Promoting Sustainable Developmentin Emerging & Developing Countries

via Non Sovereign Financing

Presentation Outline

1. AFD Non Sovereign Financing for Banks

2. Challenges and opportunities of SME Finance

3. AFD and Microfinance

AFD Non Sovereign Financing for Banks

Providing financing at market conditions or subsidized loans without any requirement of any State guarantee

Criteria for market based credit facilities: Only State Owned Banks are eligible Provide long term resources to viable financial institutions Help State Owned Banks develop their strategy and portfolio on sectors of common

strategic interest Ease the public debt burden and help SOB access market funding

Criteria for subsidized credit facilities: Privately Owned or State Owned Banks are eligible Subsidiarity (i.e. non competition with commercial banks or financial markets) Additionality:

Help banks to build capacity and experience on underserved markets, which are critical for development (energy & environmental projects, SME and small entrepreneurs, …)

Use the bank as an intermediary and a catalist to improve competitiveness (sector specific upgrading programs or CSR promotion projects)

AFD Non Sovereign Financing for Banks

Key Eligibility Criteria Strong governance & autonomous financial management Anti-Money Laundering / Terrorism Financing procedures in line with FATF 40 + 9 recommendations Availability or willingness to develop an adapted Environmental & Social Risk Management System Satisfactory risk rating based on AFD’s analysis and Ratings from International agencies (capital,

asset quality, management, profitability, sensitivity to market risks

Financial Tools : Non sovereign loans (concessional or market conditions) Technical Assistance (small grants) to help the implementation of the project, when needed

ARIZ Risk sharing scheme for SME financing

Financial terms: Maturity: from 10 to 15 years, grace periods Hard currencies (USD, EUR), local currencies Fixed or floating rate Unsecured Senior Lending with cross –default and a negative pledge to protect pari passu status

Credit Line Mechanism

Loan

AFD Bank

Eligible Client Eligible Client Eligible Client

Eligibility criteria

Credit Facility

Loan Loan

AFD credit line can be used by the Bank to finance Long term loans to renewable Energy projects which respects eligibility criteria (financial and technical)

The projects will be selected according to bank’s standard norms and procedures

The Bank takes the full risk on the final beneficiary, AFD does not interfere in the bank’s selection process

Partnership AFD-partner bank: the partner bank passes on the soft component of the loan (if any) or maturity to the final beneficiary: the loans to final clients should mirror the lower than market rate or extended maturity of the AFD credit facility.

AFD to implement capacity building for the bank if required

AFD Credit Line mechanism

The Currency Exchange Funds NV

Presentation of TCX TCX Offer in Laos

Features

• Established 2007

• Capital of USD740m

• AFD/Proparco is a prominent shareholder

• TCX is rated A- by S&P

Product

• Local Currency Loans

• Active trading capacity in 80 currencies

• Transaction sizes range from USD0,5m to USD50m

• Single currency limit up to USD150m

• Non Deliverable products available only

• Maximum maturity : 4 years

• AFD operates Non Deliverable Swap CCS

with TCX

• AFD remains the only institution dealing with

the client / partner in Lao PDR

• Clients receives LCY Facility at X% interest

• Interest Payments for 10-yr at LCY 7% settled

in USD

• Principal repaid in USD

Providing local currency funding

Presentation Outline

1. AFD Non Sovereign Financing for Banks

2. Challenges and opportunities of SME Finance

3. AFD and Microfinance

SME Banking opportunities and challenges

Core of economic growth Opportunities for banks

• Major part of the economic framework and the employment base in ASEAN countries : 90% of establishments, between 20-40% of total domestic output and employ between 75-90% of the domestic workforce.

• To ensure their development SMEs need financial services

• Around 75-90% of ASEAN SME rely on internal savings, retained earnings and borrowing from family, friends and money lenders (collectively known as ‘informal sector’) as opposed to the 3-18% which have access to formal sector finance

•SMEs provide a new target market and

business development opportunities

•SMEs offer an opportunity for risk portfolio

diversification as they are active in various

industry sectors and geographic locations

•An SME portfolio generates a stable income

and requires less complex asset-liability

management at the portfolio level. SMEs clients

are also potential personal client: cross-selling

opportunities.

Opportunities to finance SMEs

SME Banking opportunities and challenges

Barriers linked to SMEs Obstacles on the side of Financial Institutions

High rate of informal business which prevents them from access to credit

Insufficient managerial skills (management, accounting, marketing…),

Low equity contribution

Low value of assets offered as collateral (added to difficulties for banks to exercise this collateral) and impossibility to produce personal guarantees

• Financial institutions perceive risk as being high, whereas according to statistics on bankruptcies it is below the perceived risk

• Lack of client/market segmentation

• Organization, methods and tools to assess risk used by Banks are only tailored for Corporate customers and those used by microfinance institutions only for micro-enterprises

• Methods of risk analysis often lead to a restrictive asset based lending approach

Barriers to the SMEs financing

AFD’s Approach Towards SMEs

AFD’s Objective:

Tackling this market failure by bridging the gap of the « missing middle finance »

How?

A. By providing a risk-sharing tool to commercial banks (ARIZ guarantee lines)

B. By extending credit facilities at soft conditions to commercial banks engaged in an ambitious SME lending strategy

ARIZ – Partial Risk-Sharing Mechanism

To give SMEs and MFIs better access to financing through a program that encourages banks’ participation in a risk-sharing mechanism

Key Objective

Is targeted toward loans financing SME’s capital expenditures (i.e. medium term investments) or refinancing MFIs

Covers all risks including political risk and natural catastrophes

Potential beneficiaries All small and medium private companies and MFIsAll business sectors (except real estate, tobacco, alcohol and weapons),Start-ups or development projects

Applies to loans denominated in local currency, USD or EUR

Main Characteristics

AFD’s SME Credit Facility

Objectives

To promote the missing-middle finance due to major potential for contribution to economic growth and employment

To engage banks in an opportunity to increase market shares and enhance profitability

To build banks capacities in the approach towards SME clients

AFD’s Answer

Subsidized credit facilities and technical assistance scheme to implement a “downscaling” program

Integrate SME lending strategy into your institution’s business plan

Technical assistance and advisory services in the following main areas:

Staff training

Risk procedures and management

Operational Conditions to Be Eligible for a Subsidised Credit Facility from AFD Set SME lending objective of at least the amount of the credit facility

Allocate specific means (small coordinating team, mobilisation of network)

Use the “financial advantage” of the AFD credit facility to cover its specific risks and additional costs (technical assistance)

Presentation Outline

1. AFD Non Sovereign Financing for Banks

2. Challenges and opportunities of SME Finance

3. AFD and Microfinance

AFd and microfinance : more than 20 years of experience

Important Dates: AFD has been supporting Microfinance since 1988

1988: AFD’s first microfinance operations in Guinea and Burkina Faso 1995: AFD joins the Consultative Group to Assist the Poor (CGAP) 2002: A dedicated microfinance team is set up at AFD’s headquarters 2005: “Year of Microcredit” and AFD organizes the Paris International

Conference 2007: Proparco, AFD’s subsidiary, completes the range of products to finance

microfinance by offering equity investments, subordinated loans and commercial loans

2009: FISEA (Investment and Support Fund for Businesses in Africa) is launched. The fund makes equity investments in Sub-Saharan Africa, particularly in microfinance

2010: AFD adheres to the Client Protection Principles promoted by CGAP and ACCION International. AFD co-organizes the Marketplace on Innovative Financial Solutions for Development and Convergences 2015 conference in Paris.

Diversity of financial and non financial products

- 2 complementary microfinance facilities: Microfinance Investment Facility for loans and equity investments in LCY (30 MEUR) Technical Assistance Facility (20 MEUR)

- Credit lines at market rates (floating interest rate) through Proparco

- Guaranties: ARIZ & ad hoc

- Specific TA facility on AML and E&S risk management (max: 50 000 EUR)

-Research and Knowledge Management projects

- 2 complementary microfinance facilities: Microfinance Investment Facility for loans and equity investments in LCY (30 MEUR) Technical Assistance Facility (20 MEUR)

- Credit lines at market rates (floating interest rate) through Proparco

- Guaranties: ARIZ & ad hoc

- Specific TA facility on AML and E&S risk management (max: 50 000 EUR)

-Research and Knowledge Management projects

- Over 350 MEUR of cumulated commitments in microfinance

- 50 MFIs supported, mostly in rural areas

-In 2010, over 75 MEUR invested

- Over 350 MEUR of cumulated commitments in microfinance

- 50 MFIs supported, mostly in rural areas

-In 2010, over 75 MEUR invested

Strong growth of commitments

Million EUR

Evolution of AFD Group commitments on Microfinance

0

10

20

30

40

50

60

70

80

90

2002 2003 2004 2005 2006 2007 2008 2009 2010

Mill

ion

€

Grants Guarantees Local Currency Loans Hard Currency Loans Equity funding

Thank you !

Domestic and International Commercial

Banks

SME Banking opportunities and challenges

SMALL and MEDIUM

ENTERPRISES

SMALL ENTREPRISES

Usually / Frequently Unaddressed

Market by commercial banks

MICRO-ENTERPRISES MFIs

LARGE CORPORATIONS

The « Missing Middle Finance »

State or National

Development Banks

ARIZ Provides Two Types of Guarantees

ARIZ INDIVIDUAL GUARANTEE

ARIZ PORTFOLIO GUARANTEE

Targets the “Missing Middle” or “Mesofinance” sector

Guarantees up to 50% of loans between 10,000€ and 300,000€ with a maturity between 1 and 5 years

Defines a target group of final beneficiaries: by cluster, region, state, etc.

Delegation - ARIZ’s Portfolio Guarantee is a “guarantee line”: Guarantees are automatically issued by the bank with the loans provided these match the key qualification criteria defined by the bank and AFD

Issued on a deal-by-deal basis

Tailored to the bank’s needs

Guarantees any type of medium term investment (capex) loan

Guarantees maximum 50% of the loan (up to 75% for MFIs) with an upper limit of €2m (i.e. 50% of a €4m loan)

From 2 to 12 years maximum guarantee (starting at 1 yr for MFIs)

Technical Assistance Possible Points of ApplicationField Point of intervention Technical assistance examples

Strategy Implementation of SME strategy (marketing, commercial framework, product innovation, risk analysis, risk monitoring, etc.)

Coordination strategy

Resident technical assistance up to two years for coordination

Temporary technical assistance with specific expertise from external consultants (e.g. marketing, credit scoring, MIS, etc.)

Marketing SME’s market segmentation

New products definition

From « SME lending » to « SME banking »: enhanced cross-selling

Financing of SME’s market survey

Financing of surveys concerning socially value sectors ( ex. healthcare, education, etc.)

Support for implementation of new products (financial engineering, legal, etc.)

Implementation of dedicated marketing strategy

Commercial approach Re-engineering Training for methods in advising and supporting SMEs

Risk analysis Risk analysis methods review and implementation of cash flow based lending

Implementation or improvement of credit scoring tools (or « risk grading ») tailored for SMEs

Implementation of training for relationship managers and risk analysts

Risk monitoring Implementation of operational, administrative and supervision tasks

MIS (management information system) in line with the risk monitoring

Collection process improvement

Technical assistance for supervision and monitoring procedures

Intervention of IT consultants

Legal training

A multi-layered approach

MICRO

Support local MFIs at different stages

Transforming institutions

Bringing resources

Building capacity

Providing technical assistance

MICRO

Support local MFIs at different stages

Transforming institutions

Bringing resources

Building capacity

Providing technical assistance

MESO

Strengthen financial institutions

Commercial banks, Investments funds

Capacity building

… to use their financial resources and markets more

efficiently

MESO

Strengthen financial institutions

Commercial banks, Investments funds

Capacity building

… to use their financial resources and markets more

efficiently

Foster access to financial servicesFoster access to financial services

MACRO

Work alongside with central banks, MFIs networks and regulators

Creating an enabling legal and regulatory environment

Develop synergies between actors

Contribute to the debate and foster knowledge on microfinance

Organize and take part in main conferences on microfinance

MACRO

Work alongside with central banks, MFIs networks and regulators

Creating an enabling legal and regulatory environment

Develop synergies between actors

Contribute to the debate and foster knowledge on microfinance

Organize and take part in main conferences on microfinance

Support the development of the People’s credit fund (PCF) - ViêtnamSupport the development of the People’s credit fund (PCF) - Viêtnam

PCF is a network of 1000 rural cooperatives, with an outreach to 1,2 millions small producers, aiming at providing them with acess to financial services and to a sustainable financial situations. PCF is refinanced by the Central Credit Fund (CCF).

Important projects in Asia

AFD financial commitments: - 30 M EUR concessional credit line, 20 years, to finance a new financial product : long term investment loans for rural small businesses and micro-entrepreneurs- 500 000 EUR grant for technical assistance to the PCF

Objectives :- Support the growth of PCF -Support the diversification of PCF loan products to longer term Investment Loans-Support the management of the network and the quality of operations

Implementation details : -Allocation of the credit line and of the grant to the MoF (sovereign loan), then on-lending to the CCF, on-lending to the PCF- Transfer of the management of the grant to the CCF

AFD financial commitments: - 30 M EUR concessional credit line, 20 years, to finance a new financial product : long term investment loans for rural small businesses and micro-entrepreneurs- 500 000 EUR grant for technical assistance to the PCF

Objectives :- Support the growth of PCF -Support the diversification of PCF loan products to longer term Investment Loans-Support the management of the network and the quality of operations

Implementation details : -Allocation of the credit line and of the grant to the MoF (sovereign loan), then on-lending to the CCF, on-lending to the PCF- Transfer of the management of the grant to the CCF

Support the First Microfinance Bank (FMFB) in AfghanistanSupport the First Microfinance Bank (FMFB) in Afghanistan

FMFB is one the most important MFIs in Afghanistan. Member of AKAM and applying the best practices of the sector.

AFD Financial Commitments : Granting of 2 Credit lines to refinance FMFB activities: - Credit line of 4 M USD, 10 years, market rate - Concessional Credit Line of 1 M EUR in LCY, 8 years

Objectives:-Strengthen the portfolio growth and financial performance of FMFB- Foster LCY micro-credit offer - Promote the access of women to financial services

Implementation details : - USD Credit Line at market rate, dedicated to the refinancing of traditional lending activities- Concessional Credit line, exchange risk transferred to AFD, to promote LCY loans, in particular to women

AFD Financial Commitments : Granting of 2 Credit lines to refinance FMFB activities: - Credit line of 4 M USD, 10 years, market rate - Concessional Credit Line of 1 M EUR in LCY, 8 years

Objectives:-Strengthen the portfolio growth and financial performance of FMFB- Foster LCY micro-credit offer - Promote the access of women to financial services

Implementation details : - USD Credit Line at market rate, dedicated to the refinancing of traditional lending activities- Concessional Credit line, exchange risk transferred to AFD, to promote LCY loans, in particular to women

Important projects in Asia

Presentation Outline

1. AFD Non Sovereign Financing for Banks

2. Challenges and opportunities of SME Finance

3. AFD and Microfinance

4. Agricultural Finance Innovations

Financing the agricultural sector: obstacles

In most of the countries of AFD’s intervention, the financial needs of the agricultural sector are not covered. This situation leads to a lack of development, poverty in rural areas and absence of food security.

Difficulties for the financial institutions to finance the agricultural sector :

1 High delivery cost, proximity

2 Weak farm practices and farmers

3 Lack of banking technology

4 Collateral

5 Exogenous Risks (climate, price volatility)

6 Weak collaboration among farmers

Financing the agricultural sector : innovations and solutions

Innovation Constraints targeted Applicability

Member-owned localised finance (e.g.SCAs), rural banks, microfinance

1 Delivery cost, Proximity

3 Banking technology4 Collateral6 Weak farmer

organisations

All agricultureRural households

Agricultural leasing 3 Banking technology4 Collateral

Standardised equipment with a 2nd hand market

Credit guarantees 4 Collateral All agriculture

Value chain finance, including contract financing and outgrower schemes

1 Delivery cost2 Farm practices3 Banking technology4 Collateral5 Exogenous price risk6 Weak farmer

organisations

Export cropsRelatively long and complex value chains,

such as speciality crops with quality requirements

Integrated in wider value chain development actions

Agricultural factoring 3 Banking technology4 Collateral

Export cropsProduct where payment takes time

Financing the agricultural sector : innovations and solutions

Innovation Constraints targeted Applicability

Warehouse receipt finance 2 Farm practices3 Banking technology4 Collateral5 Exogenous price risk

Non-perishable crops such as grains, coffee, cashews, sesameFrozen meat and fish

Price smoothing 5 Exogenous price risk Export crops

Technology:Mobile banking (cell phone, mobile van), Biometrics

1 Delivery cost, Proximity Rural households

Insurance (index) 1 Delivery cost4 Collateral5 Exogenous risks

Crops (index)Animals (not index)

Extension servicesFinancial literacy

2 Weak farm practices5 Exogenous risks6 Weak farmer organisations

All agricultureRural households

AFD’s tools to support agricultural finance

AFD can work with agricultural development banks, commercial banks, MFIs, Business Developement Services, Farmers Organisation and partners with smallholders as much as agroindustries.

Objective Tools

Provide funds to Financial Institutions and to their clients which conditions are adapted to

the needs of the agricultural sectorSupport their geographical expansion

Credit lines

Deepen FI’s knowledge of the specificities of the agricultural sector and strenghthen their

capacities to respond to the demandTechnical Assistance

Strengthten the financial structure and the business capacities of FI’s clients from the

agricultural sector : farmers, farmers’ organisation, SMEs for transformation,

distribution, etc.

FISEA (equity investment fund)

Support FI’s clients from the agricultural sector in structuring their investments and

evaluating their financial needsTechnical Assistance

Credit Risk Sharing for banks with growing agricultural finance activities

Garantie ARIZ

Financial innovation : research, pilot projects

Ghana Rubber Outgrower Scheme

Importance of AFD envolvement Between 1986 and 1990: participation to the rehabilitation of plantations and creation

of a new factory

Since 1995: Plantation Projects to Small Holders, 4 successive phases

Period Finance by AFD AreaNo. of

Small HoldersProduction surplus

Phase 1 1995-2000 1,2 M€ 1 200 ha 400 1 550 t/yr

Phase 2 2000-2005 5,9 M€ 2 850 ha 500 3 250 t/yr

Phase 3 2006-2012 8,6 M€ 7 000 ha 1 750 11 800 t/yr

Phase 4 2010-2015 14 M€ 10 500 ha 3 500 17 850 t/yr

TOTAL 1995-2015 29,7 M€ 21 550 ha 6 150 34 450 t/yr

AFD

Local Banks

Small HoldersTechnical Operator

GREL

Investment Financing, cash advance

Loan Repayment

Sale of the production

Seedlings, InputsTecchnical Assistance

Loan in EURO

Loan in EURO

CECAM Madagascar : warehouse receipts and leasing

CECAM : major microfinance network of Madagascar for the number of clients, branches and loan portfolio

AFD has supported CECAM since its creation through, grants, guarantees and a concessional credit line.

CECAM offers specific products to cover agricultural sector’s needs for financing: Warehouse receipts systems - Grenier Commun Villageois (GCV) : credit granted

to the farmers based on warehouse receipts, to cover their financial needs between two harvets.

Leasing solution - Location Vente Mutualiste (LVM) : CECAM owns the equipment untill the credit has been completely reimbursed.

Harvets credits with possibility of in fine reimbursement

Those products account today for 90% of CECAM’s loan portfolio and are strongly contributing to its growth (+17,4% in 2010).

offshore

onshore

❶

AFD(lender)

Client(borrower)

Principal in USD

FX Spot Market

Principal in USD

Principal in LCY

LCY Income

Product/Service

TCX (hedge provider)

USD 3%

LCY 7%

❶

Interest Payments for 10-yrat LCY 7% settled in USD

Principal repaid in USD❸

Interest Payment at LCY 7%

USD equivalent

Principal repaid at LCY 7%

Principal repaid in USD

❶❷

❷

❸

The synthetic Local Currency Loan