Microfinance Regulation

1
Microfinance Regulation

• Arnaud Ventura
• Co-founder, Vice President PlaNet Finance
• Founder, President CEO MicroCred

2
Content

• I. An Introduction to PlaNet Finance
• II. An Introduction to MicroCred
• III. A few concrete cases Regulation
  microfinance investments
• Mexico
• Madagascar
• China
• Senegal
• Algeria

3
Introduction to PlaNet Finance
4
I. Introduction to PlaNet Finance Group

• PlaNet Finance is an International Non Profit
  Organization that contributes to the improvement
  of human condition by ensuring each persons
  dignity through the development of microfinance
  worldwide.
• PlaNet Finance focuses on
• Strengthening the capacity of the microfinance
  sector (Microfinance Institutions, Governments,
  Banks Financial Institutions, etc.)
• Increasing the transparency of the microfinance
  sector
• Increasing the funding available to Microfinance
  Institutions

5
I. Introduction to PlaNet Finance Group

• I.1. Services
• 1. Consulting, Technical Assistance Training
  services to
• Microfinance Institutions (NGOs, Cooperatives,
  Regulated financial institutions),
• National Microfinance Network
• Governments (defining strategies, setting up
  regulations)
• Banks interested in downscaling or supporting the
  sector
• Microentrepreneurs (Business Development
  Services)
• 2. Investment Management Advisory Services for
  microfinance investors
• PlaNet MicroFund a 1 M fund managed by PlaNet
  Finance
• responsAbility Global responsAbility Leader
  Fund
• 2 funds with cumulated assets of 200M advised
  by PlaNet Finance
• 3. Rating Services to MFIs through an independant
  affiliate
• 4. Equity Investment through MicroCred, a
  Microfinance Holding Company

6
I. Introduction to PlaNet Finance Group
I.2. Network

• Operations Programs in 60 countries
• Permanent Country presence in 36 countries
• More than 400 staff
• 100 experts

7
I. Introduction to PlaNet Finance Group
2006 9.188 M PF 7.2 M PRating 0.7
M MicroCred 1.3 M
I.3 Resources and Partners
2005 8.167 M PF 7 M PRating 0,5
M MicroCred 0,6 M
A few partners
8
Introduction to MicroCred
9
II. Introduction to MicroCred
II.1Mission and Objectives
To become one of the leading group specialized in
providing financial services to low income
micro-entrepreneurs in emerging countries To
have a global presence with a diversified
investment strategy involving investments in at
least 15 different countries before 2011. To
offer a diversified range of products for a
segmented clientele including credit savings,
but also insurances and remittances and other
target-group oriented financial services.
MicroCreds mission is to provide financial
services to microentrepreneurs excluded from the
traditional financial sector by building a group
of leading microfinance banks and finance
companies in at least 15 countries by 2011.
10
II. Introduction to MicroCred
II.2. Competitive Advantages
To have a Diversified investment strategy
mitigating country / currency risks by a
diversified exposure To focus on markets where
access to financial services is still
underdeveloped. To take advantage of the global
presence and the local expertise of PlaNet
Finance, the technical partner of MicroCred to
access more easily to these markets. Use a
standardized model to leverage economies of scale
and accelerate the development of each new
institution

• A diversified International StrategyExisting
  Investments 2006 Mexico, Madagascar
• Planned Investments 2007-2008 Argentina,
  Brazil, China, Senegal, Algeria, Nigeria etc.

• B. A unique Business ModelMicroCred will adapt
  a unique business model by leveraging worldwide
  common tools, procedures methodologies
• A strong brand and marketing strategy
• A common Management Information System (MIS)
• A consistent product offering within the Group
• A comprehensive methodology of staff training
• Strict governance and internal control policies
  
• Human Resources Management in order to create a
  strong corporate culture
• C. The support of PlaNet Finance
• MicroCred will use PlaNet Finances
  network to increase its development

11
II. Introduction to MicroCred
II.3. Shareholders
An initial capital of 25 Millions USD with strong
shareholders support
12
A few Concrete CasesMexicoMadagascarChinaSéné
galAlgeria
13
MEXICO
14
III. Case of Mexico

• Greenfield institution started in Veracruz region
• One of the largest country in Latin America with
  a high market potential
• 1. 75 of the 106 million inhabitants do not have
  access to financial services
• 2. Veracruz State with a population of 7 million
  people is underserved by MFI

Total Investment 4,2 M of equity, 15 M of
quasi equity debt in MicroCred SA, a Mexican
Sociedad Anonyma Creation Date January 2006
Shareholding Structure
15
III. Case of Mexico
No specific regulation for microfinance in Mexico
but regulation concerning financial institutions
Credit Saving Cooperatives applying to the
target group of microfinance. Ley de
Institutiociones de Credito for banks
financial institutions Ley de Credito y Ahorro
Popular published on June 4th 2001 regulating
credit savings cooperatives.

• Some issues linked to this regulatory framework
• designed considering the need of cooperatives
  structures
• no specific considerations for other type of
  structures NGOs, Private Company
• Consequences
• As a Private company operating in Microfinance in
  Mexico MicroCred can not benefit from the
  advantages of the ley de credito y ahorro
  popular, specifically it can not offer savings
  services

16
MADAGASCAR
17
III. Case of Madagascar
Context

• Greenfield institution in a country where less
  than 7 of the population has access
• 1. 68 of micro-entrepreneurs surveyed are in
  needs of microfinance services.
• Only 7 of the population have access to
  financial services.

Total Investment 3 M of equity, 10 M of
quasi equity debt in MicroCred Madagascar, a
Malagasy NBFI Creation Date August 2006
Shareholders
Currently being finalized
18
III. Case of Madagascar
Madagascar, has issues a specific microfinance
law loi n- 2005 - 016 du 29 septembre 2005 in
2005. but at the date, no implementation rules
have been adopted. The law mentions 3 types of
MFI Category 1, 2 and 3 including both
cooperatives and non cooperatives institutions.

• Some issues linked to this regulatory framework
• not finalized yet (no decret dapplication
  yet)
• Consequences
• As a Private company operating in Microfinance in
  Madagascar MicroCred was started as Non bank
  financial institution and is now considering
  transforming into a full fledge bank

19
CHINA
20
III. Case of China
Context

• Extremely promising market
• Underdevelopped financial and microfinance
  sector
• One of the four first licenses for commercials
  MicroFinance being offered in China
• Nanchong Municipality more than 108,000 MPME
  among 94,000 individual enterprises.
• Support of Local Authorities in the creation of
  a Commercial Institution.

Total Investment 5 M of equity, 20 M of
quasi equity debt in MicroCred China, a
Chinese WFOE Creation Date April 2007
Shareholders
The following investors have agreed to take an
equity participation into MicroCred China
21
III. Case of China
A specific microfinance framework has been issued
under PBOC initiative, the microfinance pilot
framework allows for private investors to invest
in the development of microfinance companies
serving the rural areas and offering credit
services. No specific law but rather a loose
regulation issued by PBOC

• Some issues linked to this regulatory framework
• a pilot program, so the sustainability is not
  yet clear
• Very limited scope of activities allowed
• Limitation of financing sources (the approved
  companies can not mobilize savings
• neither can they access bank loans)
• Consequences
• As a Private company operating in Microfinance in
  China MicroCred is starting in a very unsecured
  position, but trust that the regulation will be
  formalized in the coming years.

22
SENEGAL
23
III. Case of Senegal
Context

• There is no Microfinance institution under the
  legal form S.A. (Société Anonyme)
• A new legislation concerning the MFI is being
  developped

Total Investment 5 M of equity, 20 M of
quasi equity debt in MicroCred Senegal, a
Senegal Société Anonyme Creation Date April
2007
Potential Shareholders
SONAM
50
15
35
24
III. Case of Senegal
A specific regulation for microfinance exist in
West Africa under the CBWAS (Central Bank of West
African States) Senegal Loi PARMEC. The
regulation has been designed for Cooperatives
rather than for microfinance institutions. The
regulation is currently being revised.

• Some issues linked to this regulatory framework
• Designed for Cooperatives structures, does not
  facilitate NGOs, nor private company
• Different fiscal treatment for each legal form
• Specific approval with 5 years license for
  Private Companies
• Consequences
• As a Private company operating in Microfinance in
  Sénégal MicroCred is starting in a very unsecured
  position, but trust that the regulation will be
  formalized in the coming months.

25
ALGERIA
26
III. Case of Algeria

• Strong economic growth (7 growth of GDP in
  2005)
• Lowest banking coverage rate in the Arab world
• No microfinance sector developed in Algeria
• Strong potential market (73 of interviewed
  microentrepreneurs interested in a loan)

Total Investment 5 M of equity, 20 M of
quasi equity debt in MicroCred Algeria, a
Non Bank Financial Institution Creation Date
2007 /2008, depending on the aproval process
Potential Shareholders
27
III. Case of Algeria
No specific regulation for microfinance exist in
Algeria. Only a very strict banking regulation
allowing for Banks NBFI (minimum equity for
NBFI 6 M)

• Some issues linked to this regulatory framework
• Minimum equity to create a Microfinance Company
  very high 6 M as NBFI
• Limited scope of services (credit only)
• Long and very difficult approval process
• Approval to be sought for each branch opening.
• Consequences
• As a Private company operating in Microfinance in
  Algeria MicroCred is making a huge investment
  only to fill the un-adpated conditions of the
  Banque dAlgérie.
• MicroCred is treated as a bank and not as a
  Microfinance Institution.

28
CONCLUSIONS
29
Conclusions

• Bad Regulatory Framework can limit Microfinance
  development.
• Main obstacles are
• No regulation for Microfinance (Algeria, China)
• Regulation targeting a limited legal form of
  MFIs (Mexico, West Africa)
• Regulations not allowing deposit taking MFI
  (China, Mexico)
• Bureaucratic Obstacles long approval process,
  etc.. (Algeria)
• Solution
• In the same way the financial banking sector is
  adopting international regulations (Basle I,
  Basle II) to improve efficiency, Microfinance
  development could be foster with international
  regulations or at least international guidelines
  helping local regulatory body facilitate the
  development of microfinance.