Romanian Micro Credit Scheme

1. Romanian Micro Credit Scheme ROMANIA

2. Micro Credit SchemeStakeholders Founders: European Commission Government of Romania through the Ministry of Development, Public Works and Housing(MDPWH) European Bank for Reconstruction and Development Dezvoltare (EBRD) (matching funds) Beneficiaries: start-ups and micro-enterprises Management: MDPWH– Contracting Authority EBRD – Fund Manager Partner Lending Institutions

3. The Budget of the Scheme EU/RG – Total Contribution18,02 mil Eur - 2,5 mil. Eur – Technical Assistance - 3, 0 mil. Eur – Risk Share Fund - 12,52 mil. Eur – On-lending funds for Micro-financing institutions (MFIs) EBRD- (matching funds):approx 50-60 mil. Eur

4. Reimbursement Scheme Founders EU and RO Gov. Level 1 Fund Manager EBRD PLI MFIs, banks Level 2 Beneficiaries Start-ups and micro-enterprises

5. How the scheme works –Level 1 PLI MFIs. Banks Founders EU and RO Gov.. Fund Manager EBRD • Activities: • Negotiation of the Contribution Agreement between the Gov (MDPWH) and EBRD. • Transfer of funds to the Fund Manager. • Design of the exit-route for the scheme by the end of programme • Activities: • Drafting ToRs for PLIs • Evaluation of PLIs capacity to implement the scheme • Negotiation of the Loan Agreements with PLIs • Funds disbursement to the PLI • Schememonitoring • Reporting to founders

6. How the scheme works–Level 2 PLIs MFIs, Banks Beneficiaries Start-ups and micro-enterprises Activities: • Design financial products tailored to the beneficiary • Promotion of the microcredit scheme • Credits award to final beneficiaries • Monitoring the beneficiaries • Collect the reimbursements • Reporting to Fund Manager

7. Partner Lending Institutions (PLIs) selected: • OMRO –Opportunity Micro-credit Romania • Based in Targu Mures and has 8 branches throughout the region • Four year loan for a total of 2.8 MEUR • 71% of the loan is financed by EBRD’s own resources and 29% by the resources of the Romanian Government and the European Commission through the EBRD administered Romania Micro Credit Investment Special Fund. • As of end-June 2008 the institution disbursed a total of 1,324 loans for a total amount of EUR 4.5 million by using the RMCF funding. Compared to the previous period, this represents an increase of 27% in terms of number and 25% in terms of volume. • The average monthly disbursement during the reporting period was close to EUR 148,000 in terms of volume and 47 loans in terms of number of loans. OMRO met fully the target clients of the RMCF: the vast majority of loans disbursed are micro loans to the smallest enterprises. The average amount of loans disbursed stood below the EUR 3,500 mark.

8. The portfolio at risk (PAR) for over 30 days is only just over EUR 42,000 representing 2.15% of the outstanding loan portfolio. This is aligned with a deterioration in the arrears rates of the overall loan portfolio of the institution; the portfolio at risk for over 30 days was approximately 6% as of end-April 2008. This is in part explained by a general trend observed on the Romanian lending market, which was expected to filter into the Facility’s funded portfolio. Nonetheless, the operational team is monitoring this development closely and is planning to support OMRO’s risk management operations with future TA projects.

9. Banca Transilvania – Bucuresti/ Cluj Napoca Banca Transilvania is a success story in the Romanian banking sector. Founded in 1993 in Cluj Napoca by 40 local entrepreneurs, BT emerged as the largest bank in Romania and is still majority owned by local investors. A five year loan for a total of EUR 15 million from the Facility for on-lending to micro and small enterprises. EUR 6 million of the loan is financed by EBRD’s own resources, EUR 4 million from the resources of the Romanian Government and the European Union through the EBRD administered Romania Micro Credit Investment Special Fund. Very importantly, the EBRD and the government funding was successfully leveraged by commercial loan funds: EUR 5 million was syndicated to Caja Madrid. In terms of BT’s on-lending operations, the institution has disbursed 103 loans amounting to EUR 931,646. This represents a significant increase when compared to the last monitoring period, when the bank had significant delays in launching this product—in contrast to the NBMFIs that have MSE lending as their core products. The vast majority of the loans have been placed in the North-West region (46%), followed by Bucharest-Ilfov (16%), Centre (11%), South-East (9%), North-East (8%), South West (7%) and West (3%).

10. Express Finance – Timisoara Express Finance (EF) has more than 11 years of experience in the MSME and housing lending market in Romania, initially as an NGO called CHF Romania, and beginning with January 2006 as a commercial company Express Finance S.A. EF is now one of the largest microfinance providers. Based in Timisoara (Western Romania), EF carries out its activities through 17 site-offices, and its operations cover 26 of Romania's 42 counties. EF's portfolio has grown from an initial USD 150,000 financing pool focused on the Timis County, to a current portfolio of EUR 10 million. Despite rapid growth and geographic expansion, EF maintained a high level of portfolio quality. EF received a three year loan for a total of EUR 2.25 million from the Facility for on-lending to micro and small enterprises. 51% of the loan is financed by EBRD’s own resources and 49% by the resources of the Romanian Government and the European Commission through the EBRD administered Romania Micro Credit Investment Special Fund.

11. As of end-June 2008 the institution disbursed a total of 380 loans for a total amount of EUR 2.4 million by using the RMCF funding. This represents an increase of 32% in terms of number and 140% in terms of volume when compared to the last monitoring report. The first disbursement was done in September 2007, and up to June 2008 the average monthly disbursements were over EUR 222,000 in 36 loans. As of June 2008, 5% of the Facility’s outstanding loan is comprised of loans granted to new businesses. The regional distribution of the financing is dictated primarily by the focus of EF’s branches, but is widely spread throughout the country. At present, 51% of the loans granted were in the west region, 18% in the North West, 16% in the Centre, 8% in the South West, 5% in South Muntenia, 2% in the South East and 1% in the North East, as per definitions included in the original project study provided by the European Union. EF’s loan portfolio is of good quality and the portfolio at risk for over 30 days was around 3.5% as of end-June 2008. In respect of the loans disbursed through the RMCF, the PAR for over 30 days was 2.8%.

12. CAPA Finance SC Capa Finance IFN is a non banking financing institution located in Romania, having its headquarters in Cluj Napoca and over 25 officers both in the urban and in the rural area of the country. Capa began its loan activity in Romania in 1996. At the end of 2007 a group consisting of Romanian Enterprise Fund (RAEF) and Emerging Europe CAP Cooperatief U.A (EECAP) whose main shareholder is the Balkan Accession Fund (BAF), bought a consistent pack of CAPA shares, becoming the majority shareholder. Following the change in ownership in CAPA Finance, the negotiations have been renewed in respect of including CAPA Finance in the Facility. At present a EUR 10 million loan is being considered and it is expected to be signed.

13. A few conclusions: increased competition in the banking sector lead many commercial banks to seek new markets including microenterprises hence increased challenging environment for MFIs, relatively steep growth of MFIs' loan books leading to high leverage, overindebtness of borrowers (high level of consumer lending) combined with sharp increases in oil, energy and food prices are significant factors contributing to overall deterioration of quality of loan portfolios. This leads to higher recovery costs, high provisions eat into profits and even reduce capital base, the credit cruch lead to increase cost of funding and to a reduced availability of funds,

14. Hence, at this stage crucial: innovative products to maintain competitive edge, new capital to normalise leverage ratios and strengthen institutions allowing for further growth, strict control of the quality of the loan portfolios (for the provisions not to reduce profits or even result in losses which in turn reduce capital), not much can be done directly with the increased funding costs as such but MFIs must put in place risk management processes and controls to be able to react to funding changes.