Micro-funds to help the development of micro-credit. The KfW experience. Open Days Brussels - 09 October 2008 Dr. Annette Fritz Business Policy Europe

Overview. KfW Bankengruppe. Microfinancing. One Word – Different Meanings. KfW Microfinancing Activities. Framework Conditions for Micro-loans in Germany. KfW Micro-loan Programmes in Germany. Microfinance Fund Germany. - Key Elements. - The Structure. - Experiences. Conclusions.

KfW Bankengruppe in brief. Promotional bank of the Federal Republic of Germany. Founded in 1948. Shareholders: Federal Republic of Germany (80%), German federal states (20%). Headquarter: Frankfurt am Main; branch offices: Berlin and Bonn. Balance sheet total at end-2007: EUR 354 billion. Financing Volume 2007: EUR 87 billion (+ 13%) Average number of employees in 2007: 3,700. Rating: AAA/Aaa/AAA.

Brand structure. Promotion of developing and transition countries International project and export finance Promotion of housing, environmental and climate protection, education, infrastructure, social issues Promotion of SMEs, Business founders, Start-ups

Microfinancing. One Word – Different Meanings. Microfinancing in Developing and Transition Countries - Financial sector development to improve lives and fight against poverty - Microfinancing has become an investment opportunity for private and institutional Investors.  Esp. in Transition Countries funding is increasingly commercial Microfinancing in the EU Different framework conditions! - Need to facilitate access to finance for start-ups and micro-enterprises - Inclusion lending  Cost coverage is more challenging

KfW Microfinancing Activities. Overview Developing and Transition Countries KfW Development Bank is one of the biggest financiers of microfinancing and brings in its know-how as financial institution. Germany - KfW Start-up Coaching - KfW StartGeld - Microfinance Fund Germany

KfW Microfinancing Activities in Developing and Transition Countries KfW Development Bank employs and develops a range of different instruments: Basic products to support MFIs Credit lines Guarantees Equity Technical Assistance Elaborate products (in order to mobilize private resources) Structured finance, e.g. Mezzanine-Finance Microfinance Investment Funds Securitization Deposit insurance schemes

EFSE - Flagship Initiative in Development Finance EFSE provides long-term funding to Partner Lending Institutions through a mix of different instruments. Contribution to regional integration and cooperation. Efficient use of public funds: Scarce public funds are used in a revolving manner. They constitute a risk cushion for leveraging private capital (public-private partnership) Incorporation of local stakeholders through the Advisory Group (Central Bank Governors) / future transfer of current donor shares to local governments EFSE pursues a Tiered Funding Strategy Donor funds Development Finance Institutions Private Investors A-Shares and Notes B Shares C Shares

Framework Conditions for Micro-loans in Germany. High density of banks in Germany Good promotional infrastructure Nevertheless: Financing gap in the area of micro-financing ! Non-banks are not entitled to grant loans  § 32 KWG (German Banking Act) No “special law” on micro-lending in Germany Micro-lending involves high risk High administrative costs Interest ceilings

KfW-StartGeld. Start-up and young enterprises up to 3 years No security specifications Senior loan amount up to 50.000 EUR Monthly payments of interest and principal Working capital up to 20.000 EUR Prepayment free of charge Term up to 10y and up to 2y repayment free 80% of the liability assumed by KfW and EIF Second application possible Simplified processes

Integration of CIP-Guarantee into KfW-StartGeld 80% release of liability assumption of liabilty 40% on-lending bank refinancing loan final borrower guarantee rate: max. 20%

KfW Start-up coaching. Start-up coaching in Germany Companies up to 5 years after business establishment Coachingperiod: max.12 months 75% (50%)* allowance for coaching by professional advisor max. eligible daily net fee is EUR 800 allowance of max 4,500 EUR (3,000 EUR) * Eastern Germany (Western Germany and Berlin) Special start-up coaching for unemployed Additional support tool by BMAS* and KfW First year after business establishment Coachingperiod: max 12 months 90% allowance for coaching by professional advisor max. eligible daily net fee is EUR 800 allowance of max. 3,600 EUR * Ministry of Labour and Social Affairs New since 1st October 2008

Microfinance Fund Germany. Key Elements Start in September 2006  Pilot phase Capitalisation of Guarantee Fund: 2 Mio. EUR (initially) Fondsinvestors: BMWi*, BMAS**, GLS-Bank, KfW Bankengruppe Target group: Start-up enterprises and micro-enterprises with no access to bank loans Microfinance Institution (MFI): is responsible for screening und monitoring of borrower; MFI services and advices borrower on site MFI assumes 20 % default risk (first-loss !) DMI: Coaching, support and accreditation of MFI Microfinance Fund Germany: remaining 80% default risk Bank: provides micro-loan to borrower (no risk - 100% cash collateral) * BMWi - Ministry of Economics and Technology **BMAS - Ministry of Labour and Social Affairs

Microfinance Fund Germany. The Structure DMI Microfinance Fund Germany Recommendation on cooperation with micro-finance provider Cash deposit (100%) Fee Qualification Accreditation Monitoring Microfinance provider assumes 20% of the first loss Bank Loan recommendation Interest and redemption Loan agreement Advice Microfinance provider (e.g. start-up centre) Start-up / young enterprise Loan application

Microfinance Fund Germany. Experiences (1) Increasing number of micro-loans increase of 15% to 20% expected in 2008 Loan commitments until 09/2008: some 180 loans and 1,1 Mio. EUR disbursed Average loan size: ≈ 6,500 EUR (max. 10,000 EUR) Average term: ≈ 20 months (max. 36 months) Default Rate up-to-date: 4-5% 2008 exp.

Microfinance Fund Germany. Experiences (2) Low number of loans per MFI due to regional or local focus  Lack of economies of scale and learning effects  BUT: Success of MFIs can not only be seen in “number of loans” MFIs are very heterogeneous and act in principle independently 20% First Loss Risk limits number and scale of MFIs  Positive incentive  Regional and local risk sharing solutions partially available Capital Increase required  Microfinance Fund Germany is looking for further investors Network of different participants  Connection of participants taking part in the cooperation is costly

Conclusions Framework conditions in Germany differ significantly from other European member states. Microfinance Fund Germany is still in an early stage of development. Performance so far satisfactory. Improvements on the way. External support required for capital increase and technical improvements.

Thank you for your attention! Contact: KfW Bankengruppe Liaison Office to the EU Palmengartenstraße 5-9 Square de Meeûs 37 60325 Frankfurt am Main B-1000 Brussels Germany Belgium Internet: www.kfw.de