Private sector development financing, microfinance and Naisten Pankki (Women’s Bank) Helena Arlander January 2010

Finnfund in brief Finnish Fund for Industrial Cooperation Ltd. (Finnfund) – development finance institution State of Finland 89,0 %, Finnvera Plc 10,9 %, Confederation of Finnish Industries EK 0,1 % Founded in 1980 Office in Helsinki, staff of 45 persons Member of European Development Finance Institutions (EDFI) Risk capital for projects in developing countries and Russia Investment criteria include: - profitability - social and environmental responsibility - development impacts

Finnfund in numbers, 31 August Shareholders’ capital EUR 161 million Portfolio EUR 241 million Portfolio and undisbursed commitments EUR 464 million Total assets EUR 288 million Number of investments 138 Number of investment countries 24

Finnfund’s target countries by income level

Financial instruments Equity - risk-sharing as a minority shareholder Mezzanine - subordinated and convertible loans Loans - medium to long-term investment loans Guarantees Co-financing Finnfund’s investment usually around 1-10 million euros

Why private sector development financing Private sector investments are the most effective tool in the fight against poverty Poor countries do not get rich by receiving aid from the rich countries but through investments and capacity building Private sector offers around 90 % of all the jobs in the developing countries A succesfull private project brings to a developing country –Work to people –Knowledge, productivity, competitiviness, export income –More tax revenues => sustainable financing for public services –Responsible operations –Multiplier effects

Microfinance The provision of very small-size financial products to the working poor by Microfinance Institutions (MFIs) : − credit, savings, remittances, insurance, pensions etc. Microcredit is currently the core activity of most MFIs Microfinance is based on the notion that the poor can improve their circumstances – increasing income and economic security – through access to appropriate financial services, and that the working poor are creditworthy and good clients The alternatives to microcredit are informal moneylenders, pawnshops etc. Repayment rates in the industry average 98% Nobel Price 2006: Mr. Yunus, Grameen Foundation

Typical Features of Microfinance Loans Borrowers are usually: –Low income people –Without access to mainstream financial institutions – In need of funds for productive purposes – Self-employed and –Operators of household-based businesses The majority of borrowers are women: – Perceived as more reliable – Less mobile (men tend to migrate) – Higher repayment rates – Improved cash flow in a woman’s hand often translates into improved family health and education

Microfinance market (figures probably unprecise) Over microfinance institutions with around 155 million clients in total More than half of clients in Asia. Smallest amount in Sub-Saharan Africa –3 billion people below 2 USD / day  1 – 1,5 billion potential microfinance clients Most microfinance institutions are profitable (ROE c. 5 %). –Average interest rate to client 28 % (CGAP 2006). Total loan portfolio of MFI’s USD25 billion. Savings around USD 9,8 billion. –Average loan size from USD149 (Asia) – USD (Eastern Europe). Growing fast, soon to be 1 billion clients (?)

How can Microfinance alleviate poverty? Access to credit increases people’s ability to generate their own cash flow Access to savings products allows people to save and creates a buffer for the future Access to remittances allows people to transfer money at cost effective prices Access to insurance products allows people to be insured against the unexpected => Potential to improve income and cash flow => An effective tool for poverty alleviation

Who finances MFI’s Traditionally financed by donors and NGO’s Today development financing institutions have an important role Increasingly also private investors

Finnfund’s microfinance investment principles Objective to enhance low-income population’s access to financing in developing countries and achieve significant development and social impacts. Debt, equity or mezzanine related instruments to economically viable projects at commercial market terms and yields. Finnfund can not provide technical assistance (TA) funding. –Financing low-income segment’s commercial activities (microenterprises) and improving enabling financial infrastructure (e.g. ICT applications). Mainly invest in the microfinance sector via microfinance investment vehicles (MIV). –Funds and investment companies with experienced fund managers and track record. –Focus on commercially oriented microfinance investment funds providing equity related investments. –Diversification of Finnfund’s relatively small microfinance portfolio. –Investments which facilitate possible microfinance co-investment opportunities. Can also make direct investments in well-developed MFIs with other capable partners where Finnfund’s direct participation adds value. Emphasis on low income countries and major partners for Finnish development cooperation (Ethiopia, Kenya, Mozambique, Namibia, Zambia, Tanzania, Egypt, Nepal, Vietnam, Nicaragua and Peru).

Microfinance portfolio January 2011 Active sourcing of potential investments started in First investment in 2002 (LA-CIF fund), exit Maximum microfinance commitments 10 % of Finnfund’s total equity. Currently, total commitments in 5 funds and 1 MFI approx. 12,5 MEUR: 1)ACCION Investments in Microfinance, Global; focus on Latin America and Africa, equity related investments. 2)ShoreCap International, ShoreCap ll Global; focus on Africa and Asia, equity related investments. 3)Solidus Investment Fund Latin America, equity and mezzanine investments. 4)AfriCap II Africa, equity related investments. 5)Global Microfinance Facility Global, focus on Asia and Latin America, senior debt investments. 6)LOK Microfinance Foundation Bosnia and Herzegovina, microfinance loans

Contacts tel Ratakatu 27, FI Helsinki Finland