have little importance for the

financial statements taken as a whole.

10. Liabilities to banks

A summary of the liabilities to banks is as follows.

Dec 31, Dec 31,

(in thousands of U.S. dollars) 2007 2006

Liabilities to the group

Liabilities to banks in

22,614 9,649

OECD countries

Liabilities to banks in

9,838

non-OECD countries 11 49

Total 32,463 9,698

December 31, 2007 December 31, 2006

(in thousands of U.S. dollars)

ProCredit Bank Bulgaria, coming due

Capital Interest Total Capital Interest Total

up to August 2008

ProCredit Bank Albania, coming due

10,000 103 10,103 – – –

up to July 2009 in 2007 and 2006

ProCredit Bank Kosovo, coming due

up to August 2008 (coming due

6,875 212 7,087 5,000 1 5,001

up to June, 2007, in 2006)

ProCredit Bank Congo, coming due

up to April 2008 (coming due

3,865 94 3,959 3,250 30 3,280

up to April, 2007, in 2006) 1,431 22 1,453 1,348 20 1,368

Others 12 – 12 – – –

Total 22,183 431 22,614 9,598 51 9,649

Liabilities to Banks in OECD Countries – A summary of the liabilities

to banks in OECD countries is as follows.

December 31, 2007

(in thousands of U.S. dollars) Capital Interest Total

Citigroup, coming due up to December 2012

Bank im Bistum Essen eG, coming due

6,000 14 6,014

up to October 2010 4,000 72 4,072

Deferred fees OECD banks (248) – (248)

Total 9,752 86 9,838

11. Liabilities to ProCredit Holding A.G.

Corresponds to a bond held by the principal stockholder, ProCredit

Holding A.G. for a capital amount of US$20 million (US$23 million in

2006) coming due up to May 2009. At December 31, 2007, the annual

interest payment has been US$460,000 (US$326,000 in 2006).


12. Liabilities to customers

Liabilities to customers consist of deposits due on demand, sav-

ings deposits and term deposits. The following table shows a

breakdown by customer groups:

(in thousands of U.S. dollars)

Dec 31, 2007 Dec 31, 2006

Current accounts

Private individuals 3,939 562

Corporates 617 16

Saving accounts

Private individuals 16,217 7,818

Corporates 5,112 4,102

Term deposit accounts

Private individuals 12,396 6,605

Corporates 39,147 25,387

Other liabilities to customers 788 635

Total 78,216 45,125

Current Accounts – Correspond to current accounts with a nomi-

nal annual interest rate ranging between 0.10% and 1.50% at

December 31, 2007 (0.25% and 1.50% in 2006) based on daily balances

with monthly capitalization.

Saving Accounts – Correspond to savings accounts with a nominal

annual interest rate ranging between 2% and 4.75% at December

31, 2007 (1.75% and 3.5% in 2006) based on daily balances with

monthly capitalization.

Term Deposit Accounts – Constitute fixed-term certificates of depo-

sit for an original period of no less than 30 days with nominal

annual interest rates ranging between 4% and 9% at December 31,

2007 (3.25% and 8.75% in 2006), depending on the term. Such de-

posits are presented based on the period remaining until maturity.

13. Liabilities to international financial institutions

Liabilities to international financial institutions are an important

source of financing for the Bank. Medium - to long-term loans from

international financial institutions are reported under this item.

The following table gives a detailed breakdown for this item.

Dec 31, Dec 31,

(in thousands of U.S. dollars) 2007 2006

Liabilities with fixed interest rates

to end-2007 – 5,044

in 2008 3,370 –

in 2009 – 3,504

in 2010 2,458 –

2011 and later – 10,078

Total 5,828 18,626

Liabilities with variable interest rates

to end-2007 – 2,552

in 2008 1,003 2,113

in 2009 – 2,196

in 2010 24,831 –

2011 and later 12,589 –

Total 38,423 6,861

Total 44,251 25,487

A summary of liabilities to international financial institutions is as

follows:

December 31, 2007 December 31, 2006

(in thousands of U.S. dollars) Capital Interest Total Capital Interest Total

Instituto de Crédito Oficial – ICO, coming due

up to March 2015 in 2007 and 2006 10,064 15 10,079 10,064 14 10,078

Credit Suisse Microfinance Fund Management,

coming due up to March 2010 (coming due

up to October 2007 in 2006) 9,500 174 9,674 1,500 17 1,517

Dexia Blue Orchard, coming due up to November 2010 7,700 128 7,828 – – –

Inter-American Investment Corporation, coming

due up to November 2009 (coming due

up to July 2007, in 2006) 3,000 26 3,026 904 18 922

NOVIB, coming due up to January 2010

(coming due up to November 2009, in 2006) 3,000 21 3,021 2,000 15 2,015

Latin American Challenge Investment Fund S.A. –

LA – CIF, coming due up to December 2008

(coming due up to October 2007, in 2006) 2,500 13 2,513 2,500 18 2,518

Corporación Andina de Fomento – CAF, coming

due up to January 2010 (coming due

up to October 2009, in 2006) 2,401 57 2,458 3,431 58 3,489

BBVACODESPA, coming due up to November 2010 2,300 17 2,317 – – –

Responsibility SICAV (Lux), coming due

up to June 2009 2,000 5 2,005 – – –

Belgische Investeringsmaatschappij Voor

Ontwikkelingslanden – BIO, coming due up

F i n a n c i a l S tat e m e n t s

to December 2009 in 2007 and 2006 1,000 6 1,006 1,500 10 1,510

International Finance Corporation – IFC, coming

due up to March 2008 in 2007 and 2006 334 10 344 1,000 31 1,031

Global Microfinance Facility – GMF, coming due

up to November 2007 – – – 1,500 16 1,516

IDB/MIF, coming due up to July 2007 – – – 904 18 922

Deferred fees IFIS (20) – (20) (31) – (31)

Total 43,779 472 44,251 25,272 215 25,487


A n n u a l R e p o r t 2 0 0 7

14. Debt securities

On July 24, 2006, the Ecuadorian Superintendency of Banks and

Insurance authorized the Bank to proceed with the public issue

of commercial paper for an amount of up to US$15 million. As of

June and September, 2007, this programme of commercial paper

obtained a rating of AAA- by Bankwatch Ratings S.A. The maturities

are between 6 months and 1 year. The papers are traded on

the Ecuadorian bond market at a discount that varies between 6.5%

and 8%.

15. Provisions

A summary of the provisions is as follows:

(in thousands of U.S. dollars)

Provision for imminent losses for

Dec 31, 2007 Dec 31, 2006

pending transactions 378 316

Post-employment benefits 326 84

Other provisions 56 –

Total 760 400

Provision for Imminent Losses for Pending Transactions – Corre-

spond to provisions for expenses when the Bank has a present obligation

(legal or constructive).

Post – Employment Benefits – In Ecuador local regulations require

benefits to be paid when employment relationships terminate. The

reasons for ending employment relationships can be as follows:

termination by contract, retirement or death. Their value is determined

in accordance with IAS 19, and is calculated using actuarial

mathematical methods. The obligation to make these payments exists

solely because of local requirements; apart from these obligations,

there are no retirement plans or any other benefits after the

termination of contracts and therefore no pension provisions had

to be set aside and no plan assets had to be taken into account.

The provision is discounted at the rate of 6.5%, the interest rate on

long-term Treasury Bills in Ecuador.

The principal actuarial assumptions are as follows:

in %

Discount rate 6.5

Expected return on plan assets (weighted average) 0.0

Rate of increase in salaries 2.4

Rate of increase in pensions in payment 2.2

Inflation assumption 2.2

The following tables provide information about the development of

post-employment benefits:

(in thousands of U.S. dollars)

Dec 31, 2007 Dec 31, 2006

Balances, beginning of the year 84 –

Provision 242 84

Balances, end of the year 326 84

16. Other liabilities

A summary of other liabilities is as follows:

(in thousands of U.S. dollars)

Dec 31, 2007 Dec 31, 2006

Liabilities for goods and services 679 2,094

Other deferred income 477 477

Liabilities to employees 356 114

Liabilities for social insurance

contributions 245 165

Donations, grants for investments 10

Non-income tax liabilities 202 135

Others 161 –

Total 2,120 2,995

17. Subordinated debt

A summary of the subordinated debt provision is as follows:

(in thousands of U.S. dollars)

Dec 31, 2007 Dec 31, 2006

ProCredit Holding A.G.,

due in December 2011 (1) 5,005 5,004

Inter-American Development Bank –

IDB, due in April 2008 919 1,522

Total 5,924 6,526

(1) A convertible bond for US$5 million with an annual interest

rate of 7.8% with quarterly interest payments. This bond

was acquired by the Bank’s principal stockholder, ProCredit

Holding A.G. The conversion into shares will give rise to a

book value per share recorded at the moment of the transaction.

After the balance sheet date, on June 3, 2008, the bond was

converted into equity at the request of ProCredit Holding A.G.

and no adjustments were recorded in the income statement.

18. Stockholders’ equity

As at December 31, 2007, the shareholder structure was as follows:

December 31, 2007 December 31, 2006

Shareholder Size of stake Number of Amount Size of stake Number of Amount

in % shares in % shares

ProCredit Holding A.G.

Stichting DOEN-Postcode Loterij /

87.85% 15,045 15,045 73.17% 6,320 6,320

Sponsor Loterij/ BankGiro Loterij 12.15% 2,080 2,080 19.58% 1,691 1,691

IPC – Internationale Projekt Consult GmbH (1) 7.25% 627 627

As at December 100.00% 17,125 17,125 100.00% 8,638 8,638

(1) IPC sold its shares in September 2007 to ProCredit Holding A.G.


Legal Reserve – In accordance with the General Law for Financial

System Institutions of Ecuador at least 10% of annual income must

be allocated to a legal reserve until it reaches 50% of share capital.

Retained Earnings – Based on the Resolutions Codification of the

Ecuadorian Superintendency of Banks and Insurance and the Banking

Board, the Superintendency of Banks and Insurance may require

the Bank to not distribute entire or partial earnings to stockholders,

but oblige such to be used to form a special reserve for an immediate

capital increase. At December 31, 2007, the Superintendency

has placed no restrictions on the use of retained earnings.

Externally Imposed Capital Requirements – In accordance with

the General Law for Financial System Institutions of Ecuador and

the Resolutions Codification of the Ecuadorian Superintendency

of Banks and Insurance and the Banking Board, the Bank must

maintain a 9% ratio between technical capital and the total of the

amount weighted for risk of assets and contingencies. Furthermore,

the technical capital may not be less than 4% of total assets

plus contingencies.

At December 31, 2007 and 2006, the Bank complied with the requirements

of the Regulatory Entity.

19. Net interest income

Included within “net interest income” are interest income and expenses:

Dec 31, 2007 Dec 31, 2006

(in thousands of U.S. dollars)

Interest and similar income

Interest income from cash and

short-term funds

Interest income from available-

11,286 9,229

for-sale financial instruments

Interest income from loans and

716 341

advances to customers 22,737 12,387

Other interest income 1 –

Total 34,740 21,957

Interest and similar expenses

Interest expenses from liabilities

2,741 1,864

to banks

Interest expenses from liabilities to

1,218 566

international financial institutions

Interest expenses from

3,150 3,344

subordinated debt

Interest expenses from

904 102

debt securities 2,351 422

Other interest expenses 10,364 6,298

Total 24,376 15,659

20. Allowance for impairment losses on loans and advances

Risk provisioning is reflected in the income statement as follows:

Dec 31, 2007 Dec 31, 2006

(in thousands of U.S. dollars)

Increase in impairment allowance

(Note 7) 5,145 2,865

Release of impairment allowance (1,600) (268)

Recovery of written-off loans

Other provisions on loans and

(451) (211)

advances – 62

Total 3,094 2,448

The increase of impairment charge comprises the following

entries:

Dec 31, 2007 Dec 31, 2006

(in thousands of U.S. dollars)

Allowance for impairment on

loans and advances to customers

Specific impairment

Allowance for individually

– 122

insignificant impaired loans

Allowance for collectively

2,812 861

assessed loans 2,333 1,882

Total 5,145 2,865

21. Net fee and commission income

A summary of net fee and commission income is as follows:

Dec 31, 2007 Dec 31, 2006

(in thousands of U.S. dollars)

Fee and commission income

Payment transfers and transactions 28 10

Account maintenance fee 43 –

Fees for guarantees 7 1

Other fee and commission income 247 9

Total 325 20

Fee and commission expenses

Other fees to others 42 27

Other fees to banks 25 30

Other fee and commission expenses 93 110

Total 160 167

Net fee and commission income 165 (147)

The item “other fee income” refers to transactions carried out on

behalf of third parties, e.g. Western Union. “Other fee expenses”

consists primarily of fee expenses related to bank expenses.

22. Operating expenses

A summary of operating expenses is as follows:

F i n a n c i a l S tat e m e n t s

Dec 31, 2007 Dec 31, 2006

(in thousands of U.S. dollars)

Personal expenses

Salary expenses 4,536 3,002

Social security expenses 672 401

Other personnel expenses 1,851 1,002

Total 7,059 4,405


0

A n n u a l R e p o r t 2 0 0 7

(in thousands of U.S. dollars)

Other administrative expenses

Dec 31, 2007 Dec 31, 2006

Office rent 729 481

Communication and IT expenses 791 454

Transport 1,081 771

Office supplies 472 405

Security service 556 236

Marketing, advertising and

representation 1,699 614

Construction, repairs and maintenance 628 280

Consultancy fees 1,140 1,022

Legal and audit fees 209 194

Non-profit tax 487 386

Depreciation of fixed and

intangible assets 1,241 731

Training 742 254

Other administrative expenses 1,495 735

Total 11,270 6,563

Total operating expenses 18,329 10,968

23. Income tax expenses

This item includes all taxes on income. Income tax expenses were

as follows:

(in thousands of U.S. dollars)

Dec 31, 2007 Dec 31, 2006

Current tax 627 718

Adjustment to the prior year (198) –

Deferred tax (106) (154)

Total 323 564

In calculating both current taxes on income, earnings and the deferred

income tax, the respective tax rates are applied.

24. Breakdown of residual terms to maturity

The residual term to maturity is defined as the period between

the balance sheet date and the contractually agreed due date of

a claim or liability, or of a partial payment under such a claim or

liability.

December 31, 2007

Up to 1 – 3 3 – 12 1 – 2 2 – 5 More than Total

(in thousands of U.S. dollars) 1 month months months years years 5 years

Assets

Cash and cash equivalents 3,976 7,406 – – – 3,501 14,883

Loans and advances to banks 11,291 – – – – 17 11,308

Financial assets available for sale – – 781 – – 1,003 1,784

Loans and advances to

customers, net 9,150 18,292 66,214 46,257 36,019 2,950 178,882

Deferred tax – – – – – 1,459 1,459

Other assets – – – – – 950 950

Total 24,417 25,698 66,995 46,257 36,019 9,880 209,266

Liabilities

Liabilities to banks 6,886 1,431 17,865 6,000 – 281 32,463

Liabilities to ProCredit Holding A.G. 2,499 5,000 4,000 9,000 – – 20,499

Liabilities to customers 14,770 8,346 26,161 2,229 3 26,707 78,216

Liabilities to international

financial institutions 15,639 2,327 2,153 10,123 14,009 – 44,251

Debt securities 1,742 1,927 10,646 – – – 14,315

Deferred tax – – – – – 1,339 1,339

Provisions – – – – – 760 760

Other liabilities 1,119 – 500 – – 738 2,357

Total 42,655 19,031 61,325 27,352 14,012 29,825 194,200

Open position (18,238) 6,667 5,670 18,905 22,007 (19,945) 15,066


December 31, 2006

Up to 1 – 3 3 – 12 1 – 2 2 – 5 More than Total

(in thousands of U.S. dollars) 1 month months months years years 5 years

Assets

Cash and cash equivalents 11,269 302 – – – – 11,571

Financial assets available for sale 911 1,828 870 – 375 58 4,042

Loans and advances to customers (1,042) 13,810 47,829 29,806 15,579 937 106,919

Deferred taxes 1,671 – – – – – 1,671

Other assets – – 600 – – 387 987

Total 12,809 15,940 49,299 29,806 15,954 1,382 125,190

Liabilities

Liabilities to banks 3,108 394 1,811 2,511 1,874 – 9,698

Liabilities to ProCredit Holding A.G. 2,036 – 8,290 5,000 8,000 – 23,326

Liabilities to customers 13,387 11,712 13,128 6,894 4 – 45,125

Liabilities to international

financial institutions 894 904 8,567 1,939 5,163 8,020 25,487

Debt securities 388 7,353 – – 102 7,843

Deferred taxes – – – – – 1,814 1,814

Provisions – – – – – 400 400

Other liabilities 167 122 1,110 – – 2,074 3,473

Total 19,592 13,520 40,259 16,344 15,041 12,410 117,166

Open position (6,783) 2,420 9,040 13,462 913 (11,028) 8,024

25. Risk management

Management of risk – The management of risk includes:

1. Management of the overall risk profile

Taking risks is a core part of the banking business, and therefore

the Bank’s activities expose it to a variety of risks. The most important

types of risk for the Bank are: credit risk, liquidity risk, market

risk and operational risk.

The Bank’s aim is to achieve an appropriate balance between risk

and return and to minimize potential adverse effects on the Bank’s

financial performance.

The risk management of the Bank has the following objectives:

• Risks are adequately covered with equity

• Full compliance with external capital requirements

• Enabling the Bank to implement its plans for continued strong

growth while following its business strategy.

2. Organization and procedures

The Bank’s risk management procedures are designed to identify

and analyze these risks, to set appropriate risk limits and controls

and to monitor the risks and adherence to limits by means of reliable

and up-to-date information systems.

Risk management is carried out by a Central Risk Department,

which is supervised by a Risk Committee under procedures

approved by the Board of Directors. The latter defines principles

for overall risk management, as well as written policies. The Risk

Department identifies, evaluates and monitors risks in close cooperation

with the Bank’s operating units. In addition, internal

audit is responsible for the independent review of risk management

and the control environment.

Types of risk – Types of risk includes:

1. Market risk

Market risk is defined as the risk of loss as a result of adverse

changes in risk factors including interest rates, foreign currency

and equity prices together with related parameters such as market

volatilities.

The Group is exposed to market risk because of positions held in its

trading portfolios as will as its non-trading business including the

Group’s treasury operations.

F i n a n c i a l S tat e m e n t s 1


A n n u a l R e p o r t 2 0 0 7

2. Interest rate risk

The Bank operates in market segments in which overall interest

rate levels almost invariably show little relation to the levels prevailing

in the international capital markets. The Bank has therefore

chosen not to introduce the value-at-risk concept. It manages its

December 31, 2007

(in thousands of U.S. dollars)

Assets

interest rate risk primarily on the basis of maturity gap analyses,

duration analyses, and qualitative analyses.

The repricing analysis below shows the volumes of the individual

balance sheet items in relation to the times of possible repricing.

Up to 1 – 3 3 – 12 1 – 2 2 – 5 More than Non-interest Total

1 month months months years years 5 years bearing

Cash and cash equivalents 3,976 7,406 – – – – 3,501 14,883

Loans and advances to banks 11,291 – – – – – 17 11,308

Financial assets available

for sale – – 781 – – – 1,003 1,784

Loans and advances

to customers 9,150 18,292 66,214 46,257 36,019 1,049 1,901 178,882

Tax assets – – – – – – 1,459 1,459

Other assets – – – – – – 950 950

Total 24,417 25,698 66,995 46,257 36,019 1,049 8,831 209,266

Liabilities

Liabilities to banks 628 2,878 17,802 1,875 3,000 6,000 280 32,463

Liabilities to customers 17,269 13,346 30,161 11,229 3 – 26,707 98,715

Liabilities to international

financial institutions 1,630 3,966 6,210 11,016 13,373 8,056 – 44,251

Debt securities 1,742 1,927 10,646 – – – – 14,315

Provisions – – – – – – 760 760

Other liabilities – – – – – – 2,357 2,357

Subordinated debt

(subordinated capital) – – 600 300 5,000 – 24 5,924

Total 21,269 22,117 65,419 24,420 21,376 14,056 30,128 198,785

Open position 3,148 3,581 1,576 21,837 14,643 (13,007) (21,297) 10,481

December 31, 2006

(in thousands of U.S. dollars)

Assets

Up to 1 – 3 3 – 12 1 – 2 2 – 5 More than Non-interest Total

1 month months months years years 5 years bearing

Cash and cash equivalents 2,590 302 – – – – 8,679 11,571

Financial assets available

for sale 911 1,828 870 – 375 – 58 4,042

Loans and advances

to customers 7,247 14,216 49,254 30,700 16,039 30 (6,714) 110,772

Allowance for impairment (203) (406) (1,425) (894) (460) (465) (3,853)

Tax assets – – – – – – 1,671 1,671

Other assets – – – – – – 987 987

Total 10,545 15,940 48,699 29,806 15,954 30 4,216 125,190

Liabilities

Liabilities to banks, total 3,101 356 1,804 2,511 1,875 – 51 9,698

Liabilities to customers 15,159 11,319 21,127 11,891 8,005 – 950 68,451

Liabilities to international

financial institutions 808 833 8,508 1,939 5,163 8,052 184 25,487

Debt securities 388 7,353 102 7,843

Tax liabilities – – – – – – 1,814 1,814

Provisions – – – – – – 400 400

Other liabilities 167 122 633 – – – 2,551 3,473

Subordinated debt

(subordinated capital) – – 375 750 5,375 – 26 6,526

Total 19,235 13,018 39,800 17,091 20,418 8,052 6,078 123,692

Open position (8,690) 2,922 8,899 12,715 (4,464) (8,022) (1,862) (1,498)


3. Capital risk

Technical Capital – In accordance with the General Law for Financial

System Institutions of Ecuador and the Resolutions Codification of

the Ecuadorian Superintendency of Banks and Insurance and the

Banking Board, the Bank must maintain a 9% ratio between technical

capital and the total of the amount weighted for risk of assets

and contingencies. Furthermore, the technical capital may not be

less than 4% of total assets plus contingencies.

The Bank evaluates the capital risk through the Assets and Liabilities

Committee - ALCO, whereby periodic monitoring of compliance

with forecast of capital needs is performed.

4. Credit risk

There are two sources of credit risk for the Bank: On the one hand,

credit risk arises from customer lending; on the other hand, credit

risk is also incurred with interbank placements and from securities.

Credit risk is further divided into credit default risk and credit portfolio

risk in order to facilitate close risk management.

4.1. Credit default risk from customer lending

The management of credit default risk begins with the Bank’s loan

officers. Thanks to the Bank’s thorough credit analysis, the risk is

minimized at the beginning of the credit cycle, i.e. when the loan

application is received and processed by the responsible loan

officer. Key to the high quality of the Bank’s credit analysis is an

extensive training of its loan officers and a comprehensive cash

flow analysis.

Close relationships with credit customers in accordance with the

Bank’s mission to be a “neighborhood bank” are an important tool

for avoiding arrears and identifying problems at an early stage. The

Bank has an escalation process in place that defines the steps to be

taken when a client’s ability to service the outstanding loan shows

signs of deterioration. Due to the Bank’s credit methodology, it has

been able to establish its position as a responsible and serious

lending institution.

The effectiveness of this tight risk management is reflected in the

low arrears rate of the Bank’s loan portfolio.

Breakdown of loan portfolio by days in arrears:

The Bank’s credit portfolio risk is naturally limited by the credit

strategy resulting from its business model, in particular its focus

on small and very small loans and the geographical and economic

sector diversification of the loan portfolio.

F i n a n c i a l S tat e m e n t s

Loan portfolio PAR (>30 days) PAR as % Net write-offs Net write-offs as %

of loan portfolio of loan portfolio

As at December 31, 2007 184,378 2,799 1.52% 724 0.39%

As at December 31, 2006 110,772 1,968 1.78% 890 0.80%

The structure of the loan portfolio is regularly reviewed within the

Bank in order to identify potential events which could have an impact

on large areas of the loan portfolio (common risk factors) and if

necessary to limit the exposure to certain business sectors.

Individually significant loans are those above US$50,000, which

are reviewed for impairment on an individual basis (specific impairment).

For the calculation, a discounted cash flow approach is

applied.

Impairment for individually insignificant loans in arrears is calculated

on a portfolio basis at historical default rates. Eight or more

days in arrears is considered objective evidence of impairment. For

all impaired loans, portfolio-based allowances for impairments are

made, again based on historical loss experience.

The total allowance for impairment losses is presented in note 19.

4.2. Credit default risk with interbank placements and from securities

The Bank limits its deposit and other banking transactions to sound

local or international banks. The exposure to each counterparty is

limited based on an individual assessment; this limit may not exceed

20% of the regulatory capital of the bank. The limits are approved

by the Risk Committee of the Bank. The financial and market

performance of the counterparties is continuously monitored by

the Risk Department.

5. Liquidity risk

Banco ProCredit divides financing risk into a predominantly shortterm

liquidity risk (liquidity shortages) and a medium- and longterm

funding risk (shortage of equity and debt).

Liquidity risk is the risk of not being able to meet financial obligations

when they come due.

In the Bank, liquidity risk is monitored on a daily basis by the Treasury

Department; furthermore it is part of the monthly Assets and

Liabilities Committee (ALCO) meetings, in which senior management

participates.

The daily liquidity position is monitored by fulfillment of indicators;

the short-term liquidity position is monitored on a cash flow basis

for a forecast period of 6 months.


A n n u a l R e p o r t 2 0 0 7

The limits are set so that that Bank has sufficient liquid funds avail-

able to meet its obligations, even in extraordinary circumstances.

ProCredit Holding A.G. serves as a “lender of last resort”, and keeps

liquid funds or credit lines available for this purpose.

Throughout the reporting period, the Bank had at all times sufficient

liquidity to meet all financial obligations in a timely manner.

In order to reduce liquidity risk, the Bank finances its lending operations

by diversified local customer deposits and longer-term international

loans.

The maturity breakdown of the Bank’s balance sheet items is presented

in note 24.

6. Funding risk

The Bank’s business plans, prepared annually for a time horizon of

5 years, serve as the basis for determining medium-term funding

needs in regard to both equity and debt financing.

ProCredit Holding A.G. supports the funding needs of the Bank

through equity investments. For longer-term debt funding the

Bank uses various sources: ProCredit Holding A.G., other ProCredit

banks, international private banks, multilateral institutions, investment

funds etc.

7. Operational risk

In line with Basle II the Bank defines operational risk as the risk of

loss resulting from inadequate or failed internal processes, from

actions taken by, or errors on the part of, people and systems, or

from external events. This category includes all “event risks” in the

areas of people, processes, technology and information technology.

This definition excludes operating environment and reputation

risks, but includes legal and information security risks.

Operational risk management is one of the major tasks of management

and risk management staff. The overall operational risk profile,

operational losses, new products and processes and changes

to existing ones are regularly discussed in the operational risk

committee.

The selection and training of staff is a crucial factor in the Bank’s

success. To enhance the professional standards of the employees,

the Bank has established training facilities; and also the ProCredit

group has established regional academies and an international

academy in Fuerth, Germany. Besides purely technical and professional

capabilities, personal attitude is an important criterion

during recruitment. Employees not only receive instruction on technical

issues, but also the Bank puts a strong emphasis on transmitting

its business values and the content of its Code of Conduct.

To analyze operational risk, the loss event data base was implemented

in 2007, and international training sessions at group level

took place.

As of December 2007, no significant legal proceedings were pending.

26. Fair value of financial instruments

The following table gives an overview of the carrying amounts and

fair values of the financial assets and liabilities which are not recognized

in the balance sheet at fair value.

Carrying value Fair value

(in thousands of U.S. dollars)

Financial assets

2007 2006 2007 2006

Loans and advances to customers 178,885 106,921 178,835 106,365

Loans and advances to banks 8,291 – 8,291 –

Total 187,175 106,921 187,126 106,365

Financial liabilities

Liabilities to banks 9,849 49 10,227 49

Liabilities to customers 78,216 45,125 78,216 45,128

Liabilities to IFIs and other borrowings 44,250 25,487 41,345 23,084

Debt securities 14,315 7,843 14,315 7,843

Subordinated debt 919 1,521 – 1,521

Convertible bond 5,005 5,004 5,005 5,004

Total 152,554 85,029 149,108 82,629

The fair value of claims and liabilities at fixed rates of interest was

determined using the discounted cash flow method, with reference

to the money market interest rates for financial instruments with

similar default risks and similar remaining terms to maturity.

Receivables from customers are recognized exclusive of the allowance

for impairment losses. The estimated fair value of the receivables

corresponds to the discounted amount of the estimated expected

future cash flows. The expected cash flows are discounted

to fair value at current market interest rates.

For receivables and liabilities with a remaining term to maturity of

up to six months, the fair value was stated as equal to the carrying

amount.

During 2007 and 2006, no adjustments were recorded in either the

income statement or in equity.


27. Contingent liabilities and commitments

(in thousands of U.S. dollars)

Operating lease commitments

Dec 31, 2007 Dec 31, 2006

No later than 1 year 38 27

Later than 1 year and no later

than 5 years 1,977 1,174

Later than 5 years 199 –

Total 2,214 1,201

Operating lease commitments correspond to rental contracts for

the Banks.

December 31, 2007

28. Related party transactions

Financial receivables from related parties consist principally of a

loan and advances to Banco Los Andes ProCredit S.A., Bolivia for

US$3.017 million as at December 31, 2007.

Liabilities to related parties are set forth in the following table:

(in thousands of U.S. dollars)

Dec 31, 2007 Dec 31, 2006

Liabilities to banks 22,614 9,649

Liabilities to

Procredit Holding A.G. 20,499 23,326

Subordinated debt 5,005 5,004

Total 48,118 37,979

Liabilities to Banks – The following transactions were outstanding

to related parties:

Balance of Interest Total Interest

(in thousands of U.S. dollars) main liability accrued liability in 2007

Institution

ProCredit Bank SH.A., Albania 6,875 212 7,087 485

ProCredit AD, Bulgaria 10,000 103 10,103 341

ProCredit Bank S.A.R.L., Congo 1,431 22 1,453 85

ProCredit Bank SH.A., Kosovo 3,865 94 3,959 3,865

Others 12 – 12 –

December 31, 2006

22,183 431 22,614 4,776

Balance of Interest Total Interest

(in thousands of U.S. dollars) main liability accrued liability in 2006

Institution

ProCredit Bank SH.A., Albania 5,000 1 5,001 355

ProCredit Bank S.A.R.L., Congo 1,348 20 1,368 26

ProCredit Bank SH.A., Kosovo 3,250 30 3,280 122

Liabilities to ProCredit Holding A.G. – Corresponds to an bond held

by the principal stockholder, ProCredit Holding A.G. for a capital

amount of US$20 million (US$23 million in 2006) coming due up to

May 2008 (for one year coming due up to June 2007, in 2006). At

December 31, 2007, the annual interest payment was US$460,000

(US$326,000 in 2006) and interest incurred during 2007 was

US$2.5 million (US$1.7 million in 2006).

Subordinated Debt – This item consists of a convertible bond for

US$5 million with an annual interest rate of 7.8% with quarterly

interest payments. This bond was acquired by the Bank’s principal

stockholder, ProCredit Holding A.G. The conversion into shares will

give rise to a book value per share recorded at the moment of the

transaction and interest incurred during 2007 was US$395,000

(US$4,000 in 2006).

29. Management compensation

Management does not receive any compensation from Banco

ProCredit S.A., Ecuador. The General Manager and the Deputy Gen-

eral Manager were until November 2007 employees of IPC GmbH,

which provided management services to the Bank in the framework

of a Management Services Agreement between IPC GmbH and

Banco ProCredit S.A., Ecuador. Until November 2007, the bank paid

a monthly fee of EUR 28,000.00 for the management services provided.

9,598 51 9,649 503

From December 2007, the Managers became employees of

ProCredit Holding A.G., and the Management Services Agreement

was changed accordingly from IPC GmbH to ProCredit Holding A.G.

The bank pays a monthly fee of EUR 26,378.67 for the management

services provided.

30. Average number of employees

The average number of employees during the year 2007 was 677,

and the number of employees at year-end 2007 was 807.

31. Subseqent events

Between December 31, 2007 and the date of issuance of financial

statements (September 8, 2008), there were no subsequent events

that, in the opinion of Management, could affect the accompanying

financial statements.

F i n a n c i a l S tat e m e n t s


A n n u a l R e p o r t 2 0 0 7

Contact Addresses

Head Office, Quito

Atahualpa y Amazonas, esquina

Tel.: (02) 600 3820

Ambato Centro

Bolívar, entre Mariano Egüez y Espejo

Tel.: (03) 242 3597 / 242 3599 / 242 4032

Ambato Sur

Av. Víctor Hugo, diagonal al Mall de

Los Andes

Tel.: (03) 240 0798 / 240 0818 / 240 0878

Cayambe

Morales S 1-80 y Junín, esquina

Tel.: (02) 211 0440 / 236 4077

Cuenca

Mariscal Sucre 630, entre Borrero y

Hermano Miguel

Tel.: (07) 283 4664 / 284 1446 / 282 7576.

Durán

Av. Nicolás Lapenti (1/2 Km.) Mz. 12,

Solar 10

Tel.: (04) 281 2122 / 281 2322 / 281 2622.

Guayaquil Centro

Chile 315, entre Luque y Aguirre

Tel.: (04) 251 5953 / 251 5960 / 251 5964

Guayaquil La Alborada

Guillermo Pareja Rolando y Lateral 12,

Centro Comercial Gran Albocentro

Tel.: (04) 264 5024 / 264 5130 / 264 5176

Guayaquil Las Esclusas

Av. Las Esclusas,

al final del Parque Lineal

Tel.: (04) 250 6038 / 250 6039 / 250 6040

Guayaquil Mapasingue

Av. Vía Daule Km 5 1/2 . Centro Comercial

Big Outlets - Mapasingue Oeste entre

Av. 5ta y 6ta

Tel.: (04) 235 6065 / 235 6059 / 235 6061 / 235 6063

Guayaquil Parque California

Parque Comercial California 1, oficina 1,

Km. 11 1/2 vía a Daule

Tel.: (04) 210 1005 / 210 1006 / 210 1007

Ibarra

Antonio José de Sucre 578 y Juan José

Flores, frente al parque Pedro Moncayo

Tel.: (06) 260 6246 / 260 7535 / 260 8572

Latacunga

Padre Salcedo 5-31,

entre Sánchez de Orellana y Quito

Tel.: (03) 280 8980 / 280 8981 / 280 8982

Manta

Av. 109, entre calle 104 y 105 (Tarqui)

Tel.: (04) 261 2300 / 261 2735

Machala

Av. 9 de Octubre No. 1310, entre

Av. Ayacucho y Av. Sta. Rosa

Tel.: (04) 2966192 / 2937448 / 2937555

Otavalo

Vicente Ramón Roca y Cristóbal Colón,

esquina

Tel.: (06) 292 4069 / 292 4926

Quito Carapungo

Padre Luis Vaccari, lote 232,

frente al parque principal

Tel.: (02) 242 5470 / 242 6242

Quito Centro

Guayaquil N2-19 y Bolívar

Tel.: (02) 228 6766 / 295 4920

Quito Guamaní

Pedro Vicente Maldonado Km. 12 1/2

y Leonidas Dubles (entrada a Caupicho)

Tel.: (02) 297 4137 / 297 4117

Quito Norte

Av. de La Prensa N 60-101 y Flavio Alfaro

Tel.: (02) 229 7919 / 229 8144 / 253 2813

Quito Villaflora

Pedro Vicente Maldonado

S 9-496 y Gil Martín

Tel.: (02) 264 6043 / 266 2922

Riobamba

Carlos Zambrano 23-13,

entre Daniel León Borja y Veloz

Tel.: (03) 296 9873 / 296 5702


Sangolquí

Av. General Enríquez No. 2930 y calle Río Chinchipe

Tel.: (02) 233 2959 / 233 6566 / 208 0256 / 233 3435

Santo Domingo Centro

Av. Quito 101 y Tsáchila, esquina

Tel.: (02) 276 7304 / 276 9935

Santo Domingo Parque Ecológico

Av. Calazacón 663, entre Av. Quevedo

y Av. Chone, sector La Chorrera

Tel.: (02) 370 3037

C o n ta c t A d d r e s s e s

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