responsAbility Social Investments AG MFI – a risky business? AMFA conference Baku, Azerbaijan October 2012 Viktoriya BYCHENOK

responsAbility Social Investments AG

Leader in Social Investments Who we are Leader in Social Investments Founded 2003 >1 billion AuM Products in various asset classes (debt, equity, etc.) Focus on investment themes: Microfinance, Fair Trade and Emerging Infrastructure Geographical focus: Developing countries and emerging markets 90 employees 5 offices in Switzerland, France, Peru, Kenya, India FINMA-regulated asset manager Strong focus on risk management, transparent reporting und corporate governance

Founding Organizations and Shareholders Origins and Ownership Founding Organizations and Shareholders A Global Leader in Wealth Management Largest Swiss Retail Banking Group Traditional Swiss Banquier Privé Traditional Swiss Asset Management Bank Leader in Structured Products A Global Leader in Reinsurance A Leading Social Investor Staff and Management

Emerging Infrastructure Investment Topics Broad Range of Products Microfinance Fair Trade Emerging Infrastructure 1.1 b USD AuM 50 m USD AuM 50 m USD AuM responsAbility Global Microfinance Fund responsAbility Microfinance Leaders responsAbility Mikrofinanz-Fonds responsAbility Participations custom-made mandates responsAbility Fair Trade Fund responsAbility Ventures I responsAbility Press Freedom (Voncert)* responsAbility BOP Investments** * structured Product ** closed-end fund

Emerging- and Frontier Markets Investment Universe Emerging- and Frontier Markets Current Portfolio 70 Countries 253 Microfinance institutions 45 Fair Trade cooperatives 43 Small and medium-sized enterprises 2.1 Mio people benefit from independent media potential investment universe responsAbility local presences Source: responsAbility Social Performance Report 2012

responsAbility’s Investment Process

Investment Process Sourcing Screening Investment Decision Investment Execution Monitoring Reporting Local deal sourcing Strategic asset allocation Country and market research Due diligence Credit Risk management Approval investment committee Portfolio allocation Feedback and control Risk Management

Risks we assess Country risk Market risk MFI default risk Political stability Economic context Regulation and supervision Market environment MFI default risk Instrument risk: Asset quality Operational risk: Ownership Governance Embedded portfolio risk Sustainability Controls

MFI default risk: ownership and governance (best practice) Internal Audit Board of Directors Audit Committee Risk Committee Remuneration and nomination committee Board Credit Committee Management Credit Committee ALCO Risk management department … Internal control department

MFI default risk: controls (best practice) Internal Audit / Internal Control Independence and effectiveness of Internal Audit Department Physical cross checks with clients and files Separate unit of Internal Control/Credit Risk management Formalized procedures, adequately communicated and available to staff Trainings IT system as tool for internal control Adaptation to the size and operations Adequate infrastructure and security (data access, recovery) Real-time information: reporting tool IT support External audit Reputation and quality of report Frequent change policy

MFI default risk: portfolio (best practice) Client assessment Adequate repayment capacity analysis Several levels of credit approval Client visits before disbursement and monitoring after disbursement Creditworthiness check via Credit Bureau (clients, guarantors, family) Separate unit of Credit Risk Management Rotation of branch managers/credit supervisors Portfolio diversification Geographical, risky sector, product, branch, clients’ income source, large clients concentration Adequate risk management policies in place defining limits Constant monitoring and forecasting Product design Appropriate product design for targeted clientele (type of business)

Lessons learned: Central Asia Account effects of toxic risk combinations Weak governance and management (including key person risk) Volatile macroeconomic environment Absence of sound regulatory framework for microfinance Difficult political context High risk appetite Weak controls Inappropriate client analysis Unreliable MIS data Early warning signs Deterioration of operating environment Excessive growth Possible changes of regulation Risk related to other assets (placements, subsidiaries, investments) Worsening economic outlook Changes of underwriting standards New products with inappropriate design

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