MICROFINANCE THROUGH BANK PARTNERSHIP MODEL: STRENGTHS AND CHALLENGES, ALTERNATIVES. Novi Sad, 20 November 2014 Caroline Tsilikounas, CEO AgroInvest Serbia and Montenegro

AgroInvest is a microfinance institution created in 1999 that serves the financial needs of rural population and rural micro- enterprises in Central and Eastern Serbia. Our financial services are aimed to support the economic development of the rural underserved population. We specifically cater to those who are not eligible through banks directly. AgroInvest is an affiliate of California-based Vision Fund International  Introducing AgroInvest

World Vision International (WVI) is an international development and relief organization. In 2003, WVI recognized the importance and complexity of microfinance, and created VisionFund International (VFI) as a wholly-owned subsidiary of WVI. AgroInvest is an affiliate of Vision Fund International Vision Fund at a Glance Vision Fund FY13 Statistics Loan Portfolio: $515 million Active Borrowers: 934,700 Loans Disbursed: 318,000 Average Loan Size: From $300 to 3,640 depending on continent Loan loss allowance: $4,846,000 Countries Served: 36 3

Geographic Coverage 4 Gross Portfolio (EUR)10,205,341 Average loan size1,077 Write-off Ratio (annualized)1.12% Portfolio at Risk over 30 days1.40% AgroInvest in Serbia today operates in 17 offices and one head office, and serves the needs of 16,000 families. Externally audited. Key figures: October 31, 2014

Areas of Operations and Results - October 2014 NOTE: Market Penetration (%) = Number of Clients / Number of Rural HH x 100% 6 Existing RegionsNo of HHRural HH Rural / totalHH 3:2 (%) October 2014 Clients October 2014 Portfolio (RSD) Market Penetration 5:3 (%) Region 1 Nis, Zajecar 366,548162,48844%2,545181,023, % Region 2 Kragujevac, Jagodina, S.Palanka 298,267137,13846%2,869213,333, % Region 3 Kraljevo Krusevac, 131,87274,12356%1,969149,946, % Region 4 Leskovac, Vranje, Pirot 156,76075,66848%3,267257,281, % Region 5 Prijepolje, Novi Pazar, Uzice 152,38769,70946%2,535219,957, % Region 6 Valjevo, Loznica, Cacak 267,390155,44758%2,410193,799, % AGROINVEST 1,373, , %15, ,215,341, %

AgroInvest Target Group Survey: Social Impact “PAT” survey (USAID methodology) conducted in 17 AgroInvest Serbia branches, with a sample of 400 clients randomly selected from the IT system. Findings: 90% of AI’s households have an income below RSD 29,000. This supports AgroInvest’s target group criteria – (Gross monthly income less than 500 euros (net EUR 355) or less than EUR 100 per household). Average income RSD 39,197 in Serbia (EUR 348). Minimum income is RSD 18,400, i.e. EUR 164.* *Serbia Statistics Data Very poor Poor population Target Audience AI

Why are we Different from Banks? (1)  From our total 16,000 active clients, credit bureau sources indicate that only 10% of them have access to bank loans because our target group is different.  MFI targets the poor and entrepreneurial households mostly from rural areas (70%) and the average loan size – this directly refers to targeted clients Eligibility Criteria for Microloans MFIsBanks engaged in MF and SME lending  ‘Entrepreneurial spirit’  Live in rural areas  Low income  Regular source of income with defined minimum (salary or pension)  Registered business  Registered farmers

Almost 700,000 households in rural areas 70% of rural population do not have skills and education needed for the labor market Unemployment rate in rural areas is over 20% Over 50% of employed population in rural areas have informal employment Populations in rural area mainly do not meet banking criteria for loans Source of information:  Strategy of Rural Development  National Strategy for employment Why are we Different from Banks? (2) Characteristics of rural areas – statistics

Why are we different from Banks? (3) Loan Officers (LO) trained for assessment of targeted clients (low income, unemployed, entrepreneurial, rural, without regular income). Methodology of work is adjusted to target clients. Direct communication between MFI and clients on daily basis (LOs every day are present in the field). Purpose of loans are adjusted to real clients needs. LOs support clients trough all steps of procedures and provide advices to clients how to response to criteria.

Guarantee Agency Model SG client AI Loans are issued to private individuals (with and without salary) and agricultural producers (whether registered or not). Minimum client age has to be 18 (eighteen) and maximum client age cannot exceed 70 (seventy). AIS deposits a guarantee deposit of the whole portfolio of loans disbursed by SG as collateral, increasing the deposit as client is late with payment and repaying the whole loan at 120 days (effectively guaranteeing all loans) SG disburses loans to clients proposed by AIS SG pays the agreed monthly agency fee to AIS for its micro-lending services (finding and assessing clients, monitoring and other follow up). Guarantee deposit client

Guarantee Deposit 11 AgroInvest undertakes to provide a guarantee deposit with the purpose of guaranteeing the repayment of clients’ loans to the Bank. AgroInvest will keep in dinars a deposit on a special purpose account with the Bank in the amount of _____% of the total outstanding portfolio of loans placed by the Bank to AgroInvest clients. The bank is entitled to reimbursement from AgroInvest’s guarantee deposit in case the client is in default with the loan. Any loan will be considered to be in default after 120 days late (or more) after the due date for individual payment. In these cases, the bank is entitled to receive the total amount of outstanding principal of the defaulted loan, plus all due unpaid interest rates from the moment of default.

Benefits of the Partnership for the Bank Financial benefitsNon financial benefits Application fee from clients coming in and account maintenance fee Margin share taken by the bank on each repayment made. Revenue from business stemming from funds of the deposit No loss on defaulting loans as they are fully repaid by AIS after the number of days agreed upon (for example 120 or 180 days). This model is completely legal, it is known to NBS. Image in corporate social responsibility, excellent for marketing. Potential new market segments that cannot currently be served due to provisioning requirement of NBS. No risk on portfolio, every delay is immediately covered by the deposit, and AIS’s PAR 1 is consistently below 3% (PAR 30 is currently 1.5%). 12

Challenges Financial costsNon financial risks and problems for clients Very costly for MFI: bank gets a very high percentage of the total interest rate for no risk on the portfolio (risk is on AI). Cost of funds an issue, partly mitigated by reduction of guarantee deposit percentage on healthy portfolio. (1)+(2)-> too costly for clients. Banks are not prepared to develop this business themselves, because of the costs of operations and cost of provisioning: thus clients remain underserved. AIS’s advantage of being fast in disbursements to needy clients is slightly reduced with this collaboration. Dependency on bank’s strategic decisions-> vulnerability and lack of ability to negotiate margin. Other banks are not enthusiastic because they have other priorities aside from rural clients.

Conclusions Problems on the asset side for the MFI: high cost of the model Problems on the liability side for the MFI: local funding hard to obtain due to lack of regulatory framework and collateral requirement is prohibitive. Foreign lenders offer short-term expensive deals and open currency exposure is created/remains. Since banks do not want to reserve 100% for this target group and they do not know how to find these clients, the rural poor are bound to remain “unserved” until there is a new legal framework.

The MFIs believe that it is necessary to introduce a more flexible NBFI Law which will allow MFIs to function openly without these added costs and risks and to reach scale. The law could allow us to diversify lenders, to mitigate open currency risk, to reduce costing and to help reach scale (for sustainability) while reducing the pricing to clients. AIS and the other MFI’s will do what they can to support such a framework, including cost-sharing and planning / training events and outreach with donors. NBFI Law

Can Microfinance Play a Role? Goals of Non-Bank Lending Provision (microfinance) in Serbia: 1.Increase amount of lending support to rural areas by accessing high levels of EU donor and social loan funds from outside Serbia. 2.No deposits taken, not risking financial stability. 3.Significant outside interest of important donors and multilaterals in providing financial support. 4.Not a systemic risk to the financial sector, particularly if access to the high-quality Credit Bureau is authorized.

Microfinance Working Group of Serbia To facilitate an appropriate form of non-bank microfinance regulation, the Microfinance Working Group has been formed which includes the following stakeholders: MFI’s (AgroInvest and Micro Development) International Community Serbian Government Representatives Multilateral Financial Institutions such as EBRD Other stakeholders

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