Keeping the Quality Standards in MFIs Niclaus Bergmann Acting Managing Director Savings Banks Foundation for international Cooperation Luxembourg, November 2009

Keeping the quality standards in MFI Savings Banks Foundation for international Cooperation Founded in 1992 by the German Sparkassen (savings banks) Non-profit provider of technical assistance Portfolio end of 2009: 26 projects in 22 countries Projects mainly funded by German Government (BMZ, KfW, GTZ), Worldbank and EBRD Supporting retail banks, cooperative bank, MFIs 20 staff in HO in Bonn, Germany 100+ staff in projects

Keeping the quality standards in MFI I.Challenges for MFIs General problems Fast growth Outreach vs. Sustainability Refinancing of loan business Development of new products Growing competition (Legal) environment

Keeping the quality standards in MFI Changes in the donor community Shrinking role of ODA and social investors More profit-oriented MIVs (with private investors), i.e. with less developed social objectives Large funds become available to „good“ or well known MFIs „Competition“ between (social oriented) donors and (profit-oriented) MIVs

Keeping the quality standards in MFI Global financial (and economic) crisis Clients: problems to repay Reduced remittances Exchange rate risks:  Refinancing in hard currency (USD and EUR)  Lending in local currency  Exchange rates dropped in many developing countries during 2009: 15 – 20 % in a few months  Repayment of existing refinancing lines becomes very expensive

Keeping the quality standards in MFI Drop in EUR exchange rates in 2009 (Oct. 31, 2008 to Oct. 31, 2009) Mexico % Bangladesh % Rwanda % Serbia- 9.8 % Armenia % El Salvador % Vietnam %

Keeping the quality standards in MFI II.Fields of action for MFIs Loan Portfolio Improve quality (i.e. reduce PAR) Be more selective Quality of portfolio is more important than growth/outreach

Keeping the quality standards in MFI Cooperation with donors / MIVs Don’t take too much money Be selective with donors / MIVs Control/reduce FX risk (hedge or let donor take currency risk) Mix of currencies Mix of durations

Keeping the quality standards in MFI Risk Management Introduce / Improve risk management  FX risk  Interest rate risk  Operational risk  Counterpart risk Hire professional staff for risk management Make risk management a priority

Keeping the quality standards in MFI Professionalism in banking Efficient workflows and procedures MIS and cost management Internal audit HRM / HRD (training of management and staff) Economies of scale  Cooperation with other MFIs as alternative to growth  Setting up service-oriented networks and national MFI associations

Keeping the quality standards in MFI III.Conclusions 1.Large MFIs have to develop into professional (MF-) banks 2.Profitability and social objective are no contradiction 3.Anyway, professional banking without a social objective is not microfinance Combine banking professionalism and microfinance !

Keeping the quality standards in MFI Thank you !