International Crises and Microfinance: The impact of the financial, energy and food price crises

1. International Crises and Microfinance:The impact of the financial, energy and food price crises Inter-American Forum on Microenterprise Louise Schneider-Moretto Greater Asuncion, Paraguay-October 10, 2008

2. Women’s World Banking

3. Women’s World Banking Mission To expand the economic assets, participation, and power of poor women as entrepreneurs and economic agents by opening their access to finance, knowledge and markets Network • 30 MFIs in 21 countries, serving over 11 million poor • Largest network in microfinance based on number of clients, built over 30 years • $1.4 billion in outstanding loan portfolio of core network members, as of year-end 2007 Impact • Pioneer in setting high performance standards • Provides tools, training and technical assistance to MFIs • More than 75% of their clients are women • Members’ gross loan portfolios outstanding grew by an average CAGR of over 40% from 2003 to 2006

4. Capital Markets Group: Services • Capital Brokering and Advisory (Debt and Equity) • NM Capital Needs Review • Develop capital or funding strategy • Facilitate local commercial bank funding (LC) • Introductions to new international investors and advisory: structuring, negotiations • Provide advice on local capital markets issuances (bonds, securitizations) • NM Field Visits • Loan Guarantee Program: JPMorgan Standby Letters of Credit • Facilitate access to local commercial funding via “partial” guarantees • Bring in additional players to expand WWB loan guarantee capacity • Launch of WWB Microfinance Equity Fund (WMEF) • Capital Markets Capacity Building • Annual Capital Markets Conference (since 2000) • Capacity Building + Capital Brokering Agenda • Regional Capital Markets Trainings (Sanabel, Pakistan MF Network) • Financial Risk Management • Introducing Risk Management systems and procedures • Best practice risk management institutional structures (internal audit, ALCO, etc) • Focus on market risk management: liquidity, FX, interest rate risks • NM Field Visits

5. WWB Core Network Members and Reach Our global reach provides regional insight into- LAC, Africa, Asia andMENA and Eastern Europe • 30 Core Network Members in 21 Countries

6. International Crises and Microfinance Photo: Africa Renewal Vol22 No 2. July 2008

7. International Crises and Microfinance Finance Finance Fuel/Energy Food Food • Increased Cost of Funding • Structured Market slowdown/shutdown [CLO is a bad word] • Existing relationships with investors have not been largely affected. However, re-pricing per market conditions • Investors have a more critical eye on microentrepreneurs on an individual basis • Increased operating expenses (electricity, transportation, etc) • -Offices now closed on Saturdays • -Transportation costs becomes a serious issue for MFIs with operations in areas outside the city • Household expenses have increased, microentrepreneur margins down (especially for those who have operations outside their home) • Clients express difficulty reaching branches to receive services/repay loans • Food price increases add strain to the work of credit officers who need to prioritize interest collection over the clients’ household pressures • Clients prioritize needs associated with food over repayment of interest on loans (or vice versa) • Food consumption changes due to costs (Grameen Foundation: ‘MFI expressed concerns as their borrowers are eating less and less’) MFIs Clients

8. MFI Indicators Demonstrate Resilience Globally, MFI driving indicators do not (yet) reflect Network Members anecdotes • Indicators for years 2006 and 2007 show that the current crises do not seem to affect MFI performance • On an aggregate basis MFI are performing better in 2007 than 2006 • As of now there is not sufficient quantitative data to draw conclusions • Given that the 2008 Fiscal Year End is not yet at a close, many questions remain as to the impact • WWB has begun to obtain regional insight from Network Members

9. Financial Crisis: Real Impact TBD in 2009 To Date, the Financial Crisis has had a limited impact on the number investors in MFIs. However, network members have expressed: • Renewing loans at higher interest rates (with commercial and development institutions). On average, cost of funding has increased from ~125 up to 570bps, depending on the region (LAC, South Asia, Eastern Europe) • Higher cost of funding from local lenders who price term loans using local floating indices, which in the current economic environment are increasing • DTF (LAC), EURIBOR (Eastern Europe) • Subject to expensive/inflexible guarantee requirements (mostly for new relationships, South Asia) • Irrevocable financial guarantees (from third parties) to the extent of 50%-75% of the loan amount • Their ability to absorb increased cost of funding, while: • Monitoring margins closely • Curtailing growth • (LAC, Africa, Eastern Europe, South Asia) • They realize that “increased” interest rates are a new reality and need to be incorporated in their growth projections

10. Cost of Funding Spikes Current Credit Tightening Impact on Selected MFIs Cost of Funding (COF)

11. Fuel/Energy impact on MFIs • Fuel/Energy spikes translate into increased operating costs for MFIs • Many MFIs express that the higher costs can be absorbed on a short term basis • Due to ample margins • However, there is an acute awareness to monitor costs closely so that ratios and margins are preserved • In some cases MFIs have begun to question if these increased costs should be reflected through higher interest rates charged to their clientele. MFIs are: • Revising client loan agreements • Reviewing client interest rates closely at board meetings along with financial reports • There is a need to revisit financial projections and business plans • MFIs have expressed need to curtail growth- to reduce operating costs; reduce growth temporarily to avoid increased finance costs and the need to increase client interest rates • The impact of rising food prices is manageable in some cases, given country food subsidy (i.e. Tunisia: bread)

12. Microentrepreneurs Express Discontent-MFIs Look for Sensible Solutions • Clients request higher loan amounts to keep up with increased costs of goods and services • Requests of up to 50% increase from the previous loan amount (LAC) • MFIs in turn are • Monitoring PAR closely and questioning adequacy of current loan methodology • Wary and at times reluctant to increase loan amounts-Can clients repay these higher loan amounts? • Reporting that on an aggregate basis, their portfolios have not significantly deteriorated. However they have begun noticing quality issues on specific segments of their loan portfolios. (Africa, Eastern Europe) • Wondering if they should give into demands, since there is such intense competition which jeopardizes the retention of their current client base • Trying to respond with innovative solutions, while evaluating if these measures mean even higher costs (more branches, mobile technology)

13. Impact of Food Prices on Microentrepreneurs • The impact of rising food prices is manageable in some cases, given country food subsidy (i.e. Tunisia: bread) • Quotes from Clients (Pakistan): “Before this recent spike in food prices, my family used to eat meat almost every week. Now my children are not able to savor a meat related dish even once a month.” “Initially our credit requirement was only for investing in business and meeting medical or marriage related emergency expenses. But the food related inflation has forced us to borrow money just to get enough food so that our children don’t go hungry.” “We cannot afford to buy enough food for the entire family. Hence my husband and I have resorted to eating less in order to feed our children properly.”

14. Network Member Insights

15. Africa/Kenya: Inflation On The Rise • Power consumption bills have tripled in single households • Inflation has gone from single digits to double digits • Kenya Bureau of Statistics and the Central bank identified inflation in Dec-07 at 12.03% and last reported inflation at 29.26% (June-2008) • Consumption goods have doubled in price, while purchasing power is same • Adjusted salary levels of MFI staff (especially credit officers) • MFI feels the need to revisit long term business plan • MFI capital reserves to absorb costs in the short term • Kenya is among the 42 African nations where skyrocketing prices have resulted in public demonstrations and protests • “Inflation in the coming months will be highly dependent on developments in the global food prices, and developments in the international crude oil prices”-Kenya Monthly Economic Review June 2008 • Prices have been most pronounced with cereal crops-maize, wheat, rice, sorghum and millet-UN Department of Public Information via Africa Renewal Magazine-July 2008

16. LAC/Dominican Republic: Managing Local MFI Market While Planning Against External Shocks • MFI shows most sensitivity to increased oil prices, reflected in increased transportation costs • The Central Bank’s Monetary program for 2008 intended to track the downturn of the US economy, oil prices and upward trend in the international prices of several food supplies, mainly grain (soy, corn, sorghum) and milk • Clients express difficulty and high cost associated with reaching branches to make payments, adding more pressure on credit officers to follow up on loans • MFI evaluating feasibility of strategic partnerships, introduction of new technology and added expansion to maximize reach • It is important to note that the MFI is not contemplating increasing interest rates charged at this moment

17. Eastern Europe/Bosnia-Herzegovina: Preventive Internal Measures Alleviate Impact • Loan renewals to microentrepreneurs are subject to a more robust credit analysis • Loan documentation to have explicit clauses associated with current market conditions, reflecting possible change in interest rates as a function of macroeconomic events • Client financial education now includes macroeconomic insight • Close monitoring of expenses per credit officer allows for efficient liability management • Our Bosnian Network Member expresses that operating costs have not increased significantly due to financial expenditure analysis at the credit officer level • Favorable margins are to serve as cushion for projected increased cost of funding • ALCO/Liquidity Treasury Committees meeting more regularly

18. Asia/Philippines: Mixed Effects • High costs associated with energy has driven our network member to no longer be open on Saturdays (credit officers encouraged to follow up on administrative work from home) • Fuel costs have added significantly to operating costs (due to topography in the islands) • “Polarized” clientele reactions • Some clients request higher loan amounts to keep up with increasing prices -Inflation has increased drastically. From January 2008-August 2008, inflation has gone from(4.9%-12.5%)- Central Bank of Philippines • Some have cut back their loan amount requests and curbed the growth of their business to avoid defaulting on loans • Credit officers have expressed that some clients are not repaying loans to buy food and cover household needs • Due to subsidized funding (PCFC), cost of funding is not yet an issue. However, the MFI has requested longer amortization periods (From 4 yrs to 7 yrs) • Despite established ALCO/Risk Management Committees, the MFI is struggling on how to address these issues should it extend beyond 1-year

19. South Asia /Bangladesh: MFI Performance Unaffected, Crisis Hits Clientele • Microentrepreneurs in retail businesses facing the most challenges • Inventories shrinking due to increased prices • Credit officers reports that clients demand higher loan amounts to cope with increased costs • “Surprisingly” to management, repayment of loans has not been affected • The institution increased staff salary • Decrease in client interest ratesas part of a previous initiative, has helped retain clients • Inflation (12-month monthly average) has increased from 7.20% to 9.94%. Biggest impact on basic food items such as: rice, edible oil, baby food, etc.

20. Results, Action Plan and Network Support

21. Results • Finance Cost • Operating Cost • Portfolio Quality • Business Implications: • Cost Cutting Curtailing of growth Close monitoring of portfolio • Potential for Less Income • Higher loan sizes often requested • Some signs of reduced savings (lower HH income) • Business/Household needs overlapping, more careful management, prioritizing (not always favouring loan repayments) • Curtailing of Transportation (and therefore related activities) International Crises and Microfinance: Results Fuel/Energy Finance Food • Increased Cost of Funding • Structured Market slowdown/shutdown [CLO is a bad word] • Existing relationships with investors have not been largely affected. However, re-pricing has occurred as a reaction to market conditions • Investors have a more critical eye on microentrepreneurs on an individual basis • Increased operating expenses (electricity, transportation, etc) • -Offices now closed on Saturdays • -Transportation costs becomes a serious issue for MFIs with operations in areas outside the city • Household expenses have tightened microentrepreneur margins (especially for those who have operations outside their home) • Clients express difficulty reaching branches to receive services/repay loans • Food price increases add strain to the work of credit officers who need to prioritize interest collection over the clients’ household pressures • Clients prioritize needs associated with food over repayment of interest on loans • Food consumption changes due to increased cost of essentials (Grameen Foundation: ‘MFI expressed concerns as their borrowers are eating less and less’) MFIs Clients 21

22. Managing the Crises: Proactive Client Monitoring and Close Screening of Costs • Revisit current and projected business plans • Incorporate stress scenarios in sensitive areas (Loan Portfolio, Operating Expenses) • Reassess/evaluate the new rules of the pricing game for cost of funding • Early detection of possible issues and constant monitoring • Implement relevant monitoring reports for Liquidity, A&L and Credit Risk (monthly-basis) • Strategic partnerships should be cultivated and innovative thinking must be at the forefront of the management • Stay close to the client to ensure MFI is providing to the best of its abilities competitive products and services • Stay abreast of global market conditions- The Microfinance Industry is no longer in a vacuum

23. How WWB is helping Network Members Navigate Challenging Times • More frequent communications between Relationship Managers and Network Members • Heightened Monitoring • Capital Markets Group (CMG) updating funding information • Network Members capital needs (debt/equity) • Checking in with investors more frequently (local/international) • Providing collateral support to close deals (WWB Loan guarantees) • Monitoring the macroeconomic environment • Supporting network members in revision of business plans and providing guidance to strengthen Risk Management processes (e.g. looking at interest rate gaps, working through contingency funding plans, etc)

24. Closing Thought “As MFIs, we make the best of new crises by looking for new solutions…” (Kenyan Network Member)