November 2013

1

Enhancing financial inclusion in rural areas

TBLI Conference, Zürich Introduction by Loïc De Cannière

Incofin Investment Management

Incofin Investment Management ~ 500M USD

Retail funds 50M USD

Managed Accounts 130M USD

Institutional Funds ~ 320M USD

• Leader in rural and agricultural impact investing, strong presence in microfinance and pioneering initiative in Fairtrade

• Our mission: Our mission is to invest in companies that increase financial inclusion, in order to generate developmental impact, while generating an attractive return to our investors.

• Head Office located in Antwerp, Belgium; four regional offices based in Bogota, Colombia; Chennai, India; Nairobi, Kenya and Phnom Penh, Cambodia

Rural focused funds

Other funds

100M USD

RIF I (2007)

38M USD

RIF II (2010)

160M USD

FAF (2012)

25M USD

agRIF (2014)

200M USD

Strong focus on rural & agricultural finance

Agriculture plays a pivotal role in rural areas

3

Sources: CGAP – Segmentation of smallholder households: meeting the range of financial needs in agricultural families (2013) 1World Development Report 2005, World Bank: “It is estimated that a 1% increase in agricultural yields reduces the percentage of people living on less than $1 per day by between 0.6% and 1.2%”

Agriculture plays a pivotal role in rural poverty reduction

• Agriculture plays a critical role in the economies of poor countries (large GDP contribution from agriculture) and in poverty reduction1, especially when focused on small farms

• It is a major employer of rural labour in developing countries (1,3 B people)

• Increasing the return to land raises the value of one of the few assets of the rural poor

• Increasing food supply from small-scale agriculture is critical in meeting global food demand (+ 50% by 2030)

Despite its importance, productivity in low & middle income countries

remains quite low ...

Agriculture growth is inhibited by several factors:

• limited access to improved seeds and inputs

• declining soil fertility

• poor connectivity to markets

• weak infrastructure

• inadequate access to financial services

2011

Demand

Financing needs from smallholder farmers are largely unmet

4 Sources: Dalberg – Catalyzing Smallholder Agricultural Finance (2012); CGAP – Segmentation of smallholder households: meeting the range of financial needs in agricultural families (2013)

Market segmentation Strong market demand from smallholders

450

22

225

203

Smallholder farms Smallholders only farmingfor subsistence

Smallholders integrated inagricultural value chain

# Smallholders Millions

Only 10% of smallholders are currently part of P.O.

Subsistence farmers not included in market estimate

450 USD billions

• There are between 450-600 million smallholder farmers worldwide, they are becoming increasingly important in the global agricultural value chain.

• Smallholders can be differentiated in 3 categories:

1. Subsistence farmers, ~50% of all smallholders

2. Commercial smallholders in loose value chains (~45% of all smallholders)

3. Commercial smallholders in more structured value chains, aggregated in producer organizations (~5% of all smallholders)

• Dalberg has estimated the size of the market demand at 450 Billion USD, of which currently only 2% is being met

• In this market demand estimate, only smallholder farmers that are trading (~225M) are taken into account. It is estimated that each smallholder has on average both ST and LT financing needs of ~1,000 USD

• Currently, only about 10% of the commercial smallholders are integrated in structured agricultural value chains

Risks & opportunities of engaging in agricultural finance

5 Source: Financial Behavior of Rural residents – Acción

Risks Opportunities

On Market Level

On Household

Level

• Climate risk, deseases

• Low density of rural population high operational costs

• Poor infrastructure

• Low level of education in rural areas

• Large  majority  of  the  world’s  extremely  poor  live in rural areas

• Majority of the Microfinance Investment Vehicles (MIV) operate in urban areas and compete for same Microfinance Institutions (MFI)

• Majority of the MFI compete for same customers in urban areas, resulting in higher Over-Indebtedness risks

• Inability of farmers to influence or predict the final sale income from crops limits the financial planning of farmers

• Lack of knowledge about the offer of credit, inexperience in its use and sense of having little bargaining power w/ financial institutions

• Rural residents see credit as one of the main enablers of growth

• Rural households are as diversified as urban households

• Favorable client retention rates among rural clients, with increasing average loan sizes

• Very traditional people w/ strong cultural roots & values

Incofin’s  flagship  funds: Rural Impulse Fund I & II

6 June 2013 *Including approved deals

Fund launch 2007 2010

Fund size 38 M USD 115 M EUR

Fund model Hybrid – investing in equity investments & debt investments

Geographical spread Global fund – developing countries

# Equity investments 3 15

Underlying IRR equity investments 31,5% 9,8%

Avg equity size ~ 1,3 M USD ~ 2,7 M EUR* # Cumulative Debt investments 80 39

Underlying IRR loan portfolio 8,3% 7,7%

Average Loan size ~ 1 M USD ~ 1,2 M EUR

Rural Impulse Fund I Rural Impulse Fund II

Fund structure

Fund Results

Strong financial performance

7

100

81

88

96

99

80

85

90

95

100

105

01-06-10 31-12-10 31-12-11 31-12-12 30-06-13

NAV evolution (IFRS)

NAV/share (EUR)

100

95 100

134 136

153

197

199

90

110

130

150

170

190

210

NAV evolution (IFRS)

NAV/share (USD)

RIF II

NAV increase since 12/10:

22,4%

RIF I

IRR to date:

14,5%

• Underlying MFI performance for RIF I & II is solid:

MFIs’  ROE  excl.  donations:  18,3%

PAR30 + rescheduled: 2,1%

Operational Self-Sufficiency (OSS): 120,9%

• Some  of  the  Fund’s  investors  include  both DFIs and institutional investors, for example:

Incofin has invested in sustainable, commercially viable MFIs that provide financial services to the rural poor

8 * Rural score defined as % of points of sales in rural areas Sources: Internal Reporting Incofin IM, MIX market Note: Average Loan size calculated based on Gross Loan Portfolio (USD) divided by total # clients

Average rural score* of MFIs in RIF I & RIF II:

higher than average

Average loan size of MFIs in RIF I & RIF II: lower than average

USD

68% 67%

0%

10%

20%

30%

40%

50%

60%

70%

80%

RIF I RIF II

% Rural 31-12-2012

687 675

2.069 1.896

RIF Iportfolio at

31/12/2012

RIF IIportfolio at

31/12/2012

SymbioticsMIV Survey

2012

MIX avg2012

A strong outreach to the rural poor has been achieved

9 Source: Internal reporting Incofin IM, Symbiotics MIV Survey Report 2012

2,10

2,44

2,89

2010 2011 2012

2,88 3,27

3,82

2010 2011 2012

1.275 1.424

1.606

2010 2011 2012

1600 branches of RIF investees ...

... reach out to 3,8 M clients ...

... of which 2,9M women

73% 75%

76% +12%

+13%

+ % Annual growth % Women/Total Clients

+14% +17%

Goal is to act as a catalyst so that rural microfinance becomes an investible asset class

10 Source: Internal analysis Incofin IM

Questions analyzed (for equity investments) Scoring of analyzed MFIs Underlying rationale/required answer

1 Is Incofin first International Investor?

2 Do other international investors come on board after Incofin does?

Do we go where others don’t

Do we attract new Int’l investors for the MFI once invested

A strong catalytic effect can be observed for RIF I equity investments; for RIF II equity investments, it is often too early to tell

%

64

36

Too early to tell # negative scores # positive scores

Graph legend:

5

9 5

9

A well diversified portfolio of equity stakes

0,8 0,9 1,0 1,0 1,1

1,3 1,4

1,7 1,9 1,9

2,2 2,4

2,6 2,8

3,3 3,8

4,2 4,7

5,2 6,0 6,1

Eligible investment universe

~300 desk reviews

~20 investments

Very high selectivity was applied in  the  investment  process  …

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Executed deals

Approved deals

…  leading  to  a  very  diverse  set  of  investments  in  RIF II

0

1

Subsistence farmers Commercial smallholder farmers in loose value chains

Commercial smallholder farmers in tight value chains

Different financial institutions must be addressed to provide financial services to smallholder farmers

12 Source: CGAP – Segmentation of smallholder households: meeting the range of financial needs in agricultural families (2013)

• Nonprofits promoting savings & loans groups

• Microlenders using group-based lending

• Licensed pawn-based lenders (incl. Banks)

• Banks, credit unions, licensed deposit-taking MFIs

• Input suppliers • Microlenders w/ specialized

capacity in agri-lending • Agricultural banks

• Purchasing agents along the Value Chain

• Producer Organizations • Banks offering specialized

products (warehouse finance etc)

• Relatively basic financial needs

• Household cash flows usually not robust enough to ensure loan repayment for agricultural production

• Clients reached largely through group mechanisms as high transaction costs

• This is changing as technology gains importance and decreases service costs

• Wider range of financial suppliers to meet their wider demand

• Varied sources of household income

• Good target for MFIs & banks expanding into rural areas

• Risk mitigation through diversification across many zones, crops, livestock & markets

• Most complex financial needs

• Diverse sources of income, but significant share of agricultural income may depend on one output or single buyer

• MFIs/Banks have to build their skills and/or find knowledgeable partners

• Value chain financing (e.g. contract farming)

Access to different financial service providers

Fund structure agRIF

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Key Characteristics agRIF Targeted Balance Sheet structure agRIF

• Luxembourg SA, SICAV-SIF: Restricted to institutional and well-informed investors

• USD denominated

• Target size of USD 200M

• Fund has a hybrid structure and invests

In equity and quasi-equity up to the funding equity tranche minus USD 5M

In senior loans

• Investments in financial intermediaries in all countries on the OECD DAC list (and Russia)

• Closed-end fund (12 years extendable with 3 times 1 year)

• Fund issues:

Shares

Senior notes and loans (up to D/E of max 1:1)

• A significant Technical Assistance Facility will be raised

Assets

Senior loans (105M USD)

Senior notes & loans

(100M USD)

Equity and quasi-equity investments

(95M USD)

200M USD 200M USD

Equity (100M USD)

Liabilities