Microfinance
Global Investor Focus, 02/20065 Credit Suisse
Global Investor Focus, 02/20065
Credit Suisse
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Global Investor Focus<br />
Expert know-how for Credit Suisse investment clients May 2005<br />
MICROFINANCE<br />
Can microfinance create a more prosperous and peaceful world? // Jane Nelson<br />
<strong>Microfinance</strong> enters the mainstream // Christian Gattiker, Sylvie Golay<br />
Davos microfinance roundtable // Walter B. Kielholz, Giles Keating, Paola Ghillani,<br />
Jane Nelson, Hernando de Soto, Roshaneh Zafar<br />
responsAbility – and other ways to invest in microfinance // Klaus Tischhauser
A daily<br />
interest rate of<br />
20%:<br />
For every five pesos borrowed in the morning,<br />
six must be repaid by the evening –<br />
these are standard conditions set by<br />
loan sharks<br />
in the Philippines.<br />
Source: Consultative Group to Assist the Poor (CGAP) website
500 m<br />
450 m<br />
400 m<br />
350 m<br />
300 m<br />
250 m<br />
200 m<br />
150 m<br />
100 m<br />
50 m<br />
There are an estimated 500 million microentrepreneurs worldwide, but less than 10% of them<br />
have access to financial services.<br />
CMore information on page 8
How can USD 100 change an economy? // One<br />
small loan can change a family, but several<br />
can strengthen a community, and thousands could<br />
transform an entire economy. //<br />
CMore information on page 9
Write-off rates of less than 2% for properly managed microfinance lending portfolios compare favorably to many<br />
traditional commercial bank portfolios.<br />
Microcredit<br />
98% of microloans are promptly repaid – with interest.<br />
CMore information on page 16
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—06<br />
Editorial<br />
The United Nations Organization has declared this year as the International<br />
Year of Microcredit 2005. The objective of the initiative is to<br />
make a noticeable contribution to reducing poverty over the next ten<br />
years. Numerous loans of small sums of money should help the poor<br />
to help themselves.<br />
This idea was already successfully applied in the nineteenth century,<br />
when Europe stood on the threshold between an agricultural and<br />
industrial society. The notion of microcredit emerged out of consideration<br />
for opening the door for small and microbusinesses to gain<br />
access to capital in order to free themselves from poverty. The success<br />
of this concept in Europe inspires confidence that herein lies one<br />
of the keys to broadly underpinned economic growth in the emergingmarket<br />
countries. The wealth of entrepreneurial imagination and the<br />
ideas that people create in these countries – as well as the energy<br />
that they expend to realize these ideas under adverse conditions – are<br />
quite impressive, in our view. The resoluteness with which these individuals<br />
work to enhance their standard of living can also be perceived<br />
in their high level of morality, guiding them to promptly repay these<br />
microloans – with interest.<br />
The conservatively estimated demand for microcredit exceeds the<br />
total amount of development aid provided by the Western world. Hence,<br />
sustained development can only be achieved through private investment<br />
in a sound economic system. Public-sector development aid is a prerequisite<br />
for building up such a system, of which functioning microfinance<br />
institutions and clearly regulated ownership rights are a part.<br />
Among our wealthy clients, there is an increasing number of<br />
investors who would like to invest some of their money in self-help<br />
projects. These clients have an affinity for enterprising people in thirdworld<br />
countries and feel the need to return something to society,<br />
making a valuable contribution to bridge the great divide between rich<br />
and poor.<br />
Credit Suisse, together with partner banks, has founded the company<br />
“responsAbility” and set up the corresponding responsAbility<br />
Global <strong>Microfinance</strong> Fund to try and fulfill the needs of its clients in<br />
this regard, thereby providing the requisite funding for microcredit.<br />
Additional important details surrounding the microfinance theme<br />
are available for investors in this debut issue of Global Investor<br />
Focus – the first of a series that will in the future provide investors<br />
with in-depth analysis of important longer-term investment themes.<br />
Dr. Arthur Vayloyan<br />
Member of the Executive Board of Credit Suisse Group<br />
Head of Private Banking Switzerland
p Glossary<br />
Bankable are those individuals or businesses deemed eligible to<br />
obtain financial services that can lead to income generation,<br />
repayment of loans, savings and build-up of assets.<br />
Group lending, also known as solidarity lending, is a mechanism<br />
that allows a number of individuals to provide collateral or<br />
guarantee a loan through a group repayment pledge. The<br />
incentive to repay is based on peer pressure: if one person in<br />
the group defaults, the other group members make up the<br />
payment amount.<br />
Individual lending, focuses on one client. The lending institution<br />
may ask for collateral or a guarantor.<br />
Microcredit is a small amount of money loaned to a client by a<br />
bank or other institution. Microcredit can be offered to an<br />
individual, or through group lending or community lending.<br />
Microentrepreneurs are people who own small-scale businesses,<br />
which are known as microentreprises. These businesses are<br />
usually family owned and operated. Typical microentrepreneurial<br />
activities include retail kiosks, sewing workshops, carpentry<br />
shops and market stalls.<br />
Microsavings are deposit services that allow people to store<br />
small amounts of money for future use, often without minimum<br />
balance requirements. Savings accounts allow households to<br />
save small amounts of money to meet unexpected expenses<br />
and plan for future investments such as education and old age.<br />
Some microfinance institutions require forced savings as an<br />
indicator for credit worthiness.
p Reference sources<br />
International Year of Microcredit 2005<br />
www.yearofmicrocredit.org<br />
Consultative Group to assist the poor<br />
www.cgap.org<br />
<strong>Microfinance</strong> Gateway<br />
www.microfinancegateway.org<br />
<strong>Microfinance</strong> Information eXchange (MIX) Market<br />
www.mixmarket.org<br />
The Virtual Library on Microcredit<br />
www.gdrc.org/icm<br />
Journal of <strong>Microfinance</strong><br />
http://marriottschool.byu.edu/microfinance/<br />
p Investment Community<br />
ACCION<br />
www.accion.org<br />
Oikocredit<br />
www.oikocredit.org<br />
Triodos Bank<br />
www.triodos.com<br />
BlueOrchard Finance<br />
www.blueorchard.ch<br />
responsAbility<br />
www.responsability.ch<br />
p Rating agencies<br />
Microrate<br />
www.microrate.com<br />
Planet Rating<br />
www.planetrating.org<br />
p Leading <strong>Microfinance</strong> Institutions and Networks<br />
ACCION<br />
www.accion.org<br />
Compartamos<br />
www.compartamos.com<br />
FINCA International<br />
www.villagebanking.org<br />
ProCredit Holding<br />
www.procredit-holding.com<br />
Women’s World Banking<br />
www.swwb.org
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—07<br />
08<br />
Jane Nelson // Harvard University<br />
Harnessing the potential of microfinance<br />
Especially in developing countries, microenterprises lack access to<br />
reliable financial services, but the solutions are in our reach.<br />
Table of contents<br />
12<br />
Klaus Tischhauser // responsAbility<br />
Ecuador: The market, credit systems and clients<br />
One of the key success factors is the way the banking business<br />
has adapted to clients’ needs. A closer look at Ecuador.<br />
15<br />
Sylvie Golay, Ursula Oser // Credit Suisse<br />
<strong>Microfinance</strong> as an attractive business model<br />
Enhancing the productivity of millions of microentrepreneurs in the<br />
emerging markets can be financially rewarding.<br />
18<br />
Davos roundtable<br />
Is access to capital a key factor for development?<br />
Is access to capital a key factor for development and poverty alleviation?<br />
The role of microfinance.<br />
28<br />
Christian Gattiker-Ericsson, Sylvie Golay // Credit Suisse<br />
The microfinance market<br />
An increasing number of mainstream financial players are becoming<br />
active in the promising market for microfinance.<br />
30<br />
Philipp Jung // University of St. Gallen, Mike Imam // Credit Suisse<br />
Securitization of microloans<br />
Refinancing microfinance banks has the potential to generate significant<br />
benefits for both investors and microfinance banks.<br />
32<br />
Klaus Tischhauser // responsAbility<br />
Bridging the gap: The responsAbility Global <strong>Microfinance</strong> Fund<br />
Institutional and private investors’ access to financial returns and<br />
social benefits.<br />
34<br />
36<br />
Author index<br />
Imprint
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—08<br />
How to give 500 million microentrepreneurs access to financial services // In<br />
the world’s most successful economies, small and microenterprises serve as a major<br />
engine of job creation and economic growth. However, those operating in developing<br />
countries often lack access to reliable financial services. This does not have to be<br />
the case. We have the solutions within our reach – and they include the creation of more<br />
inclusive financial markets that profitably serve these needs.<br />
Jane Nelson / Harvard University<br />
Harnessing the potential<br />
of microfinance<br />
One of the greatest economic and moral imperatives of our time is to<br />
develop innovative new funding mechanisms, technologies and business<br />
models that can empower small and microenterprises by providing<br />
them with reliable and commercially viable financial services and<br />
other business support. Expanding access to such services creates<br />
an unprecedented opportunity to unleash the spirit of innovation and<br />
entrepreneurship, as well as the untapped human capital and financial<br />
assets that already exist in millions of low-income households and<br />
communities all over the world.<br />
The renowned economist Hernando de Soto, for example, estimates<br />
that “the total value of the real estate held but not legally owned by<br />
the poor of the Third World and former communist nations is at least<br />
USD 9.3 trillion.” 1 Management strategist C.K. Prahalad speaks of the<br />
huge market potential of the four to five billion underserved people<br />
who live at the bottom of the world’s economic pyramid on less than<br />
USD 2 a day; people who are willing and able to pay for products and<br />
services that are affordable, accessible and available. 2 There are an<br />
estimated 500 million microentrepreneurs worldwide and less than<br />
10% of them have access to financial services, other than through the<br />
usurious rates of informal-sector moneylenders. In addition to ensuring<br />
better governance and institutions, which is primarily the role of government,<br />
the crucial challenge for corporate leaders, bankers and investors<br />
is to develop new financing mechanisms, technologies and business<br />
models that can serve these untapped markets in a manner that is<br />
profitable and sustainable.<br />
Successful track records<br />
In the case of microfinance – loans, savings, insurance, transfer services<br />
and other financial products targeted at low-income clients 3 – we<br />
already have successful examples that work. There are a growing number<br />
of microfinance institutions (MFIs) that serve as effective and increasingly<br />
profitable intermediaries between individual microenterprises and<br />
a range of commercial banks, development banks, donor agencies, nonprofit<br />
organizations, and socially responsible and commercial investors.<br />
Some of these MFIs have track records spanning more than ten years,<br />
with quantifiable results that show not only consistently high repayment<br />
of loans on time, but also clear economic and social benefits to<br />
the microentrepreneurs, their families, their communities and their
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—09<br />
countries (please refer to page 12 for some case studies in Ecuador).<br />
There is growing political will to support the expansion of these MFIs,<br />
building on models that already work and experimenting with new<br />
approaches. Individual and institutional investors can also play a crucial<br />
leadership role, both on a for-profit basis – looking for a competitive<br />
financial return – and on a social investment or philanthropic<br />
basis. In doing so, they can be part of an emerging global agenda that<br />
has the potential to expand economic opportunity, alleviate poverty<br />
and transform the prospects of poor communities around the world.<br />
Access to microfinance can make all the difference<br />
As UN Secretary-General Kofi Annan has observed, “A small loan, a<br />
savings account, an affordable way to send a paycheck home, can<br />
make all the difference to a poor or low-income family. With access<br />
to microfinance, they can earn more, build up assets and better protect<br />
themselves against unexpected setbacks and losses. They can<br />
move beyond day-to-day survival toward planning for the future. They<br />
can invest in better nutrition, housing, health and education for their<br />
children. <strong>Microfinance</strong> is a way to extend the same rights and services<br />
to low-income households that are available to everyone else.<br />
It is recognition that poor people are the solution, not the problem. It is<br />
a way to build on their ideas, energy and vision. It is a way to grow<br />
productive enterprises and thus allow communities to prosper. Where<br />
businesses cannot develop, countries cannot flourish.” 4<br />
How can individual investors play a role?<br />
There are at least five ways that individual investors can support the<br />
global expansion of microfinance:<br />
p First, they can invest in microfinance funds, such as the respons-<br />
Ability Global <strong>Microfinance</strong> Fund, which provide loans to microfinance<br />
institutions (MFIs), make equity investments in these institutions,<br />
and/or securitize their assets. There is growing evidence that such<br />
funds can provide investors with a reasonable financial return while<br />
also generating significant social benefits.<br />
p Second, depending on their risk profile, investors can choose to<br />
invest directly in microfinance institutions, especially some of the<br />
larger and more established institutions that operate on a global or<br />
national basis, by buying securitizations of microloans, bonds or equity<br />
stakes.<br />
p Third, they can make grants or philanthropic donations to microfinance<br />
institutions, nonprofit development organizations or academic<br />
institutes to support education, training, research and other activities<br />
that will help to expand microfinance.<br />
p Fourth, they can financially support and/or get personally involved<br />
in the wide range of workshops, conferences, project visits, research<br />
projects and media activities that are occurring under the umbrella of<br />
the UN International Year of Microcredit 2005.<br />
p Fifth, they can choose to target their investments or philanthropic<br />
support on institutions and initiatives that focus on a particular region<br />
or client group, such as female entrepreneurs or young entrepreneurs.<br />
Entrepreneurs as part of the solution<br />
Many individual investors have an impressive personal record or family<br />
tradition of wealth creation and innovation. What better way to continue<br />
to build private assets, while also leaving a broader public legacy, than<br />
to invest in the next generation of wealth creators and innovators, both<br />
at home and abroad? Many of these will be large companies, but there<br />
is also enormous potential to dedicate a percentage of investment<br />
portfolios and philanthropic donations to building the success of<br />
microfinance and microenterprises. In doing so, investors can effectively<br />
combine economic value creation with societal value creation,<br />
and private gain with public good.<br />
We have the means to alleviate extreme forms of poverty. We have<br />
the financial and technical resources to make a difference. What we<br />
need is the political will and the personal investment choices that will<br />
channel these resources in the right direction. This requires investments<br />
in innovative funding mechanisms, technologies and business models.<br />
It requires willingness to recognize entrepreneurs in low-income communities<br />
as key partners to reach a solution. Above all, it requires<br />
recognition that the spirit of social and economic entrepreneurship –<br />
combined with personal and corporate responsibility, and with good<br />
government – offers one of our greatest hopes for creating a more<br />
prosperous and peaceful world.<br />
æ<br />
1<br />
De Soto, Hernando. The Mystery of Capital: Why capitalism triumphs in the West<br />
and fails everywhere else. Basic Books, 2000.<br />
2<br />
Prahalad, C.K. The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through<br />
Profits. Wharton School Publishing, 2004.<br />
3<br />
United Nations. <strong>Microfinance</strong> and Microcredit: How can USD100 change an Economy?<br />
International Year of Microcredit, 2005. www.yearofmicrocredit.org<br />
4<br />
Speech made by UN Secretary-General Kofi Annan at the launch of the International<br />
Year of Microcredit, 18 November 2004.
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—10<br />
The global microfinance landscape<br />
<strong>Microfinance</strong> activities have been emerging in almost every country around the globe. Still, the market<br />
structure may vary a lot. To illustrate the big differences in economic basis, microfinance markets and potential,<br />
this overview shows some examples from every region of the world.<br />
Source: The CIA World Factbook, MIX Market, company data<br />
Region Country Population 2003 GDP Per capita GDP<br />
(millions) (USD billions) (USD)<br />
Central America Mexico 105 941 9,000<br />
South America Peru 28 146 5,100<br />
Middle East /North Africa Egypt 76 295 4,000<br />
Sub-Saharan Africa South Africa 43 457 10,700<br />
Sub-Saharan Africa Kenya 32 33 1,000<br />
Eastern Europe Serbia and Montenegro 11 24 2,200<br />
Central Asia Russia 144 1,282 8,900<br />
Indian subcontinent India 1,065 3,033 2,900<br />
Asia Cambodia 13 25 1,900<br />
1 Definition of poverty line varies from country to country.<br />
2 All data are from MIX Market or company websites and the most up-to-date available.
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—11<br />
% of population below poverty line 1 Name of MFI 2 Founded/licensed No. of customers Average microloan<br />
(USD)<br />
40% Compartamos 1990 309,637 294<br />
54% Bantra 1994 245,000 883<br />
17% Banque du Caire (MF Business Unit) 2001 45,000 311<br />
50% Teba Bank 1976/2000 160,000 1,117<br />
50% K-Rep Bank 1984/2000 45,400 456<br />
30% ProCredit Bank Serbia 2001 37,465 6,550<br />
25% KMB Bank 1992 32,178 780<br />
25% BASIX 1996 190,000 165<br />
36% Amret 1996/2000 105,283 77
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—12<br />
A closer look at Ecuador reveals some of the different approaches used in the<br />
field of microfinance.<br />
Klaus Tischhauser ⁄ responsAbility<br />
Ecuador: The market, credit<br />
systems and clients<br />
Ecuador is one of the Andean countries in Latin America that hosts a<br />
diverse microfinance industry made up of banks, non-banking financial<br />
institutions, cooperatives and NGOs. The Superintendencia de Bancos<br />
supervises the entire banking sector, including the regulated microfinance<br />
institutions. In 2004 alone, these institutions posted a volume<br />
growth rate of 174%. With a total of USD 360 million in assets at the<br />
end of 2004, the microfinance industry accounts for just 6% of the<br />
entire financial sector’s USD 6 billion in assets. But the impressive<br />
growth rates indicate that the microfinance sector serves a segment<br />
of the market that is still largely underserved.<br />
The largest Ecuadorian bank, Banco del Pichincha, has now<br />
become a serious player in the country’s microfinance sector. Within<br />
a short period, through a specific microfinance program, the bank has<br />
attained a microfinance market share of close to 15%, which is already<br />
half the microlending volume of the former uncontested dominator<br />
Banco Solidario. In this so-called downscaling process, established<br />
traditional banks reach out to client groups that they had previously<br />
regarded as unbankable. In October 2001, German ProCredit Holding<br />
Group entered the market and opened a specialized microfinance<br />
institution called Sociedad Financiera Ecuatorial (SFE). Since then, the<br />
three players have shared nearly 60% of the Ecuadorian microfinance<br />
market. The good results achieved by the microfinance pioneers have<br />
finally induced mainstream banks to turn their attention to the majority<br />
of the country’s population.<br />
Village banking: The credit system to reach the masses<br />
On Friday, 3 March 2005, 14 women gather in a small grocery store.<br />
Situated on a side street in Ecuador’s capital city of Quito, every other<br />
week the tiny shop serves for an hour or so as a bank. All members<br />
of the group, including the shop owner, Fernando Garcia, are clients<br />
of FINCA Ecuador, an affiliate of the international microfinance network<br />
FINCA International, the pioneer of so-called village banking credit<br />
systems. The group is just one of nearly 2,000 throughout Ecuador,<br />
with a combined total of more than 40,000 clients.<br />
Today is a special day; a credit cycle comes to its end. On this<br />
occasion, the members not only repay the last installment of their<br />
loans (comprising principal, interest and a savings component), but<br />
also dissolve and reinstate their own “village bank.” Supervised,
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—13<br />
trained and supported by their FINCA credit officer, Viviana Cruz, they<br />
elect a president, a vice president, a cashier and an auditor. After a<br />
short round of applause after each election, the necessary documents<br />
are signed and the group starts the banking business. Using computer<br />
output brought along by the credit officer, the cashier starts with<br />
a report about the group’s savings. Then a serious issue is immediately<br />
dealt with: a group member did not show up and has not paid<br />
her last installment. Soon, one of the group’s members leaves the<br />
shop to go and look for her. The group is understandably concerned,<br />
for if the money is lost, the group’s savings will be tapped first to<br />
cover the loss. Then each group member would be held jointly liable.<br />
This solidarity mechanism, coupled with the close contact between<br />
the credit officer and the group, is one of the main secrets behind the<br />
success of village banking credit systems. The group members know<br />
each other well; they normally live and work in the same street, neighborhood<br />
or village. So the ability to run a business successfully and<br />
the honesty and creditworthiness of each new member are assessed<br />
by those who are in the best position to do so.<br />
Discipline as a success factor<br />
After the meeting, the members walk away from the store – not far,<br />
sometimes just across the road – and go back to their businesses.<br />
Like Teresa Rosero, the owner of a small tailor’s shop right across the<br />
street. When asked why she had become a FINCA client, she replied:<br />
“It’s closer and more convenient than where I was before (she was a<br />
client of one of FINCA’s competitors), and I can do business with my<br />
neighbors who I know and trust.” Has she ever had difficulty repaying<br />
her loans? Never in the three years that she has been with FINCA,<br />
she says. Well, recently it has become a bit harder; the economy took<br />
a deeper turn for the worse, so her sales likewise declined. She<br />
therefore wants to be prudent and is postponing her plan to apply for<br />
an increase in her current loan of USD 1,000.<br />
The next group member, Maria Espinoza, runs her tiny business<br />
a few meters down the street. It’s not much more than just a box on<br />
wheels with an umbrella to protect against sun and rain. On top of the<br />
box there is an entire pig on display fresh out of the oven, “hornado”<br />
style (“horno” is the Spanish word for oven). She sells the delicious<br />
meat along with potatoes and herbs. Maria did not participate in<br />
today’s meeting because she had to look after her business, which<br />
was started on a USD 300 loan. Unless they have a good excuse,<br />
members must pay an absence fee for not personally participating in<br />
meetings. Discipline is a success factor not only for the management<br />
of microbusinesses, but also for the management of the village banking<br />
groups. That’s what FINCA’s credit officer told her group when<br />
the members asked to meet just once a month instead of biweekly so<br />
they could spend more time on their businesses. And it is her job to<br />
maintain FINCA’s excellent current credit repayment rate of close to<br />
98%.<br />
Individual lending: The credit system for growing needs<br />
The ProCredit branch Quito Norte attracts quite a crowd. Its bright<br />
and inviting new design chimes with the worldwide rebranding of the<br />
entire ProCredit network consisting of 19 microbanks in Latin America,<br />
eastern Europe and Africa. On the ground floor, a few seats accommodate<br />
new clients who patiently wait until they can move on to the<br />
desks where their personal information is entered or checked. ><br />
Ecuador at a glance<br />
Source: The CIA World Factbook, Institute of International Finance<br />
Capital Quito Currency (adopted in 2000) US dollar<br />
Government type Republic GDP per capita (purchasing power parity, 2003 estimate) USD 3,300<br />
Population (2004 estimate) 13.2 million GDP real growth rate (2003 estimate) 2.5%<br />
Population growth rate (2004 estimate) 1.03% Public debt (in % of GDP, 2003 estimate) 53.7%<br />
Median age (2004 estimate) 23 years Exports (goods, 2004 estimate) USD 6.6 billion<br />
Life expectancy at birth (2004 estimate) 76 years Current-account balance (2004 estimate) USD 125 million<br />
Population below poverty line (2003 estimate) 65% Inflation rate (consumer prices, 2003 estimate) 7.9%<br />
Literacy rate (population over the age of 15, 2003 estimate) 92.5% Unemployment rate 1 (2003 estimate) 9.8%<br />
Natural resources<br />
1<br />
Underemployment of 47% (2003 estimate)<br />
Petroleum, fish, timber,<br />
hydropower<br />
Labor force by occupation<br />
(2001 estimate)<br />
Agriculture (30%), industry<br />
(25%), services (45%)
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—14<br />
Klaus Tischhauser: “It’s amazing to see how much entrepreneurial<br />
energy can be unleashed.”<br />
There are several tellers at the back of the room for cash transactions.<br />
Armed guards at the building entrance and next to the teller windows<br />
provide security for the bank and its clients. The two upper floors are<br />
filled with desks where credit officers interview loan applicants and<br />
analyze clients’ businesses. ProCredit banks use individual lending<br />
as its credit system of choice for micro and small business lending.<br />
The loan decision is not based on collateral, but rather on projected<br />
future cash flows and the ability of the client and the business to<br />
produce them. Although the handsome building and modern equipment<br />
are certainly important in attracting new clients, a key part of<br />
the credit officers’ work takes place outside the premises. To really<br />
get to know and understand a client’s business, a credit officer needs<br />
to spend a lot of time with clients in their own working environment.<br />
That explains the row of motorbikes in front of the bank and the helmet<br />
on each credit officer’s desk.<br />
Viviana Andrango is one of ProCredit’s loan officers for microbusinesses.<br />
Her district is the Atucucho neighborhood on the outskirts of<br />
Table 1<br />
FINCA and ProCredit client base structure<br />
Source: Finca Ecuador, ProCredit Ecuador<br />
Finca<br />
ProCredit<br />
Total clients 42,676 20,760<br />
Village banking groups 1,878 —<br />
Average loan size USD 309 USD 2,098<br />
Total loans outstanding USD 13,179,000 USD 43,555,000<br />
Total client savings USD 2,671,000 USD 6,696,000<br />
On-time repayment rate 97.97% 99.39%<br />
Quito, where unemployed farmers from the countryside illegally settled<br />
some years ago in search of work. At that time, there were only dirt<br />
roads, no electricity and no water system. “I should have taken pictures<br />
back then. Incredible development has taken place here,” says Viviana,<br />
pointing at different shops that have all been her clients for some<br />
years now. She is particularly proud of her first and now biggest client,<br />
a store with a working capital loan of USD 10,000. The shop owner,<br />
César Crespo, started his business in a single-story building. Over<br />
time, his family has invested in additional floors – a visible form of<br />
wealth creation. The added space is being used as storage room, which<br />
allows the shop to purchase in larger quantities at lower prices.<br />
Personal relationships are key<br />
The business run by Gabriela and Sebastián Nieto with an outstanding<br />
loan of USD 800 is more modest. It sells menswear, and the owners<br />
would like to expand. Gabriela and Sebastián would be happy to take<br />
out a loan of USD 1,500, but Viviana argues that this is too big a step<br />
for a business with such seasonal fluctuations.<br />
The longstanding relationship that Viviana has with her clients and<br />
the level of mutual trust are essential for her work and for the individual<br />
lending system in microfinance in general. In many cases,<br />
Viviana is considered part of the extended family and gets invited to<br />
weddings and other such events. The depth of her relationship with<br />
her clients also becomes evident when she’s on holiday. Her clients<br />
would rather wait for her to return than speak to some other credit<br />
officer, a behavior more associated with private banking clients, who<br />
often demand permanent availability of their relationship manager. In<br />
the context of microfinance, this underscores the equally important<br />
roles that personal relationships and mutual trust play in forming the<br />
basis of the business.<br />
æ<br />
Note: The names of the clients mentioned in this article have been changed to protect<br />
their privacy.
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—15<br />
How to achieve repayment rates of 98% // The current microfinance industry<br />
could grow into a USD 15–20 billion financial market in the coming years – if the microfinance<br />
industry is able to grasp the market potential. The industry’s profitability,<br />
with double-digit returns on equity as well as default rates below 2%, are encouraging<br />
aspects.<br />
Sylvie Golay, Ursula Oser / Credit Suisse<br />
<strong>Microfinance</strong> as an attractive<br />
business model<br />
The microfinance industry provides a wide range of financial services<br />
to microenterprises. Microenterprises are small businesses in urban<br />
or rural areas that are generally family owned and operated. They are<br />
active in the trade, service and production sectors, mainly in the socalled<br />
informal economy. It is estimated that there are about 500<br />
million microentrepreneurs in the world, with average microcredit of<br />
around USD 500. These estimates further indicate that today only<br />
10% of these microenterprises have access to reliable financial services.<br />
<strong>Microfinance</strong> is actually a high-growth industry, fueled not only<br />
by the size of its target market, but also by its profitability. The market<br />
is witnessing growth rates of 20% to 40%, with extensive diversity in<br />
structures and frameworks across the world. Concurrently, microfinance<br />
is maturing into a more transparent and regulated industry. In<br />
recent years, 250–500 commercially viable institutions, serving an<br />
estimated 50 million microentrepreneurs, have emerged from this very<br />
fragmented market place. They increasingly receive attention from<br />
regulators, auditors and ratings agencies. In many countries – e.g.,<br />
Bolivia, Brazil, Peru and El Salvador – new types of financial licenses<br />
that are tailor-made for deposit-taking microfinance institutions have<br />
been introduced.<br />
Different types of risks<br />
Loan portfolio quality is one factor determining a microfinance institution’s<br />
specific risk since it is the basis for future cash flow in the<br />
absence of formal guarantees. Fostering a close relationship and<br />
mutual trust between loan officers and their clients is thus key for any<br />
microfinance institution. Leading institutions provide timely information<br />
on their loan portfolios. They report repayment rates of 98% for<br />
properly managed loans, which compares quite favorably to many<br />
traditional commercial bank portfolios. The payment behavior of microentrepreneurs<br />
is clearly superior to that of US credit card holders, for<br />
example (see Figure 1). <strong>Microfinance</strong> institutions are very solvent<br />
because credit risk is spread over thousands of microcredit borrowers<br />
who mostly have only their business as resource for financial survival.<br />
Importantly, rapid growth has not come at the expense of portfolio<br />
quality given the huge still-unserved client pool. Systematic risk is<br />
mitigated by the low correlation with political and economic conditions<br />
because the informal sector, by its very nature, is less directly linked<br />
to the formal economy.<br />
Institutional investors have standard practices for credit appraisal,<br />
which includes rating of investments. <strong>Microfinance</strong> ratings >
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—16<br />
from specialized ratings agencies – e.g., Micro Rate – help to enhance<br />
investor confidence. The leading microfinance institutions should and<br />
do increasingly search for a risk appraisal by international rating agencies<br />
(S&P, Fitch or Moody’s).<br />
Financial profitability as a prerequisite for global success<br />
In terms of profitability, data compiled by Micro Rate suggest that the<br />
leading microfinance institutions are profitable companies, surpassing<br />
many domestic and international banks. Return on equity (ROE) for<br />
32 Latin American institutions averages 19%. Return on assets (ROA),<br />
another indicator of financial strength, averages 4.8%. At the same<br />
time, the operating expense ratio (operating expense divided by gross<br />
loan portfolio) has dropped to 21%, with the most efficient microfinance<br />
institutions in the region approaching 10%. Operation expense includes<br />
staff as well as administrative expense, making the ratio a measure<br />
of the overall efficiency of the respective microfinance institution.<br />
Since staff is the main cost factor, loan officers’ productivity in dealing<br />
with their clients is key for improving and maintaining efficiency.<br />
Some worry that excessive concern over profitability may compromise<br />
the social and development goals. However, given the everincreasing<br />
funding needs in this rapidly growing business, serving poor<br />
clients can only be secured by financially profitable institutions, which<br />
are able to grow their capital base. Charging unrealistically low interest<br />
rates would prohibit sustainable microlending. Indeed, microfinance<br />
institutions need to charge interest rates that are higher than “normal”<br />
bank rates because the administrative costs of making small loans<br />
are high in relation to the amount lent.<br />
Figure 1<br />
Typical default rate of microfinance loans versus<br />
US credit card business (2002)<br />
Source: Credit Suisse, CSFB European Securitization Research, MIX Market<br />
7<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
%<br />
<strong>Microfinance</strong> loans<br />
US credit card business<br />
Lending methodology<br />
Besides the cooperative model, several lending methodologies have<br />
been developed in order to adapt to client’s needs and constraints<br />
(see Table 1, page 17). Solidarity groups are one of them. In this type,<br />
three to ten clients form a group to get access to financial services.<br />
The group members are collectively responsible for the repayment of<br />
the loan. In contrast to the cooperative model, where the profits<br />
remain in the cooperative in the form of equity, or are distributed to<br />
the members, the earnings generated by solidarity groups are used<br />
to build up reserves or group funds. The ownership of these funds is<br />
often unclear.<br />
Village banking, which can be seen as a mix of the two previous<br />
models, has an autonomous structure that allows its members access<br />
to financial services also in remote areas. The village bank is created<br />
via savings or/and membership fees and is managed by a committee<br />
elected by the members. As for solidarity groups, repayment relies on<br />
collective pressure. Analogical to cooperatives, profits are used to<br />
increase equity or distributed to members. In addition to these partly<br />
microfinance-specific lending methodologies, a lot of microfinance<br />
institutions or microbanks, such as BancoSol in Bolivia, rely on traditional<br />
individual lending.<br />
Double-bottom line<br />
Experience has shown that while microfinance is a business per se,<br />
it is also a powerful development tool. Access to finance, even in the<br />
form of very modest loans, generates huge business productivity gains<br />
and contributes to alleviating poverty in the emerging markets. By<br />
enhancing the living standards of entrepreneurs and their families –<br />
and by empowering women – microfinance provides a significant
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—17<br />
contribution to achieving the UN Millennium Development Goals.<br />
Many investors, especially private investors, who target the microfinance<br />
market, do so with social objectives. While anecdotal evidence<br />
and surveys conducted among the recipients of microloans provide<br />
evidence of the genuine social impact, no universally acceptable<br />
standards exist yet for reporting on the social performance. Initiatives<br />
are targeted in this direction, but more efforts need to be put into<br />
developing and reporting standardized measurements of social impact<br />
at a reasonable cost.<br />
æ<br />
<strong>Microfinance</strong> harks back to the Raiffeisen idea<br />
The concept of microfinance is frequently publicized in the media<br />
through accounts of the success story of the Bangladesh-based<br />
Grameen Bank and its more than four million borrowers. Grameen<br />
Bank was founded in 1974 by Prof. Muhammed Yunus for the<br />
express purpose of extending microloans to needy women to<br />
assist them in helping themselves and improving their families’<br />
living conditions. In actuality, though, microfinance is not a novel<br />
invention. It is also no coincidence that the concept proliferated in<br />
western Europe in the second half of the nineteenth century. The<br />
Raiffeisen philosophy arose 150 years ago in Germany under difficult<br />
economic circumstances analogous to what one encounters<br />
today in many developing regions. On the cusp of industrialization,<br />
craftsmen and farmers suffered from a scarcity of financial resources<br />
because capital was being drawn to the higher returns promised<br />
by alternative investment opportunities such as railways and<br />
textile factories.<br />
The Raiffeisen model developed by mayor and social reformer<br />
Friedrich Wilhelm Raiffeisen was based on the self-help and solidarity<br />
principle. The farmers and craftsmen of individual villages<br />
banded together into cooperative associations. The members of<br />
each association declared their willingness to pledge their property<br />
as collateral for the cooperative’s liabilities. Since the members<br />
of the cooperative resided in an easily surveyable area, the<br />
character of the borrowers could be taken into account alongside<br />
their material property in the lending decision. The joint liability<br />
enhanced the creditworthiness of the cooperative members and<br />
gave them access to affordable business credit for the purchase<br />
of livestock, fodder, fertilizer and seed, and for their workshops.<br />
They also acquired a safe means of investing their savings. The<br />
Raiffeisen movement spread throughout the German-speaking<br />
world and beyond. The Union of Swiss Raiffeisen Banks was founded<br />
in 1902. In France, the same credit cooperatives go by the name<br />
Crédit Mutuel. And somewhat similar models emerged in other<br />
European nations such as Great Britain in the nineteenth century.<br />
Table 1<br />
Major lending methodologies in microfinance<br />
Source: Zeller, Manfred. Promoting Institutional Innovation in <strong>Microfinance</strong> – Replicating Best Practices is Not Enough.<br />
D+C Development and Cooperation, January 2000; Credit Suisse<br />
Cooperative model Solidarity groups Village banks<br />
Participation p The cooperative members are the owners p Ownership often unclear<br />
p 3 to 10 clients build a group<br />
Structure<br />
p Each cooperative is geographically limited<br />
p Joined support center exists (disbursement<br />
p Regional/central union<br />
of loans, collection of savings, etc.)<br />
Responsibility<br />
p Members vote/elected democratically<br />
p Support center makes decisions<br />
p Financial liability limited to own shares<br />
p Members collectively guarantee loan repayment<br />
p Equity capital build-up by members/the community<br />
p Highly decentralized<br />
p Ideally independent of any upper-level organization<br />
p Committee elected by, and among, members<br />
Profit sharing p Improve balance sheet or payout to members p Improve balance sheet; no distribution p Improve balance sheet or payout to members
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—18<br />
Davos roundtable // Globalization is a powerful process, but it has not yet resolved the<br />
problem of widespread poverty in many parts of the world. Is microfinance a possible,<br />
sustainable solution for the promotion of business initiatives at the bottom of the social<br />
pyramid? Is there an untapped market for the creation of jobs and income?<br />
Ernst A. Brugger / The Substainability Forum Zurich<br />
The following is an edited transcript of the roundtable discussion that took place in Davos, Switzerland on 28 January 2005.<br />
Is access to capital a key<br />
factor for development?<br />
Ernst A. Brugger // Globalization is a powerful process, but it still<br />
excludes a majority of the world’s population. Is it correct that out of 6.5<br />
billion people in the world, globalization has not yet reached about four<br />
billion people? Is there a hidden, huge market, neglected by statistics,<br />
business and politics?<br />
Jane Nelson // I think that’s the right picture in terms of up to<br />
4 billion people residing at the bottom of the so-called economic<br />
pyramid. In terms of funds, access to credit and other basic resources,<br />
they need development, not only in economic terms, but also in terms<br />
of basic human development. The potential for micro- and small-scale<br />
businesses is huge. To me, the big challenge is how to deliver products<br />
and financial services to that potential market in an efficient and<br />
equitable way.<br />
Hernando de Soto // We’ve got some detailed figures for some<br />
countries. In Mexico, for example, after working there for about a year<br />
at the request of President Vicente Fox, we’re talking about six million<br />
enterprises that are outside the legal system, most of which are familyowned<br />
microbusinesses. This corresponds to roughly 40–50 million<br />
human beings out of a population of 100 million.<br />
Ernst A. Brugger // And what kind of hidden value do they<br />
produce?<br />
Hernando de Soto // These people – i.e., the extralegal sector<br />
– actually own around 11 million plots of land or buildings that cover<br />
a total of about 134 million hectares. Now, we also have additional<br />
statistics that tell us that 49% of the population of Mexico is employed<br />
full-time outside the legal sector. What the extralegal sector has in<br />
assets is the machinery and equipment in the six million enterprises,<br />
the 134 million hectares of land and the buildings valued at about USD<br />
315 billion that are situated on this land. This is equal to seven times<br />
the value of Mexico’s oil reserves. We use this comparison because<br />
we say the greatest resource that a country has is actually its people,<br />
and these USD 315 billion correspond to 31 times the amount of<br />
foreign direct investment that Mexico has received – mainly from the<br />
United States – since the Mexican Revolution. There is a lot of potential<br />
tied up there.<br />
Ernst A. Brugger // Why does this extensive extralegal market<br />
really exist?<br />
Hernando de Soto // What we do is not only size up what we<br />
call the extralegal sector, but also find out why it’s outside the system.<br />
Basically, it is about bad rules of law. And the next thing that we want<br />
to find out is how to bring the extralegal sector inside. And one >
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—19<br />
Ernst A. Brugger<br />
The Sustainability<br />
Forum Zurich<br />
Roshaneh Zafar<br />
Kashf Foundation<br />
Roshaneh Zafar: A lot of women are actually providing income for their families in the microbusiness sector, but they are not recognized.<br />
There is no training and no support. That’s why we offer access to microcredit.
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—20<br />
Walter B. Kielholz<br />
Credit Suisse<br />
Paola Ghillani<br />
previously CEO of<br />
Max Havelaar<br />
Paola Ghillani: We may have scope for cooperation with microfinance institutions to serve our suppliers.
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—21<br />
“The most important element that we can<br />
contribute is to put projects out in the marketplace<br />
where people can see that this is a real<br />
investment and that investors have a genuine<br />
interest in microfinance.” // Walter B. Kielholz<br />
of the ways, of course, to bring the extralegal sector inside is for the<br />
government to make a proposal clarifying quite clearly that this sector<br />
has to conform to the rules of law. One of the things you add to the<br />
package is, how does the sector access the sizeable benefits? How<br />
can people operating in the extralegal sector obtain credit? How can<br />
they get electricity? So this is starting to give the informal sector all<br />
the benefits that everyone who lives in the formal sector enjoys.<br />
Ernst A. Brugger // Let’s take the example of Pakistan. Does<br />
that country also have a huge informal sector?<br />
Roshaneh Zafar // Actually, 65% of the country’s current<br />
employment is in the informal sector. I actually don’t like using the<br />
term “informal sector.” I prefer to call it the micro- and small-enterprise<br />
sector, because once you talk about an informal sector, you are basically<br />
saying it’s a tertiary economy, which it isn’t. It’s a primary economy<br />
really; if we are saying “informal sector,” we’re not recognizing the<br />
input – the fact that these businesses provide employment in the<br />
country. If you look at job creation, every year there are 3.1 million<br />
people entering the market in Pakistan looking for jobs. Over 75% of<br />
them find jobs in the micro- and small-enterprise sector. That’s why<br />
it’s a major source of employment for people in the country. My perspective<br />
on this is a woman’s perspective. If you look at the labor force<br />
participation rate in Pakistan, it’s 24% right now – that’s the official<br />
rate. But when we turn to the informal sector, the percentage rate is<br />
up in the high fifties. The reason why I’m providing this backdrop is to<br />
talk about the impact that a microcredit program especially for women<br />
would have. The government does not recognize women as active<br />
economic elements in the country. Why? There are two reasons. One,<br />
because the government does not record these businesses; they’re<br />
really not within the spectrum of taxable income brackets, so they’re not<br />
licensed, they’re not registered, there is no counting, they’re very<br />
informal in the way they do business and they’re really not recognized.<br />
And two, a lot of women are actually providing income for their families<br />
in this sector, but they do not receive support, there is no training, there<br />
is no opportunity and no access to credit. They’re huge numbers. The<br />
overall population of Pakistan is 140 million at present, and if we turn<br />
this around and look at the demand for microfinance in the country,<br />
the estimate is that there are 5.6 million households that require access.<br />
If we look at the market penetration of the largest microfinance providers<br />
in the country, they do not even cover five percent of the market<br />
demand. Which means that 95% of the market is underserved.<br />
Ernst A. Brugger // Walter Kielholz, when you listen to these<br />
numbers, are they a big surprise to you, or do you think this is a reality<br />
that is well known in the international banking system?<br />
Walter B. Kielholz // Well, the banking industry knows that something<br />
is going on below the top ten percent of the economic pyramid.<br />
The informal sector seems to be so important and has its laws and<br />
rules as to how it works, and it must have a way to allocate resources.<br />
People must be very smart, because otherwise the sector wouldn’t<br />
survive. There is indeed a market in the informal sector – and it<br />
works.<br />
Roshaneh Zafar // But it has major constraints; it’s not a value<br />
proposition for the household. I agree it’s a market that functions, but<br />
it’s not an efficient market, and it must become more efficient for the<br />
people. The majority of our clients (we have 70,000 clients now) still<br />
need the moneylenders as much as the popular lottery because my<br />
organization cannot actually offer them full service, including savings<br />
accounts, because it’s not a fully organized bank.<br />
Ernst A. Brugger // So the informal market is a huge, but inefficient<br />
market with high transaction costs.<br />
Roshaneh Zafar // It’s very heavy on transaction costs.<br />
Ernst A. Brugger // Hernando, do you agree?<br />
Hernando de Soto // Well, the constraints that you were mentioning<br />
are important. Looking at the United States, we know that<br />
85% of all employment there comes from small enterprises. And most<br />
of these small enterprises in the United States obtain their start-up<br />
capital from mortgages used as collateral. The question is: Can you<br />
mobilize your collateral? So to give you an idea, in the case of Egypt,<br />
if you want to formally open a bakery, it takes about 549 days working<br />
eight hours a day. The result is that you do not have any legal bakeries.<br />
Which means you do not have the documents to identify your assets,<br />
you do not have the documents to identify your collateral, and you do<br />
not have efficient access to credit.<br />
Ernst A. Brugger // Why does it take so much time to formalize<br />
a bakery?<br />
Hernando de Soto // Because you have to comply with government<br />
rules; you have to report to 33 different government offices.<br />
The average time it takes to formally establish a business in Egypt is<br />
between 300 and 400 days. It’s red tape and it’s also corrupt bureaucracy.<br />
I repeat: To go into the bakinvg business there are 33 government<br />
offices; there are 29 different offices that you have to apply to<br />
if you want to get into real estate. In the case of Mexico, to give you<br />
an idea, forming a limited liability company takes a minimum of 17<br />
months working eight hours a day; and if you want to close a mortgage<br />
it takes 16 months; if you want to open a mortgage it takes about<br />
20 months. >
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—22<br />
Ernst A. Brugger // Your life is over by then…<br />
Hernando de Soto // That’s right. So the result is the creation –<br />
and we also don’t like the word “informal” – of the extralegal market.<br />
But anyhow, a big part of the problem is constraints, and they’re<br />
absolutely useless. In other words, it’s simply government disorder.<br />
It’s collateral damage to a great extent – a result of the fact that the<br />
government churns out about 28,000 ordinances a year. That’s about<br />
106 a day, and nobody knows whose hand is in whose pockets and<br />
which law is really effective. Viewed from the perspective of the poor,<br />
which is what we’re trying to do, there is a grass-roots base from<br />
which we can create a constituency for change. It’s no longer an<br />
imported American issue (or neoliberal program), the poor themselves<br />
want to do it. It’s something that stifles the poor, and so you create a<br />
constituency for change that every politician should like. Anyhow, the<br />
idea is that, yes, you’ve got this other system that we were talking<br />
about, you’ve got all these other rules. The problem with these other<br />
rules is that it’s not one system of rules, it’s a thousand systems of rules:<br />
each community has one, you can go three blocks, you can go fifteen<br />
blocks, each community has it’s anarchy. But anarchy is not chaos,<br />
anarchy means a variety of little systems as you had in Switzerland<br />
before Eugen Huber put all these things together.<br />
Walter B. Kielholz // It sounds very familiar; all industrialized<br />
countries were developing nations at some stage and have gone<br />
through this process at some time.<br />
Giles Keating // You’re talking about collateral, but mind that<br />
at times a lot of microfinance is being done on the basis of trust and<br />
a kind of peer pressure.<br />
Roshaneh Zafar // That’s a good point. It’s actually the way the<br />
market is created. You have poverty lending programs in Asia that usually<br />
have loan sizes of up to 300 to 500 dollars. Lending in Latin America<br />
goes up to 1,000 or 1,500 dollars. When you’re talking about poverty<br />
lending programs, mostly these are based on credibility. How is credibility<br />
gauged? There are several models that work. There are so-called<br />
solidarity lending programs, where you build groups and these become<br />
the unit of transaction. There are many reasons behind this: one is to<br />
lower the cost of transaction, which means, for example, that we use<br />
25 women as one unit of transaction, which means all their loans are<br />
recorded as one, and that cuts down on supervision and monitoring.<br />
Ernst A. Brugger // Do you also do individual lending?<br />
Roshaneh Zafar // Our organization does solidarity lending and<br />
individual lending. It depends on the loan size: when loan sizes increase<br />
to USD 800, we begin to look at collateral. How do you do collateral<br />
with poor people?<br />
Since there is no efficient market mechanism for collateral, we<br />
take co-guarantors. These are people who actually have income tax<br />
statements or are salaried workers. We use them as proxy collateral.<br />
And the next thing we do is also look at property titles. And as<br />
Hernando pointed out, people didn’t want property rights. When we<br />
told them that we were willing to transfer title to them, that we would<br />
walk them through the process and negotiate a transaction for them,<br />
they were still not interested. They didn’t want to get caught up in the<br />
tax net and didn’t want to be documented. And, of course, there are<br />
good reasons for that, because there is corruption, there is nepotism,<br />
there is collusion, there are other transaction issues, and the poor are<br />
scared. These are crucial problems in my part of the world. Litigation<br />
is very common. It’s a very litigious society, and litigation usually centers<br />
on two things, property or personal feuds, family feuds. Those<br />
are the two reasons. People are very scared of the law.<br />
Hernando de Soto // We must remember, they reject the legal<br />
system, not the property rights, because the system is what takes 17<br />
months to enter, it’s what requires 549 days to register a business.<br />
So, of course they don’t want it. It’s the fact that none of these various<br />
property titles helped you to get into the formal economy to begin with,<br />
so they make no sense. If the title is just for taxing, but titleholders<br />
are not connected to the banks, then why should they want titles.<br />
Roshaneh Zafar // And so, in our case, credibility is built over<br />
time. It’s like credit-card operations. As I see it, microfinance is very<br />
similar to a credit card; you have a limit, you repay a loan, your limit<br />
is raised. In some ways we are documenting these people. And<br />
recently in Pakistan we decided to set up a credit bureau for microfinance<br />
institutions. The government is not doing it. So we decided to<br />
engage with the private sector, and we emulated, for example, the<br />
case of the Bolivian market, where a credit bureau does exist. So in<br />
some ways people are documented, but again, it’s not formal.<br />
Hernando de Soto // But it’s a logical first stage. It gradually<br />
evolves to encompass those who are more adventurous, other types<br />
of legislation, and then later you start doing the formal lending. So<br />
there is always this 20- to 30-year period before you actually get to<br />
the formal sector in the developing countries.<br />
Walter B. Kielholz // I wanted to come back to this element of<br />
trust or credibility mentioned before. It is actually nothing other than<br />
the sole criterion for a successful allocation of capital. Why? Otherwise<br />
what are the criteria? There are no files, no numbers, no collateral,<br />
and so on. The only thing is trust. That’s why I think the question in<br />
microfinancing is about the front side and the cost involved.<br />
What’s important is that the individual decision at the front end is<br />
right, because if that decision is wrong, the system is corrupted and<br />
the money flows into the wrong channels.<br />
Hernando de Soto // May I just add something there? One of
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—23<br />
“The existence of the extensive extralegal<br />
market is the result of constraints<br />
because of an improper system. It’s<br />
simply government disorder. It works<br />
against the poor. So you have to create a<br />
constituency for change.” // Hernando de Soto<br />
the ways to look at the issue is that to a great degree it is based on<br />
trust, reflected in the fact that the English word credit comes from the<br />
Latin word “credere,” meaning “I believe in you because you have something<br />
to lose.” We found out that a lot of the poor do have assets, have<br />
something to lose, but it doesn’t mean that they can use them as collateral.<br />
It means that they possess an asset that can be developed, but<br />
until you dismantle all these extralegal, dispersed structures that allow<br />
people to deal with each other at a local level, trust cannot be fostered.<br />
Ernst A. Brugger // Let’s continue with this important train of<br />
thought. Two questions: First, how do you ensure that you make the<br />
right decisions at the front end? Second, isn’t it the case that poor<br />
people cannot afford not to pay back a loan, because if they don’t repay<br />
they risk falling into this really illegal sector with its very high costs?<br />
Roshaneh Zafar // I will answer the first question. If I were a<br />
bank and wanted to lend to the poor, my biggest problem would be<br />
asymmetry of information. How do I know who’s credible and who isn’t?<br />
The way we do it, and it’s something that has been tested, you let the<br />
community decide. It’s a principle of involvement and participation and<br />
the principle of self-selection. If you’re running a solidarity lending<br />
program, what you do is let the group decide who comes into the<br />
group. Then you have a second way to verify. We use what engineers<br />
call a triangle of information: you collect the same data from three<br />
different points. I think any researcher would do that too. So you first<br />
let the community decide, then you go to their houses and you see<br />
that they are genuinely credible and actually live there, and the third<br />
person you go to is someone from the community who is not linked to<br />
them. Usually you would go and check that information with the local<br />
grocery store. Because that’s where they have lines of credit. And<br />
you know instantly who’s been paying their credit and who hasn’t.<br />
Ernst A. Brugger // So it’s like social engineering…<br />
Roshaneh Zafar // Absolutely. We are basing our entire credit<br />
decision on the person’s reputation. We’re not basing it on the business<br />
proposition.<br />
Ernst A. Brugger // And the result?<br />
Roshaneh Zafar // In our case, and in most microfinance<br />
instances, if it’s done right, the recovery rate is above 99%. So obviously<br />
we are doing something right with the principle of self-selection.<br />
That’s if you’re talking about credibility or solidarity in generating social<br />
capital; you can’t do it without ownership. Now, coming back to the<br />
issue of costs. You know the transaction cost or the cost of delivery<br />
becomes very important, and that’s a big challenge. If you look at the<br />
alternatives on the market, there is another option: it’s the moneylender.<br />
We’ve done a lot of research to discover what moneylenders<br />
do right. They’re the tougher ones. They provide the client immediate<br />
access. The moment you need money, they will put it in your hands.<br />
But they are charging something like 200% or 360% interest per year<br />
on their loans. It is completely outrageous.<br />
Walter B. Kielholz // The important part is the decision-making,<br />
and that’s why it has to be done properly. The moneylender is actually<br />
spending a lot of money trying to recollect the loan, by all kinds<br />
of means.<br />
Roshaneh Zafar // That’s right. But if you compare their pricing<br />
with our service charge or interest rate of 20%, the household finds<br />
this to be very economical. At the same time, we have to charge that<br />
rate because it costs us on average 15%. For every dollar that we lend<br />
in the market, it costs us 15 cents to recover the money. So it’s a very<br />
labor-intensive, cost-intensive service because it’s small tickets and<br />
high volume. And because you are offering service delivery; you are<br />
going to the client.<br />
Ernst A. Brugger // So it’s about efficiency and professionalism in<br />
microcredit. We have about 5,000 microfinance institutions in the market,<br />
and I would place only about 10% of those in the top tier of professionally<br />
managed financial institutions, which probably serve around 50<br />
million people. The rest are largely working in a development-aid mode,<br />
subsidized by aid money. Jane, would you agree with these estimates?<br />
Jane Nelson // That’s roughly correct. My sense is that there are<br />
obstacles to overcome in learning the best practices of the more commercially<br />
oriented and sophisticated microfinance institutions. I think<br />
part of the reason probably is that there have been more aid-driven<br />
initiatives and fewer major commercial banks coming through.<br />
Ernst A. Brugger // Can you imagine, Walter Kielholz, that this<br />
could become a mainstream banking business?<br />
Walter B. Kielholz // Maybe one day, but it will take a very long<br />
time. I think there was a monetization in society in the nineteenth<br />
century which took place because there was a rural exchange community<br />
here in Switzerland. It took a very long time. It’s principally not<br />
a funding problem, but rather a question of how to bring it to the<br />
forefront. It reminds me really of the Raiffeisen movement.<br />
However, the increasing demand for financial services in developing<br />
countries will further advance this development. That’s also the<br />
reason we have joined with other financial institutions to provide a<br />
platform for microfinance investments for our clients. Of course, this<br />
is only a small step, but it shows that there are possibilities to act as<br />
a financial intermediary and to contribute to bridge the gap between<br />
the financial markets and developing countries. >
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—24<br />
Jane Nelson<br />
Harvard University<br />
Hernando de Soto<br />
Instituto Libertad y<br />
Democracia<br />
Giles Keating<br />
Credit Suisse<br />
Giles Keating: We should bring microfinance into the mainstream, to have it as something that is regarded as natural and into which<br />
investors want to put their money.
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—25<br />
“Around four billion people live at the<br />
bottom of the economic pyramid.<br />
So, the potential for micro- and smallscale<br />
businesses is huge.” // Jane Nelson<br />
Giles Keating // As a bank, we would like to take some of the<br />
existing microfinance portfolios and securitize them and then market<br />
the securitization. We want private clients to assume the risk, and we<br />
think they will be happy to do that, particularly in view of the high<br />
quality of the portfolio. I spoke to a couple of clients in Asia a couple<br />
of weeks ago, and the people there said there is immense interest<br />
among our big private clients who’ve contributed charitably to the<br />
tsunami relief, and now they’re interested in helping in the medium<br />
term. One of the ways that they’re interested is that microfinance<br />
can help.<br />
Walter B. Kielholz // That’s indeed an interesting role for us,<br />
because it’s commercial and not pure charity.<br />
Roshaneh Zafar // It can be a commercial value. The return on<br />
assets alone, right now, is 10%. The good organizations are financially<br />
viable. They would be able to pay out a return to investors. Interestingly,<br />
there are only two microfinance securitization vehicles in the world,<br />
the one by ICICI Bank in India and the other by BlueOrchard together<br />
with OPIC. So there are only two in existence so far, which is surprising.<br />
But I know why. Because the banks don’t trust us. It took us ages;<br />
it took us ten years as an NGO to get a loan from a local bank. If we<br />
talk about credibility, it’s not just the credibility of the poor, it’s also<br />
the credibility of the NGOs and microfinance institutions.<br />
Ernst A. Brugger // Is it because of a lack of professionalism<br />
on the part of microfinance institutions?<br />
Roshaneh Zafar // We are a high-volume, small-ticket business.<br />
Professionalism is crucial. How will we use technology to cut<br />
down costs, how do we make it more efficient? It has happened in<br />
Latin America with ATMs, for example. If you look at Bolivia, Indian<br />
women in the remotest village have an ATM machine and fingerprint<br />
technology to get credit. It can be done.<br />
Giles Keating // How about equity capital. What’s the vision<br />
here?<br />
Roshaneh Zafar // If you’re first an NGO, it’s donated equity.<br />
When you transform into a commercial enterprise, you license yourself<br />
into a bank, which we are hoping to do in the near future. So that is when<br />
you need equity investors who are like-minded. Because once you’re<br />
licensed, your transaction costs will change, the returns will change, the<br />
whole business will change, and the market will change. So you need<br />
the initial capital and you need people who invest in microfinance.<br />
Ernst A. Brugger // Jane, how do you see the role of big banks<br />
in the market?<br />
Jane Nelson // Take the perspective of Credit Suisse or any bank<br />
that wants to get into this. It seems to me that there are four ways in<br />
which you can become engaged: through commercial products and<br />
services, through portfolio securitization or equity capital or whatever,<br />
and through philanthropic venture capital projects. And then, fourthly,<br />
through activities to influence the policy dialogue for better framework<br />
conditions.<br />
Ernst A. Brugger // Paola, you are a commercial buyer. Max<br />
Havelaar is one of the leading commercial agents for socially and<br />
ecologically responsible products in Switzerland, and you are the CEO<br />
and have brought the company up to an impressive level that was<br />
unimaginable some years ago. How do you treat your suppliers, the<br />
small agribusinesses? Do you extend them credit?<br />
Paola Ghillani // No, I’m not a specialist in microcredit. We do<br />
fair trade labeling, and our mission and task is to open the market to<br />
disadvantaged producers and workers from developing countries<br />
under fair trade conditions. And we control and certify the products<br />
they sell to importers and retailers in our country.<br />
Ernst A. Brugger // And no links to microfinance institutions?<br />
Paola Ghillani // No, not yet. But our discussion shows that we<br />
may have scope for cooperation with microfinance institutions interested<br />
in serving our suppliers. I would be interested in exploring this<br />
idea and in experimenting with some concrete projects.<br />
Ernst A. Brugger // That leads directly to my last question to everybody<br />
in the round: What would you say is the most important priority<br />
for developing this microfinance market? One priority or one wish.<br />
Roshaneh Zafar // Scale. Scale up, we have to do that.<br />
Paola Ghillani // I think it’s about systemization and efficiency<br />
in the evaluation process.<br />
Jane Nelson // Scaling up the existing microfinance institutions<br />
and creating many more.<br />
Walter B. Kielholz // I think the most important thing that we<br />
can contribute is to put projects out in the marketplace where people<br />
can see that this is a real investment and that investors have a genuine<br />
interest in microfinance.<br />
Giles Keating // Bring microfinance into the mainstream, to<br />
have it as something which is regarded as a business that clients want<br />
to put money into.<br />
Hernando de Soto // I agree with all of you, but none of this is<br />
going to happen if you don’t have the rule of law – a rule of law that<br />
everybody obeys. Because uniform laws are going to give you the<br />
standards that give you the scale.<br />
æ
Microfi nance as an attractive asset class<br />
Low correlation with business cycles<br />
Low return volatility<br />
Dexia Micro-Credit Fund (in USD) versus US equity and bond indices<br />
1998 2005<br />
140<br />
Dexia Micro-Credit Fund (NAV)<br />
100<br />
60<br />
140<br />
S&P 500 Index<br />
100<br />
60<br />
140<br />
LUCI-CSFB US Investment Grade Corporate Bond Index (price return)<br />
100<br />
60<br />
Since its launch in 1998, the Dexia Micro-Credit Fund – the fi rst commercial investment fund designed to refi nance<br />
microfi nance institutions – showed low volatility, low correlation with US equity and bond indices, and consistent growth.<br />
CMore information on page 29
The microentrepeneur<br />
is not<br />
a charity recipient,<br />
but a client,<br />
generating revenues for the<br />
microfi nance institution
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—28<br />
The microfinance market<br />
Today, most investors active in the<br />
microfinance market are development<br />
agencies, foundations and nongovernmental<br />
organizations (NGOs). However,<br />
an increasing number of mainstream<br />
financial investors are becoming active in<br />
this promising market as interest<br />
from high-net-worth individuals and<br />
pension funds grows, and innovation<br />
provides simpler investment vehicles.<br />
Christian Gattiker-Ericsson, Sylvie Golay / Credit Suisse<br />
1<br />
Goodman, Patrick, “<strong>Microfinance</strong> Investment Funds: Objectives, Players,<br />
Potential,” KfW, 2004<br />
2<br />
Ivatury, Gautam and Abrams, Julie, “The Market for <strong>Microfinance</strong><br />
Foreign Investment: Opportunities and Challenges”, KfW, 2004<br />
3<br />
Brugger, Ernst A. and Duggal, Bikram, “<strong>Microfinance</strong> Investment Funds:<br />
Looking Ahead”, KfW, 2004<br />
The United Nations Organization’s declaration of 2005 as the<br />
International Year of Microcredit, among other things, has recently<br />
drawn the attention of the mainstream investment community<br />
to microfinance. Participation by foreign commercial investors has<br />
begun, though it is still at a low level. The major contributions<br />
emanate from development agencies, foundations and NGOs.<br />
According to a survey on foreign investments in microfinance<br />
conducted in 2004, about USD 395 million has been invested in<br />
microfinance investment funds up to now, with roughly USD 222<br />
million in inflows expected in the first quarter of 2005, bringing<br />
the total amount to USD 617 million. In addition, development<br />
agencies, foundations and NGOs have invested heavily through<br />
grants and subsidized loans. 1 Figure 1 depicts the different market<br />
participants and processes through which investors allocate<br />
their funds to the microfinance industry.<br />
The launch of microfinance funds by large investors such as<br />
Dexia and Deutsche Bank in the late 1990s, or more recently by<br />
Credit Suisse in collaboration with other major financial investors,<br />
should soon persuade other mainstream investors to enter the<br />
market. The share of commercial investors should thus increase<br />
significantly.<br />
Debt funding predominates<br />
Analyses have shown that nearly 70% of foreign investment in<br />
microfinance is provided through debt funding. This is mainly<br />
explained by the large proportion of loans provided by development<br />
banks and other development agencies 2 . With the increase<br />
of commercial funding, the share of debt should stay high since<br />
commercial investors will primarily find opportunities through<br />
direct participation in securitization of loans and in investment<br />
funds, which mainly refinance the credit portfolios of microfinance<br />
institutions. Because of the lack of symmetric information as well<br />
as other factors such as currency risks, equity investments should<br />
stay limited until the local markets adopt higher transparency and<br />
governance standards, but thereafter reach critical mass.<br />
Potential demand<br />
It is difficult to estimate the ultimate potential demand for microfinance<br />
investment by commercial investors, but our view is that if it<br />
were to broadly follow the magnitudes invested in community investments<br />
in the USA, it could, over time, reach a figure of some USD<br />
15–20 billion worldwide. Although investment in microfinance is very<br />
unlikely to ever reach the large sums invested in hedge funds, its<br />
performance to date has illustrated some similar characteristics –<br />
notably consistent returns and low correlation to major capital markets<br />
– and for this reason microfinance is likely to become increasingly<br />
favored as one component in a well-diversified portfolio.<br />
The limited data available on socially responsible investment<br />
(SRI) help us to estimate investors’ demand for microfinance<br />
products. The Social Investment Forum and its European branch,<br />
EuroSIF, estimate the size of the respective US and European<br />
SRI markets at USD 2.164 trillion and EUR 336 billion. Altogether,<br />
the global market for SRI amounts to approximately<br />
USD 2.5 trillion. However, a major part of these assets is<br />
defined as SRI simply by screening for criteria such as the<br />
exclusion of the tobacco industry from portfolios. In the USA,
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—29<br />
community investing – the sole SRI strategy that embraces a<br />
development purpose by providing capital to communities that<br />
are underserved by traditional financial services – represents only<br />
0.65% of the total assets invested in SRI. In contrast to other<br />
forms of SRI, growth in community investing remained positive<br />
between 2001 and 2003 (up 75%), while other SRI strategies<br />
showed declining growth. This reinforces the often-mentioned<br />
business-cycle resistance characteristic of microfinance investment<br />
– a characteristic that plays an important role for the diversification<br />
potential of an asset class.<br />
With the help of these figures, most studies have assumed<br />
some growth in the potential demand for microfinance investment<br />
products. Thanks to increasing promotion by some large financial<br />
investors, this demand could soon amount to the aforementioned<br />
around USD 15–20 billion. Taking the current volume of foreign<br />
investment of less than USD 1 billion, this would mean a surge in<br />
demand for microfinance investment. With worldwide need for<br />
microcredit estimated at USD 100 billion, 3 the market saturation<br />
point would hardly be reached. However, microfinance institutions<br />
are presently unable to absorb such an inflow of investors’ funds.<br />
Innovation and standardization should therefore play a crucial role<br />
in improving the cost structure and enhancing the decision-making<br />
process of microfinance institutions. In this way, they will be<br />
able to build up the size of their profitable microentrepreneur client<br />
base. With the financing needs of these lending institutions<br />
growing, investors will be able to enter this still-confined market<br />
via the different investment vehicles.<br />
Investment vehicles<br />
A few microfinance funds were created in the late 1990s to early<br />
2000s. All these investment funds are relatively small compared<br />
with the minimum size (USD 20–30 million) for a traditional fund<br />
to be considered sustainable. In addition to this size effect, the fixed<br />
costs are spread among a relatively small investor base. Assessing<br />
small microfinance institutions tends to be more costly than<br />
analyzing mainstream investments, so management fees are<br />
often higher than for traditional funds. However, as the microfinance<br />
industry matures, microfinance funds will be able to reach<br />
their “commercial” critical mass.<br />
European legislation sets criteria that have to be met before<br />
microfinance funds can be actively sold to the general public. For<br />
example, open-end funds must publicly disclose the results of a<br />
regular valuation of their assets: i. e., the net asset value (NAV).<br />
The Dexia Micro-Credit Fund and the responsAbility Global <strong>Microfinance</strong><br />
Fund are the two funds that currently fulfill such requirements.<br />
Many other funds undergo an irregular valuation assessment<br />
due to the difficulty of valuing the underlying assets.<br />
Leading microfinance institutions, such as Mexico-based<br />
Compartamos and Bolivia-based Banco Sol, have been issuing<br />
bonds in their domestic markets. In July 2004, BlueOrchard<br />
Finance – in collaboration with the Overseas Private Investment<br />
Corporation (OPIC), a US government development agency – provided<br />
the first large international microfinance bond offering,<br />
channeling USD 40 million worth of securities on the US capital<br />
market, thus paving the way for using financial structuring to<br />
create a diversified range of securities catering to different investor<br />
risk profiles. Looking ahead, financial structuring as well as<br />
loan securitizations should play a crucial role in expanding the<br />
choice and enhancing the appeal of microfinance investments to<br />
a broad investor base.<br />
Portfolio implications<br />
There are no authoritative figures on the number and performance<br />
of the microlending institutions or their respective funds. The performance<br />
figures from one of the few aforementioned established<br />
microfinance funds (see also page 26) cannot be extrapolated<br />
and applied to the whole microfinance universe. From a portfolio<br />
standpoint, the lack of key data, such as historical returns, volatility<br />
and benchmark performance, currently makes optimization<br />
of exposure to microfinance vehicles difficult.<br />
æ<br />
Figure 1<br />
<strong>Microfinance</strong> market participants and fund-allocation process<br />
Source: Goodman (2004), Credit Suisse<br />
Development institutions<br />
p Private donors (foundations, NGOs, etc.)<br />
p Development agencies<br />
Socially responsible investors and commercial investors<br />
p Private individuals<br />
p Institutional investors<br />
<strong>Microfinance</strong> investment vehicles<br />
Grants,<br />
subsidized loans<br />
Equity/loans<br />
at or close to<br />
market conditions<br />
Equity/loans<br />
at market conditions<br />
<strong>Microfinance</strong> institutions<br />
Microentrepreneurs Microentrepreneurs Microentrepreneurs Microentrepreneurs Microentrepreneurs Microentrepreneurs
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—30<br />
Securitization of microloans<br />
Providing commercial funding for microfinance<br />
banks means developing a<br />
financial product that can attract mainstream<br />
investors. Refinancing microfinance<br />
banks by securitizing microloans<br />
has significant potential to generate<br />
numerous benefits for both investors and<br />
microfinance banks.<br />
Philipp Jung / University of St. Gallen<br />
Mike Imam / Credit Suisse<br />
1<br />
A special-purpose vehicle (SPV) is an instrument specifically designed for the<br />
respective transaction. It is not actively managed, but administered by a trustee that<br />
strictly follows the documented procedures.<br />
The securitization principle …<br />
The securitization of balance-sheet assets is one of the key innovations<br />
introduced by banks in recent years. In such transactions,<br />
illiquid assets (e.g., loans) can be converted into tradable capitalmarket<br />
products. For originators (owners) of such illiquid assets,<br />
securitization can be an instrument to tap capital markets for<br />
funding purposes – and to free-up regulatory capital as assets<br />
are transferred off balance sheet. The terms of the funding<br />
mainly depend on the quality of the assets to be securitized: i.e.,<br />
on the expected losses. Generally, a portfolio of assets is transferred<br />
from the balance sheet of an originator (e.g., a bank) to a<br />
special-purpose vehicle (SPV) 1 . For refinancing and compensating<br />
the originator for the asset transfer, the SPV issues notes<br />
(asset-backed securities) to investors. The SPV repays interest<br />
and principal of the issued notes to the investors out of the cash<br />
flow of the acquired assets. These notes often include separate<br />
classes of different seniority, meaning that losses in excess of<br />
the most junior tranche are absorbed by the subsequent tranche<br />
and so on. Consequently, the most senior tranches bear only a<br />
relatively remote possibility of being affected by defaults in the<br />
underlying reference portfolio.<br />
… applied to microloans<br />
Microloans have a strong potential to be established as a new<br />
asset class for securitization transactions. In spite of the oftenabsent<br />
collateral for backing microloans, default rates have consistently<br />
been at low levels, and the excess spread is significant.<br />
Securitization of microloans refers to a transaction in which an<br />
SPV buys (parts of) the microloan portfolio of a microfinance bank.<br />
The microfinance bank will still act as servicing entity (i.e., the<br />
microloan borrower is not affected by the sale). All proceeds of<br />
this asset transfer to the SPV are paid to the microfinance bank,<br />
which also keeps an equity tranche (the so-called first loss piece)<br />
of the SPV. The first loss piece (FLP) provides incentives for<br />
efficient servicing of microloans, while allowing the microfinance<br />
bank to still participate in the revenues of the loan portfolio<br />
it has sold. This participation in the cash flow of the<br />
microloans is nonetheless subordinated to the payments to the<br />
investors in the SPV (interest and principal of investor notes). Due<br />
to this structure, investors are exposed only to limited credit risk,<br />
which is reflected by a corresponding rating of the respective<br />
investor note.<br />
Existing securitization transactions …<br />
This concept of securitization of microloans has not been seen in<br />
the market as such. However, in a somewhat revolutionary move,<br />
Blue Orchard structured a transaction that first applied the securitization<br />
principle to microfinance institutions. Several bonds<br />
issued by microfinance banks were repackaged and sold to capital<br />
markets. A similar structure was later also applied by Deutsche<br />
Bank Foundation’s Global <strong>Microfinance</strong> Consortium and others.<br />
This has marked the beginning of linking capital markets with<br />
microfinance banks. Noteworthy is, however, that such transactions<br />
do not represent securitization of microfinance banks’ assets<br />
(microloans), but of bonds issued by microfinance banks and held<br />
by an intermediary.
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—31<br />
… and how to further develop them<br />
The Swiss State Secretariat for Economic Affairs (SECO) is currently<br />
financing a feasibility study that is supported by Credit<br />
Suisse and other institutions such as the European Investment<br />
Fund (EIF) and MicroRate (a rating agency specialized in microfinance<br />
institutions). For the first time, this project aims at setting<br />
up a platform enabling securitization of the actual assets (microloans)<br />
of microfinance banks. The platform could provide a structure<br />
that mitigates the political risk through diversification and<br />
sophisticated insurance mechanisms, pools microloan portfolios<br />
of different originators, and provides standardized procedures and<br />
documentation. The transaction is structured to apply a direct<br />
securitization principle: meaning that individual microloans are<br />
directly securitized (and not a portfolio of bonds issued by a microfinance<br />
banks). The benefits of such an approach are potentially<br />
lower funding costs for microfinance banks (due to the asset<br />
isolation of the microloans), regulatory capital relief effects for<br />
microfinance banks and correspondingly increased loan volume,<br />
and direct integration of microfinance banks in global capital<br />
markets. In other words, mainstream investors are offered a structured<br />
product that is ultimately backed by microloans, but can be<br />
viewed as a conventional securitization transaction, in which the<br />
investor buys rated notes and is paid a corresponding spread – a<br />
private-sector approach that could strongly increase commercial<br />
refinancing for microfinance banks. Hence, an initial pilot transaction<br />
should be implemented at some time.<br />
æ<br />
Figure 1<br />
Simplified structure of the concept<br />
Source: Credit Suisse, University of St. Gallen<br />
Asset side<br />
Capital market side<br />
<strong>Microfinance</strong> bank<br />
(asset seller)<br />
proceeds (funding)<br />
SPV<br />
(asset buyer)<br />
proceeds<br />
Investors<br />
microloan portfolio<br />
sale of microloans<br />
investor notes<br />
loan-servicing agreement<br />
cash flow generated by microloans
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—32<br />
Bridging the gap: The responsAbility<br />
Global <strong>Microfinance</strong> Fund<br />
Investors interested in microfinance will<br />
currently find a situation that is barely<br />
comparable with the established markets<br />
in which they normally invest, reflecting<br />
the origins, development and particularities<br />
of this emerging industry. Moreover,<br />
selecting and monitoring investments<br />
pose additional challenges, considering<br />
the fact that microfinance, by its very<br />
nature, is a global industry operating in<br />
the more distant or less connected<br />
corners of the world. However, adaptable<br />
and innovative investment concepts can<br />
overcome these challenges.<br />
Klaus Tischhauser / responsAbility<br />
Providing access to microfinance investments<br />
The small but growing number of investment vehicles providing<br />
individual and institutional investors with access to microfinance<br />
have developed innovative ways to overcome the challenges of<br />
bridging the gap between microentrepreneurs and investors.<br />
These vehicles offer not just access, but also diversification and<br />
a certain degree of liquidity to investors.<br />
A recent and innovative example is the responsAbility Global<br />
<strong>Microfinance</strong> Fund, an open-ended mutual fund, launched in<br />
November 2003. The fund’s investment advisor is Switzerlandbased<br />
responsAbility Social Investment Services Ltd., a company<br />
founded by a group of Swiss banks, including Credit Suisse. This<br />
fund offers investors access to all segments of the microfinance<br />
markets worldwide.<br />
Financing outreach<br />
The fund invests mainly in debt securities issued by microfinance<br />
institutions in order to refinance their growing credit portfolios.<br />
The institutions in the fund’s portfolio realized an average 67.7%<br />
growth rate in their credit portfolios in 2004 and increased the<br />
number of clients by 47.1%. The fund invests in established institutions<br />
as well as in newer and smaller institutions if they have a<br />
solid growth plan showing potential for reaching out to new areas<br />
and more clients.<br />
Participating in growth<br />
Equity investments in microfinance have so far always been private<br />
equity investments, which are hardly accessible for investors.<br />
The responsAbility Global <strong>Microfinance</strong> Fund offers investors<br />
convenient access to this form of investment. But due to their<br />
poor liquidity, the share of such investments in the fund is limited.<br />
The fund is currently a shareholder of the ProCredit network, a<br />
microfinance network comprising 19 microbanks in Latin America,<br />
Central Europe and Africa, with a combined 275 branches, a<br />
high-quality credit portfolio of USD 1.2 billion, and 411,000 clients<br />
as well as persistently strong growth.<br />
Flexible investment approach<br />
Today’s microfinance investment landscape is characterized by its<br />
low degree of formalization of securities, limited access to existing<br />
investment vehicles, lack of secondary markets, generally<br />
heterogeneous investment objects and still-limited market size<br />
and depth. The responsAbility fund uses a flexible investment<br />
approach in order to offer investors the best know-how, expertise<br />
and market proximity – and at the same time keep the flexibility<br />
to adapt to the changing needs of the microfinance market place.<br />
It comprises the ability to invest in various forms of securities and<br />
vehicles. Hence, the fund can invest in securities with a low grade<br />
of formalization as well as in bonds, and can participate in securitizations<br />
and invest in other microfinance investment vehicles.<br />
Best partner concept<br />
The microfinance industry is partly driven by some globally active<br />
microfinance networks. Managed centrally with a strong local<br />
presence, these networks combine market know-how and the
GLOBAL INVESTOR FOCUS<br />
<strong>Microfinance</strong>—33<br />
ability to promote, for example, best practice, standardization and<br />
product innovation across their affiliates. The responsAbility fund<br />
has established partnerships with such networks in order to<br />
facilitate investment and refinancing. The fund currently provides<br />
access to three networks that are quite distinct from each other:<br />
Figure 1<br />
responsAbility Global <strong>Microfinance</strong> Fund:<br />
monthly performance<br />
Source: responsAbility Social Investment Services Ltd.<br />
%<br />
USD<br />
p FINCA and Opportunity International, both reaching very low<br />
segments of the market with their credit technology, involving<br />
microloans.<br />
p ProCredit, which offers individual lending in the microfinance<br />
segment up to the small business segment, where larger amounts<br />
are involved. Other types of partners include independent finance<br />
companies specialized in microfinance such as the aforementioned<br />
Geneva-based Blue Orchard or Brussels-based Alterfin. These<br />
partners identify, propose and monitor microfinance institutions.<br />
1.00<br />
0.75<br />
0.50<br />
0.25<br />
0<br />
01/04<br />
02/04<br />
03/04<br />
04/04<br />
05/04<br />
06/04<br />
07/04<br />
08/04<br />
09/04<br />
10/04<br />
11/04<br />
12/04<br />
01/05<br />
02/05<br />
03/05<br />
103<br />
102<br />
101<br />
100<br />
99<br />
Financial returns<br />
The responsAbility fund’s objective is to produce consistently<br />
positive monthly returns, with total returns exceeding those at the<br />
US-dollar money-market level and with low volatility. In the 16<br />
months between its inception in December 2003 and March<br />
2005, the fund’s net asset value (NAV) increased by 2.23%. The<br />
annualized portfolio yield at the end of first-quarter 2005 was<br />
3.56%. Half of the portfolio is invested in Central and South<br />
America, and a quarter in Eastern Europe and Central Asia. Africa<br />
and Asia account for slightly more then 10% each. More than<br />
80% of the fund is invested in fixed-income instruments, using<br />
to a large extent floating interest rates.<br />
Social benefits<br />
The responsAbility Global <strong>Microfinance</strong> Fund follows a clear<br />
reporting policy about social benefits. Besides standard fund data,<br />
the monthly reporting includes some key social impact indicators.<br />
A Social Performance Report is published on a yearly basis, providing<br />
more insight into the social dimension of the investments.<br />
As a rule of thumb, each investment of USD 1,000 in the fund can<br />
be expected to reach between two and three microentrepreneurs,<br />
who, in turn, provide support for more then 20 household members<br />
and create several jobs. The more detailed yearly analysis<br />
uses the UN Millennium Development Goals as a reference model.<br />
Most thorough studies about the fund’s portfolio of companies<br />
show the positive impact that microfinance has on the position of<br />
women in society, on hunger and health, on poverty and risk, and<br />
partly on education, as also conveyed elsewhere in this issue of<br />
Global Investor Focus.<br />
æ<br />
Figure 2<br />
responsAbility Global <strong>Microfinance</strong> Fund:<br />
geographical distribution<br />
Source: responsAbility Social Investment Services Ltd.<br />
Africa 10%<br />
Rest of Asia 10%<br />
Central Asia/Eastern Europe 35%<br />
Figure 3<br />
responsAbility Global <strong>Microfinance</strong> Fund:<br />
asset allocation<br />
Source: responsAbility Social Investment Services Ltd.<br />
Equities 10%<br />
Money market/cash 10%<br />
Growth in net asset value (NAV) measured in USD ( l.h. scale)<br />
Net asset value (NAV ) in USD (r.h. scale)<br />
Latin America 45%<br />
Fixed income 80%
GLOBAL INVESTOR FOCUS<br />
Authors—34<br />
Jane Nelson // Harvard University . . . . . . . . . . . . . . . . . . . . . . . . . 8–9, 18–25<br />
Jane Nelson is Director of the Corporate Social Responsibility Initiative and a<br />
Senior Fellow at the Center for Business and Government, at the Kennedy School<br />
of Government, Harvard University, and a Director of the Prince of Wales International<br />
Business Leaders Forum. A former banker with Citigroup, she has worked<br />
in the office of the UN Secretary-General, Kofi Annan, preparing a report for<br />
the UN General Assembly on partnerships between the UN and the private sector,<br />
and written extensively on the role of the private sector – from multinational corporations<br />
to small and micro-enterprises – in helping to achieve international<br />
development goals.<br />
She is co-author of a recent book entitled ‹Profits with Principles: Seven strategies<br />
for achieving value with values› and has co-authored the World Economic<br />
Forum’s four corporate citizenship reports since 2002. She has lived in Africa, Asia,<br />
Europe and North America, and worked throughout these regions and also in<br />
Latin America and the Middle East.<br />
Klaus Tischhauser // responsAbility . . . . . . . . . . . . . . . . . . . . . . . . . . .12–14<br />
Klaus Tischhauser is a co-founder and Managing Director at responsAbility Social<br />
Investment Services Ltd., Zurich, Switzerland. Klaus is an economist by training<br />
with a post-graduate education in ecology. He has more than 10 years of professional<br />
experience in the financial sector. After 8 years with Credit Suisse in the<br />
Foreign Exchange and Money Market divisions and with Credit Suisse Asset<br />
Management in the investment funds division for Retail, Private and Institutional<br />
Banking, he joined SAM Sustainable Asset Management where he was instrumental<br />
in building up the company which is today on of the world’s leading asset<br />
managers for sustainable investments.<br />
After almost two years of cycling through the African continent from Zurich<br />
to Capetown between 1999 and 2001, Klaus founded responsAbility Social Investment<br />
Services Ltd., a Social Investment platform in the Swiss financial market with<br />
a strong focus on developing countries.<br />
Giles Keating // Credit Suisse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18–25<br />
Giles Keating is a managing director at Credit Suisse Group, where he is Head of<br />
Global Research and a member of the Investment Committee in Zurich, which is<br />
responsible for setting investment strategy for the bank’s discretionary clients. An<br />
economist by profession, Giles started his career with the Confederation of British<br />
Industry where he was Head of the Economic Forecasting Department. In 1981,<br />
he was a research fellow at the London Business School, Centre for Economic<br />
Forecasting in London. Mr. Keating joined Credit Suisse First Boston in 1986 and<br />
held various posts including Chief Economist, Global Head of Fixed Income<br />
Research and Economics, member of Global Fixed Income Management Committee<br />
and Co-Head of the Pensions Advisory and Structuring Group. In 2004, he<br />
became Head of Global Research at Credit Suisse in Zurich.<br />
Giles Keating graduated from Oxford University with a BA in Philosophy,<br />
Politics and Economics and holds an MSc in Mathematical Economics and Econometrics<br />
from the London School of Economics.<br />
Ernst A. Brugger // The Sustainability Forum Zurich . . . . . . . . . . . . . . . . 18–25<br />
Ernst A. Brugger is a founding partner and the president of BHP – Brugger and<br />
Partners Ltd, a consulting firm specialized in sustainability strategies for private<br />
and public organizations. He is also the chairman of Sustainable Performance<br />
Group, Switzerland’s largest sustainability mutual fund, a member of the executive<br />
committee of the International Red Cross, the chairman of SV Group, the chairman<br />
of the board of Blue Orchard Finance (Geneva-based microfinance asset manager<br />
and advisor), the vice president of the board of Henry Dunant Center for<br />
Humanitarian Dialogue, and a Professor at Zurich University.<br />
In his role as co-founder and CEO of The Sustainability Forum Zurich and in his<br />
project work, he advocates the implementation of long-term strategy, sustainability<br />
and good governance in business and politics. Over the past 20 years, he has<br />
carried out numerous consultancy tasks for various Swiss and international companies<br />
and institutions in Europe, Latin America, Africa and Asia.<br />
Hernando de Soto // ILD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18–25<br />
Hernando de Soto is currently President of ILD – headquartered in Lima, Peru –<br />
considered by The Economist as one of the two most important think tanks in the<br />
world. Time magazine chose him as one of the five leading Latin American innovators<br />
of the century in its special May 1999 issue on “Leaders for the New Millennium,”<br />
and included him among the 100 most influential people in the world in 2004.<br />
Furthermore, Forbes magazine, in its 85th anniversary edition, included him among<br />
15 innovators “who will reinvent your future.” Entwicklung und Zusammenarbeit,<br />
the German development magazine, in its January 2000 issue, regarded Mr. de Soto<br />
as one of the most important development theoreticians of the last millennium.<br />
He has served as an economist for the General Agreement on Tariffs and<br />
Trade, as President of the Executive Committee of the Copper Exporting Countries<br />
Organization (CIPEC), as CEO of Universal Engineering Corporation (Continental<br />
Europe’s largest consulting engineering firm), as a principal of the Swiss Bank Corporation<br />
Consultant Group, and as a governor of Peru’s Central Reserve Bank.<br />
Today, as his principal activity, Mr. de Soto, together with the ILD, is designing<br />
and implementing capital formation programs to empower the poor in Asia, Latin<br />
America, the Middle East and former Soviet nations. He has been called by many<br />
heads of state, most of whom he is (or will be) working for directly.<br />
Roshaneh Zafar // Kashf Foundation . . . . . . . . . . . . . . . . . . . . . . . . . . 18–25<br />
Ms. Roshaneh Zafar is the CEO of the Kashf Foundation, which is based in Pakistan.<br />
The organization has grown from a mere 15 female clients in 1996 to 62,000 clients<br />
today. It is one of the fastest-growing MFIs in the country and the first one to<br />
achieve financial self-sufficiency, continuing to have a portfolio at risk of less than<br />
0.3%. Kashf was also the first NGO-MFI to broaden the scope of microfinance by<br />
introducing insurance services, and has recently started pilot research for introducing<br />
individual lending in order to target the “missing middle” in the microfinance<br />
market. In 2002, the Kashf Foundation was awarded the <strong>Microfinance</strong> Excellence<br />
Award by the Grameen Foundation USA for its groundbreaking innovations in the<br />
field of microfinance in Pakistan.<br />
Ms. Zafar founded the Kashf Foundation – the first specialized microfinance<br />
organization in Pakistan – in 1996 after a chance meeting with Professor Muhammd<br />
Yunnus of the Grameen Bank. Prior to this, she worked with the World Bank in<br />
Islamabad in the Water and Sanitation department for several years. Ms. Zafar was<br />
one of the first Ashoka Fellows in Pakistan and was recently selected as a Social<br />
Entrepreneur by the Schwab Foundation. She represented the Social Entrepreneurs<br />
at the World Economic Forum in January 2004 and spoke at the Opening Plenary<br />
of the WEF along with UK Foreign Secretary Jack Straw, President Obasanjo of<br />
Nigeria, Carly Fiorina of Hewlett Packard and Mr. Wolfenson of the World Bank,<br />
responding to the theme Partnering for Security and Prosperity. She is also the<br />
founding member of the Pakistan <strong>Microfinance</strong> Network and is a member on the<br />
board of several NGOs in Pakistan. Ms. Zafar is a graduate of the Wharton Business<br />
School University of Pennsylvania in Finance and Economics. She also holds<br />
a Masters in International and Development Economics from Yale University.<br />
Walter B. Kielholz // Credit Suisse . . . . . . . . . . . . . . . . . . . . . . . . . . . 18–25<br />
Walter B. Kielholz studied Business Administration at the University of St. Gallen,<br />
and graduated in 1976 with a degree in Business Finance and Accounting.<br />
His career began at the General Reinsurance Corporation, Zurich. After working<br />
in the USA, the UK and Italy, he assumed responsibility for the company’s<br />
European marketing. In 1986, he moved to Credit Suisse, Zurich, where he was<br />
responsible for client relations with large insurance groups in the Multinational<br />
Services department.<br />
Walter Kielholz joined Swiss Re, Zurich, at the beginning of 1989. He became<br />
a member of Swiss Re’s Executive Board in January 1993 and was Swiss Re’s<br />
Chief Executive Officer from January 1997, to December 2002. A board member<br />
since June 1998, the Board of Directors of Swiss Re appointed him Vice-Chairman<br />
with effect from 1 January 2003.<br />
Since 1 January 2003, Walter Kielholz has been Chairman of the Board of<br />
Directors of Credit Suisse Group. He was originally appointed to the Board of Directors<br />
of Credit Suisse Group in 1999.
GLOBAL INVESTOR FOCUS<br />
Authors—35<br />
Paola Ghillani // Previously with Max Havelaar . . . . . . . . . . . . . . . . . . . 18–25<br />
Paola Ghillani is a member of the International Committee of the Red Cross (ICRC).<br />
A pharmacist by profession, she started her career in the pharma industry at Ciba/<br />
Novartis. After spending the first part of her career in multinational companies, in<br />
1999 she became CEO of the Max Havelaar foundation – a fair-trade organization<br />
active in Switzerland and abroad. During the same period, she was appointed<br />
member of the board of FLO International (Fair Trade Labelling Organizations) and<br />
subsequently elected president and chairwoman of the board, a post she held from<br />
2001 until 2004. Ms. Ghillani is on the advisory board of different organizations,<br />
among them diverse ethical funds.<br />
Paola Ghillani graduated with a degree in pharmacy from the University of<br />
Lausanne. She completed her business background at the IMD in Lausanne, with a<br />
degree in International General Management and the International Program for Board<br />
Management. In addition to her many achievements, Ms. Ghillani was selected as<br />
Global Leader of Tomorrow (GLT) at the World Economic Forum in Davos, Switzerland<br />
in 2000.<br />
Sylvie Golay // Credit Suisse . . . . . . . . . . . . . . . . . . . . . . . . . . . 15–17, 28–29<br />
Sylvie Golay is a Credit Analyst in the Credit Suisse Fixed Income und Credit<br />
Research Department. She joined Credit Suisse as an economist in the Economic<br />
Research Department, where she conducted regional studies with focus on the<br />
Swiss economy.<br />
Sylvie Golay holds a Master’s Degree in Economics and Finance from the<br />
University of St. Gallen (HSG), where she graduated in 2002. She expanded her<br />
financial knowledge garnering experience in the Equity Research department at<br />
Pictet & Cie, in Asset Management at BNP Paribas and in the investment banking<br />
industry at Credit Suisse First Boston.<br />
Christian Gattiker-Ericsson // Credit Suisse . . . . . . . . . . . . . . . . . . . . . 28–29<br />
Christian Gattiker-Ericsson is a director at Credit Suisse, where he is Head of Global<br />
Equity Strategy. He began his career as a member of the economics department<br />
of Swiss Bank Corporation in 1995. At the beginning of 1998, he moved to one of<br />
the major Swiss investor relations agencies, where he served two years as a consultant<br />
for stock-market-listed companies in Switzerland and Europe. Christian joined<br />
Credit Suisse in January 2000 as an equity analyst for capital goods, pulp & paper<br />
and steel sectors. Since June 2001, he has additionally taken over the role of Swiss<br />
Equity Strategist, heading the Swiss market team.<br />
He received an MA in Economics and Political Science from the University of<br />
Berne in 1995. Christian Gattiker-Ericsson is a CFA charterholder.<br />
Ursula Oser // Credit Suisse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15–17<br />
Ursula Oser was Global Credit Strategist at Credit Suisse from August 2004 to<br />
April 2005 and additionally responsible for thematic research. She started in<br />
Credit Suisse Private Banking at end-1998 as Global Strategy Analyst in the<br />
Investment Research Department, developing quantitative models for the asset<br />
allocation decision-making process. In 2001, Ms. Oser was appointed as Head of<br />
Macro and Fixed Income Research and subsequently Head of Fixed Income and<br />
Credit Research.<br />
Ursula Oser studied economics at the University of Constance in Germany as<br />
well as the London School of Economics and was holder of a scholarship to the<br />
Friedrich-Ebert Foundation. Ms. Oser earned a doctorate degree in applied econometrics<br />
from the University of Constance.<br />
Mike Imam // Credit Suisse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30–31<br />
Mike Imam is a staff member of Credit Suisse Group. Due to his various assignments<br />
within the group, he has extensive product structuring and business project<br />
knowledge. He is currently based in Singapore and serves as Head Asia-Pacific<br />
Business Projects within the Private Banking International Division. In his capacity,<br />
he is responsible for implementing business expansion projects within the Asia-<br />
Pacific Region. Previously, he worked on business and product development<br />
projects in China, Taiwan, Luxembourg and Zurich.<br />
With regard to his academic career, he holds a Master’s Degree in International<br />
Relations from the University of St. Gallen (HSG), and has written a PhD<br />
thesis in economics on the implications of China’s WTO entry on the Chinese<br />
banking system – to be awarded in 2005/2006.<br />
Mike Imam was born in 1974 in St. Gallen, Switzerland. Throughout his professional<br />
and academic career, he has shown a big interest in developing economies<br />
and capital-market development in general. He is fluent in German, English and<br />
Chinese (Mandarin) and has excellent knowledge of French.<br />
Philipp Jung // University of St. Gallen . . . . . . . . . . . . . . . . . . . . . . . . . 30–31<br />
Philipp Jung has conducted a feasibility study on securitization of microloans and<br />
subsequently prepared a blueprint for a pilot transaction for such a transaction, both<br />
mandated by the Swiss State Secretariat for Economic Affairs (SECO) and supported<br />
by Credit Suisse. Philipp Jung works for the Swiss Institute of International<br />
Economics (SIAW-HSG) and as a consultant for the European In-vestment Fund<br />
(EIF) in Luxembourg, where he has been working on guarantee and securitization<br />
transactions – among others, also on microfinance-related projects.<br />
Philipp Jung holds a Master’s Degree in Economics and Finance from the<br />
University of St. Gallen (HSG), where he graduated in 2004 and is currently enrolled<br />
in the PhD program in finance. He has gathered experience in the Finance and IT<br />
department of Great Lakes Chemical Corp, Hoffmann-La Roche and as a research<br />
associate with the Institute of Empirical Economics at the University of St. Gallen.<br />
In addition, he was enrolled in the trainee programs of the United Nations Capital<br />
Development Fund (UNCDF) in New York and at the European Investment Fund<br />
(EIF) in Luxembourg.
GLOBAL INVESTOR FOCUS<br />
Imprint—36<br />
This document was produced by and the opinions expressed are those of Credit Suisse as of<br />
the date of writing and are subject to change. It has been prepared solely for information<br />
purposes and for the use of the recipient. It does not constitute an offer or an invitation by or<br />
on behalf of Credit Suisse to any person to buy or sell any security. Any reference to past<br />
performance is not necessarily a guide to the future. The information and analysis contained<br />
in this publication have been compiled or arrived at from sources believed to be reliable but<br />
Credit Suisse does not make any representation as to their accuracy or completeness and<br />
does not accept liability for any loss arising from the use hereof. The issuer of the securities<br />
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A Credit Suisse Group company may, to the extent permitted by law, participate or invest in<br />
other financing transactions with the issuer of the securities referred herein, perform services<br />
or solicit business from such issuers, and/or have a position or effect transactions in the securities<br />
or options thereof.<br />
An investment in the funds described in this document should be made only after<br />
careful study of the most recent sales prospectus and other fund regulations and basic legal<br />
information contained therein. The sales prospectuses and other fund regulations may be<br />
obtained free of charge from the fund management companies and/or from their agents.<br />
Alternative investments, derivative or structured products are complex instruments, typically<br />
involve a high degree of risk and are intended for sale only to investors who are capable of<br />
understanding and assuming the risks involved. Investments in Emerging Markets are speculative<br />
and considerably more volatile than investments in established markets. Some of the<br />
main risks are Political Risks, Economic Risks, Credit Risks, Currency Risks and Market Risks.<br />
Furthermore, investments in foreign currencies are subject to exchange rate fluctuations.<br />
Before entering into any transaction, you should consider the suitability of the transaction to<br />
your particular circumstances and independently review (with your professional advisers as<br />
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Neither this document nor any copy thereof may be sent to or taken into the United States or<br />
distributed in the United States or to a US person, in certain other jurisdictions the distribution<br />
may be restricted by local law or regulation.<br />
Publisher<br />
Credit Suisse<br />
Global Research<br />
P.O. Box 300, CH - 8070 Zürich<br />
Director: Giles Keating<br />
Editor<br />
Christian Gattiker-Ericsson<br />
Sylvie Golay<br />
Editorial deadline<br />
April 2005<br />
Organization<br />
Bernhard Felder<br />
Design and concept<br />
Arnold Design AG<br />
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Translations<br />
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Regula Zweifel (G), Andreas Weber (G),<br />
Übersetzer Gruppe Zürich (F/Sp)<br />
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Language editors<br />
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Barbey/Magnum, Gueorgui Pinkhassov/<br />
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Harvey/Magnum, Susan Meiselas/Magnum,<br />
Martin Parr/Magnum, Ian Berry/Magnum (3),<br />
Thomas Koehler/Photothek (5), Gee Ly (6),<br />
Rainer Heubeck/Das Fotoarchiv (15),<br />
Martin Stollenwerk (21, 22, 26)<br />
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