LEGAL FRAMEWORK FOR MICROFINANCE FUNDS IN EUROPE Why is it crucial? How to move forward? Luxembourg November 25, 2009

A.Presentation of the E-MFP Action group B.Challenges of microfinance funds regulation 1.Microfinance context and need for regulation 2.Exceptions and models: Luxembourg and the Netherlands 3.Issues to be addressed C.Different solutions & comparative analysis 1.Regulation under AIFM Directive 2.Regulation under UCITS V 3.Specific microfinance regulation 4.Comparative analysis Summary

European Microfinance Patform (E-MFP) Action Group  EMFP Action Group: 19 members from 5 countries, representing almost $2 billion assets under management in microfinance and 23.5 million retail & private investors.  European Microfinance Platform (E-MFP) founded in 2006 is a network of 119 organizations and individuals active in the area of microfinance. Its objective is to promote co-operation amongst European microfinance bodies working in developing countries.

A.Challenges of microfinance funds regulation 1.Microfinance context and legal environment 2.Luxembourg and the Netherlands as exeptions 3.Specific issues to be addressed

5  No regulation = law of the jungle  Importance of the creation of an equal level playing field within the European Union  Demand of retail investors for microfinance products  Necessary protection of the retail investor  Social impact in developing countries (4 billion individuals concerned)  Microfinance as a way forward in the social crisis in Europe  European expertise in Microfinance (Banks & Asset Managers, NGOs) Why regulation of microfinance funds at EU level is crucial

6 Investing in Microfinance: a new type of asset class Best In Class Thematic (e.g. : environmental) Microfinance DebtMicrofinance Equity Approach Selection of companies with the best social, environmental and corporate governance practices Selection of companies whose products or services benefit directly to the improvement of the environment or society Selection of Microfinance Institutions (MFIs) whose aim is to contribute to financial inclusion. Investment Universe Mainly Large Caps Multi-sectors Mainly Mid Caps 1 specific sector NGO / Financial Institutions Nature of underlying assets Listed Listed or non listed (private equity) Non Listed companies Non Listed instruments (Promissory notes) Mainly Non Listed (Private Equity) Categories of Investors All Mainly Private banking (HNWI) Institutional, HNWI, RetailPrivate Banking, HNWI Profitability Close to the benchmark Higher than the benchmark Small profitabilityHigh profitability Volatility Close to the marketFrom limited to highLow (<1%)NA Social and economic impact MediumHigh Underlying Risks LowFrom low to highLow by experienceHigh

7  Microfinance as a tool of positive contribution to financial inclusion and poverty reduction. As of June 2009, microfinance represents $50 billion assets for an estimated number of 10,000 microfinance institutions (MFIs).  There are more than 100 funds in the world which finance $6.6 billion to MFIs (75% in debt instruments). Currently 34% of the fund investors are retail clients.  The current regulation on general investment funds (UCITS 1 3 and 4 directives) as the major obstacle for the development of microfinance funds:  Investment instruments in MFIs are not “transferable securities and money market instruments admitted to or dealt on a regulated market” (i.e. listed) as required by the regulation.  Microfinance Funds instruments are not adequate for daily publication of their Net Asset Value (NAV) as required by the UCITS regulation.  Microfinance Funds are not liquid enough to be able to cope anytime with redemptions demand from investors as required by the current regulation. 1 Undertaking for Collective Investment in Transferable Securities Context and Current Situation Most European countries have only limited options to promote and distribute microfinance funds at the retail level.

8  The Netherlands and Luxembourg have allowed for fund structures licensed by the national regulator, without falling under the scope of the UCITS directive. Exceptions of Luxembourg and the Netherlands The Netherlands Regulation - Promotion of SRI through the implementation of Green Funds - Tax break of 2.5% of the amount invested - National distribution to institutional, private and retail investors Luxembourg Regulation - Flexible Investments Vehicules through the law on « Part II » Funds or the law on SIF (Specialised Investment Funds) Part II Fund - Distribution to Institutional and private investors SIF - Fiscal incentive - Distribution to Institutional and private investors 36% of the AUM 15% of the AUM

9 Main Issues to be addressed Main issues regarding products (UCITS):  Consider promissory notes as valid debt instruments for funds  Adapt the valorization method to microfinance assets (debt & equity)  Regulate risk diversification (number of countries & MFIs)  Define a regulatory allowance of microfinance in the fund (at least 50%)  Define a category of acceptable MFIs (for example rating) Main issues regarding asset managers (AIFM):  Flexible supervision for funds manager Main issue regarding national regulation:  Taxation issues: tax break / withholding tax

B. Different ways to regulate at the EU level 1.Regulation under AIFM directive proposal 2.Regulation under UCITS V 3.Specific microfinance regulation 4.Comparative analysis

Decision procedure under European Directive FIRST READING SECOND READING THIRD READING COMMISSION PARLIAMENT COUNCIL 1 Presentation of the legislative proposal simultaneously to Parliament and Council 2 Parliament adopts amendments and submits them to the Council 3 If the Council agrees with the outcome of Parliament, the legislative text is adopted. 5 Parliament may approve the common position and the text is adopted Parliament may table amendments to the common position. In this case, the Council can approve Parliament’s amendments and the legislative text is adopted If the Council reject the amendments, a Conciliation Committee is created (27 members of Parliament + 27 members of the Council). 8 The Conciiliation Committee adopts a joint text which is submitted to the Parliament and the Council. CONCILIATION COMMITTEE 4 If the Council does not accept Parliament’s first reading vote, it draws up a common position.

Different ways to regulate: European Directive on AIFM  AIFM 1 directive proposal (April 2009) aims create a common set of rules in terms of licensing and supervision for European investment managers of non-UCITS invesments funds.  Once licensed as Alternative Investment Funds (AIFs), the funds will benefit from a European Passport for cross-border distribution to EU professional investors.  Main features (especially regarding microfinance): Creation of a European passport for microfinance funds Indirect regulation: regulation of the managers rather than the products Wide scope: regulation covering many different types of funds (hedge funds, private equity funds, etc.) Insufficient consistency with other EU regulations, especially with UCITS directives Not allowing distribution for retail investors: professional investors only Short or mid-term solution 1 Alternative Invesment Fund Managers Different solutions:  AIFM Directive  UCITS V  Specific Regulation

Different ways to regulate: Regulation under UCITS V Different solutions:  AIFM Directive  UCITS V  Specific Regulation  Main features (especially regarding microfinance): Creation of a European passport for microfinance funds Direct regulation: regulation of the funds themselves General scope: regulation covering all the invesment funds without taking into account specificities of the microfinance sector Allowing distribution for retail investors Long term solution

Different ways to regulate: Building of a specific regulation  Main features (especially regarding microfinance): Creation of a European passport for microfinance funds Direct regulation: regulation of the funds themselves Specialized scope: regulation covering only microfinance funds and taking into account specificities of the microfinance sector Allowing distribution for retail investors Long term solution Different solutions:  AIFM Directive  UCITS V  Specific Microfinance Regulation

Solutions Achievement in terms of coherence and opportunities Actors concerned by the regulation Outreach & distribution Position regarding microfinance & its specific features Current Situation No harmonization or EU passport « law of the jungle » Depending on national regulations Institutional & private investors Not specialised AIFM EU passport & acces to cross- border market Asset managers (investment managment companies) Institutional & private investorsNot specialised UCITS V EU passport & access to cross- border market Funds (invesment products) Institutional, private & retail investors Not specialised Specific Microfinance Regulation EU passport & access to cross- border market Funds (invesment products) Institutional, private & retail investors Specialised Comparative Analysis regarding regulation objectives

Contacts of the Action Group  Emmanuel de Lutzel – Chairman Head of BNP Paribas Microfinance Group  Loïc de Cannière – Co-chairman Managing Director of Incofin Investment Management  Bernard Coupez – Special Adivser BNP Paribas Asset Manager in charge of regulatory monitoring  Christoph Pausch Executive Secretary of the European Microfinance Platform