1. Facilitating Growth of SMEs through Introduction of Non-bank Financial Institutions as Alternative Sources of Financing Presentation at Hyatt Hotel 8 November 2013 Caroline Tsilikounas, CEO AgroInvest Serbia and Montenegro

2. AgroInvest is a Microfinance Institution (MFI) created in 1999 that serves the financial needs of the rural population and rural micro- enterprises in Central and Southern Serbia. Our financial services support the economic development of the rural population that lack access to credit. We specifically cater to those who are not eligible to borrow from banks. AgroInvest is an affiliate of California-based Vision Fund International  Introducing AgroInvest

3. What is Microfinance? Microfinance is a term that describes the provision of lending services by poverty-focused institutions (MFIs) to small enterprises, startups, or rural populations that are not served by mainstream financial services providers. These are usually not banks. The importance of microfinance lies in the fact that it provides a model of development that promotes entrepreneurship and gives people the means to fight poverty. In many countries, non-bank microfinance is provided under a separate regulatory framework than banks. In Serbia, there is not such a framework and so MFI’s must lend through banks.

4. AgroInvest in Serbia today operates in 18 offices and one head office, and serves the needs of 15,000 rural families. We are externally audited. Key figures September 30, 2013 Geographic Coverage Gross Portfolio (EUR)9.54 million Write-off Ratio (annualized) 0.8% Portfolio at Risk > 30 days1.92% Number of clients15,388

5. Areas of Operations and Results – September 2013 Rural Regions # of Households # of Rural Households Rural / total HH 3:2 (%) September 2013 Clients Rural Market Penetration 5:3 (%) 123457 Region 1 Cacak-Užice140,83864,23546% 1,714 2.67% Region 2 Kraljevo48,72123,43748% 2,3113.12% Region 3 Kragujevac- Jagodina-S.Palanka 298,267137,13846% 2,6681.95% Region 4 Kruševac- Aleksinac-Zajecar 265,350120,35045% 1,7462.51% Region 5 Leskovac- Vranje 135,01370,74152% 2,3183.28% Region 6 Pirot- Prokuplje 99,70055,83456% 1,7053.05% Region 7 N.Pazar- Raska-Prijepolje 64,51431,81549% 1,5594.90% Region 8 Loznica- Valjevo 194,425118,10561% 1,3621.15% AGROINVEST1,246,828621,65650% 15,3832.47%

6. AgroInvest Target Group Survey: we conducted a Social Impact “PAT” Survey (USAID methodology) conducted in 17 AgroInvest Serbia branches, with a sample of 400 randomly selected AIS clients.. 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). The Average income is RSD 39,197 in Serbia (EUR 348). Minimum income is RSD 18,400, i.e. EUR 164.* *Source: Serbia Statistical Data Very poor Poor population Target Audience AI

7. Why are we Different from Banks? (1) Satellite offices MunicipalitiesPopulation No of Househol ds Rural household s Rural/ total HH Market share 2012 Market share Sept 2013 Čačak Čačak, Gornji Milanovac, Lučani, Ivanjica 218.02972.96534,34247%0.91%2.48% Kragujevac Kragujevac, Aranđelovac, Knić, Lapovo, Batočina, Topola 302.38596.92332,10433%1.16%4.26% Užice Užice, Kosjerić, Arilje, Požega, Bajna Bašta, Čajetina 207.44567.87329,89344%1.26%2.89%  Of our total 15,000 active clients, credit bureau sources indicate that only 10% of them have access to bank loans - our target group is different.  In the areas of Cacak, Užice and Kragujevac, among others, banks do not provide loans to unregistered farmers or start-up SME’s, because of NBS provisioning requirements and predominance of low-income clients.

8. Why are we Different from Banks? (2) MFI’s target poor and entrepreneurial households mostly from rural areas (70%) and a low average loan size – the target group is different. Main CharacteristicsMFIs Banks targeting micro segments and SMEs  Currency  Amount of loan  Terms  Grace period  Collateral  Purpose RSD only 30.000 – 400.000 RSD 3 - 24 Months Up to 3 Months Pledge; Guarantors; BoE Working capital, Fixed assets; Basic needs EUR / RSD 500 – 15.000 EUR 6 - 60 Months Up to 6 Months Pledge; Guarantors; BoE Working capital, Fixed assets  Average loan disbursed1,000 EUR4,000 EUR

9. Why are we Different from Banks? (3) 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 Characteristics of rural areas – statistics Almost 700,000 households in rural areas. 70% of rural population lack skills/education needed for labor market. The unemployment rate in rural areas is more than 25%. 50% of employed population in rural areas have informal employment. Populations in rural area mainly do not meet banking criteria for loans but often they need these types of financial services. Source of information:  Strategy of Rural Development 2010-2013  National Strategy for employment 2011-2020

10. Why are we Different from Banks? (4) Loan Officers (LO) are trained for better assessment of targeted clients (low income, unemployed, entrepreneurial, rural, irregular income), and “know the client better.” MFI methodology of work is adjusted to poor 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 through all steps of procedures and provide advices to clients on how to response to criteria.

11. Current Challenges of Operating MFIs cannot lend directly, they are required to operate through banks, using two models: 1. Deposit Model 2. Agency Model Lending only in accordance with the Law on Banks means that clients must pay much more (up to 30- 40% more) for micro-loans than if the MFI’s could lend via an NBFI framework.

12. 1. Deposit Model (Used by all MFIs) AIS PBB Current Account at PBB client Guarantee deposit AIS borrows from US and EU social investors and deposits a 105.3% deposit per each individual loan with PBB as a guarantee for each loan (100% for loan, 5.3% for NBS mandatory reserve) PBB disburses loans to clients recommended by AIS, with each loan being guaranteed by a specific deposit provided by AIS AI is paid interest on its deposits and thus it indirectly receives money from its clients. Liquidity- and administration-intensive, FOREX risk.

13. 2. Agency Model (used only by AIS) Bank client AI AIS deposits a guarantee deposit of the whole portfolio of loans disbursed by the bank as collateral, increasing the deposit as client is late with payment and repaying the whole loan at 120 days (effectively guaranteeing all loans) The bank disburses loans to clients proposed by AIS The bank pays the agreed monthly agency fee to AIS for its micro- lending services (finding and assessing clients, monitoring and other follow up). Guarantee deposit

14. Problems with these Models Financial costsNon-financial risks and problems for clients -Very costly for the MFI: the bank gets a very high percentage of the total interest rate for no risk or requests very high deposits. - Cost of funds an issue for the MFI. -The banks’ margin is passed onto the clients, which result in much higher loan costs for them due to the need of working with a partner bank. -AI depends on the financial health of the bank. -AI’s advantage of being fast in disbursements to needy clients is put in question. -Bank can changed conditions on a whim, which in turn can affect sustainability and conditions for clients.

15. Conclusions The primary issues and problems with this situation include: Problems on the asset side for the MFI: preventing growth due to bank putting caps and changing conditions, 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. In the long term, both models are likely to lead to the disappearance of the MFI as its equity is eaten up by expensive bank charges, higher operating costs and FOREX risk. 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 “un-served.”

16. The MFI’s believe that the only path forward is 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. Solution: NBFI Law

17. Can NBFI’s Play a Role? Goals of Non-Bank Lending Provision (microfinance) in Serbia: 1.Increase the amount of lending support to startups, SMEs and rural areas by accessing high levels of EU donor and social loan funds from outside Serbia for NBFIs. 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.

18. 18 How Should NBFI’s Be Regulated? In Serbia, MFIs should only be allowed when operated by established players meeting sufficient requirements of : – Transparency (externally-audited) – Liquidity (funded by major players) – Capital (sufficiently high capital ratios) – Governance (high standards and experience). Where the safety of individual deposits is not at risk. Where loan sizes are limited (to below EUR 25,000) to meet EU criteria and so not to provide unfair competition to banks.

19. 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

20. 20 Next Steps Serbian government will decide if access to credit is a problem, and if so, whether microfinance can be a solution. If so, create a law that facilitates FDI and microfinance funding by international players if appropriate regulation is in place. A Coordination Group of donors, key ministries and NBS can then be formed to finalize the regulations and bylaws and to define the best steps in the provision of microfinance services. Then the international donor community can commit to working with the Serbian government on appropriate steps.

21. THANK YOU FOR YOUR ATTENTION!