Philip Brown Global Risk Director Citi Microfinance Group October 6th 2009

Strictly Private and Confidential

Beyond Institutional Performance

Macroeconomic trends and shocks,

e.g.

- Too little funding - Political / external interference - Regulatory - Competition

MFI Individual performance,

e.g.

- Portfolio risk - Management quality - Refinancing - Corporate Governance

Client credit risk

e.g.

- Capacity - Stability - Behaviour and willingness - Over-indebtedness Strictly Private and Confidential

Individual classification of important Risks

Individual Identification of Most important Five Risks

Please rate the most Important 5 Risks out of the 25 Risks identified in the Microfinance Banana Skins survey 2009, in relation to Expected Performance over the next 12 months.

Please for each risk, state the name of the risk and its current ranking (number) in the Banana Skins report 2009

Most Important Risks identified

1. Credit Risk 2. Competition 3. Management Quality 4. Inappropriate Regulation 5. Liquidity / Macroeconomic Trends

Comments

Strictly Private and Confidential

Introduction

From managing

risk in a booming Industry …

in 2008 …to

confronting crisis and change

in 2009

Philip Brown Global Risk Director Citi Microfinance Group October 6th 2009

Strictly Private and Confidential

Looking for 2010 Banana Skins

Most Important Risks – Round-Table Groups 

1.



2.



3.



4.



5.

How it compares with the Top Risks identified in the Banana Skins Survey 2009 

1. Credit Risk



2. Liquidity



3. Macro-economic Trends



4. Management Quality



5. Refinancing

Looking for 2010 Banana Skins in India

India

1 Competition 2 Liquidity 3 Management quality 4 Corporate governance 5 Managing technology 6 Staffing 7 Political interference 8 Inappropriate regulation 9 Transparency 10 Too little funding

World

1 Credit risk 2 Liquidity 3 Macro-economic trends 4 Management quality 5 Refinancing 6 Too little funding 7 Corporate governance 8 Foreign currency 9 Competition 10 Political interference

Microfinance Risk Barometer - Increased Risk Profile

 Low pressure – increased risk profile  Directionally – Where will we be in 2010?

 What current and anticipated risk events will impact performance in 2010?

Composition of Loan Portfolio

for the Top 100 biggest MFIs by GLP Mix Market 2008 South Asia 9% Africa 6% Asia 13%

Microfinance Risk Barometer 2009 2008

LAC 43% ECA 27% MENA (Morocco) 2%

Composition of Borrowers

for the Top 100 biggest MFIs by GLP Mix Market 2008 Africa 7% Asia 17% South Asia 48% ECA 4% MENA (Morocco) 3% LAC 21%

Continued growth

 Strong decrease in GLP growth rate in 2008 and during 1 st half of 2009 across all regions  Citi's internal Microfinance portfolio growth from 2008 to 2Q09 is in line with data reported by MIX and Symbiotics

GLP Growth (%)

Africa Asia ECA MENA (Morocco) SA South Asia Total

2007

82.9% 90.9% 68.1% 72.5% 42.3% 55.8% 56.6%

2008

30.1% 44.8% 25.4% -3.5% 12.1% 46.4% 22.2% Source: Mix Market 2007-2008 Representing a sample of the top 100 biggest MFIs per GLP in 2008

110000000 100000000 90000000 80000000 Dec. 31, 2008 June 30, 2009 July 31, 2009

Source: Symbiotics SYM50 Index

Portfolio-at-Risk rising across all regions

 The highest increases are situated in Africa (1.6% increase in 2008), South America (1.3%) and ECA (0.9%) (excluding the Moroccan Market, 3.3% increase in PAR > 30d).

 Citi Microfinance portfolio PAR >30 days also showed an increasing trend from 2008 to 2Q09. However most MFI's have provisioned in excess of 100% of PAR>90 days

PAR > 30 days (%)

2007 2008 12% 8% 4% 0%

6.5% 8.1%

Africa

7.0% 4.9% 0.1% 0.4%

Asia

1.5% 2.4%

ECA

1.5%

MENA (Morocco)

5.7%

SA

3.1% 3.5%

South Asia Representing a sample of the top 100 biggest MFIs per GLP in 2008 Source: 2007 and 2008 Mix Market

Institutional performance – Managing Structural Funding

 Ability to absorb losses due to unexpected events - The high level of Stuctural Funding has helped manage refinancing risk and absorb operating losses over 2008-09  Management of Structural Funding expected to be a vital Financial risk management consideration for MFI’s over 2010

Structural Funding (%)

((Long Term Debt + Equity)/Total Liabilities) 100% 85% 70% 55% 40% 25% 10% -5%

91%

Africa

88% 93% 86% 64%

LAC ECA MENA Representing a sample of MFI’s from Citi’s Microfinance Portfolio INDIA

Institutional performance – Maintaining adequate capitalisation

 Divergence in capitalisation across regions  Financial flexibility has been tested

Capitalisation (%)

Equity / GLP 60% 45% 30%

43% 35%

15% 0%

27% 27%

Africa Asia 2007 2008

16% 17%

ECA

22% 21%

MENA (Morocco)

17% 17%

SA

18% 39%

South Asia Representing a sample of the top 100 biggest MFIs per GLP in 2008 Source: 2007 and 2008 Mix Market

Where is the bottom? - First quarter feedback 1Q09

 CGAP Global Opinion Survey – May 2009  Based on answers of over 400 MFIs Managers

MFIs



64% of MFIs

interviewed

say Loan portfolio

is stable or decreasing 

Credit risk is up

according to

69% of managers interviewed

. More severe in ECA and LAC 

Increasing liquidity constraints

 especially for smaller Tier 3 MFIs

CLIENTS



60% of respondents

say clients are

somewhat affected

, more in ECA and LAC 

Repayment is down

in all regions  Greater % of

income spent on food

Client Credit Risk – Can it be effectively managed?

Quality of Management

– Commercial Strategy   Clear Target Segment Lending model – Group vs. Individual, % of consumer and SME segment – Borrower Screening Process – The Client   Willingness and Ability to repay Stability of Income  Level of indebtedness – Loan Product Structuring (Purpose, Tailored to Ability of the Client to Repay) – Close Monitoring (Delinquency Policy and Process)    Early Warning Signs Trends - Rising PAR>30 days Learning lessons: drivers of delinquency – Collections      Active Oversight by Senior Management Portfolio Management Risk Concentration Adequacy of Reserves Credit Culture – Loan Provisioning

Macroeconomic risk – Competition as a revelator



Competition -

Competitive pressures in microfinance are mounting with the proliferation of MFIs, new entrants and unregulated institutions. Will these push MFIs to take greater risks in areas such as pricing, product innovation and credit quality?

Example - Maturity crisis for the Moroccan Microfinance Sector

 Morocco was a micro-credit champion in MENA : Loan portfolio multiplied by 11x between 2003 and 2007    As of Dec. 2008, 12 licensed MFIs, 1.3 million clients, USD 705 million of assets, 45% of client outreach in the Arab world 2007 : First signs of stress, fierce competition between MFIs in urban areas, over-indebtedness and loan delinquency 2009 : PAR > 30d passed from 5% in Dec. 2008 to 10% in June + Collapse of MFI “Zakoura” in May  Responses:  Merger of Zakoura with the Fondation des Banques Populaires (Government backed)  Management changes and freezing of new disbursement / loan recovery plans  Coordination among MFIs: MFIs will be integrated in new credit bureaus

Macroeconomic risk – Local politics and performance



Political interference

-MFIs may face political pressures, for example in the areas of interest rates, lending terms and subsidised government programmes. How big a risk do these pose to the business?

Examples



India

– Social /Communal tensions in some areas leading to rapid portfolio deterioration (e.g; Mysore, Kolar , Ramnagaram) 

Pakistan

– Local Politicians issuing loan pardon slips to MFI borrowers in Kamoki and Ravi Rayon with the objective of gaining political mileage. Worst affected areas have been Lahore, Faisalabad, Sheikhupura and Gujranwala 

Venezuela

– Direct competition from the government encouraging government backed social cooperatives and community production centres rather than private MFIs – Interest rate caps and no recognition of special status for microfinance institutions 

Nicaragua

– Government supporting the “Movement of no pay” initiated in July 2008 and which claims a 10-yr moratorium law and cap on interest rates on microfinance portfolio – Loan disbursement were suspended by most MFIs in Northern Nicaragua in Sept. 2009

Institutional performance – Learning Lessons

Corposol Case Study – What went wrong?

 Failure to track multiple loans to a single client  High delinquency rate and loan losses  Accounting errors  Poor self-governance

Source: Micro enterprise Americas 2003

Strictly Private and Confidential

Looking for 2010 Banana Skins

Microfinance Risk barometer

2010?

Directionally – Where will we be in • • • • •

Growth Competition Liquidity / refinancing Management Quality Regulatory

•

In terms of identifying 2010 Banana Skins

: What are the three success / failure factors to look in microfinance risks today?

* Unsustainable growth ?

* Competition ?

* Credit culture / discipline ?

2010

Winners and losers / Cornerstones of success

Winners and Losers

Emmanuelle Javoy, Managing Director of Planet Rating in France “

overall, one third of MFIs have systems, procedures and performance that should really allow them to manage the above stated risks without major problems, while another half have decent systems or procedures or performance, but that might take a little time to adapt to changing situations

”.

Risk Management, a differentiator

Philip Brown, Risk Director at Citi Microfinance “

Effective risk management (strategy, process and culture), has become a differentiator of performance… Greater instability and uncertainty exists across the spectrum of macro and micro business risks. These risks have stressed some businesses, resulting in cracks appearing with negative performance, in some case threatening business survival…There is a renewed focus on the monitoring and management of risks associated with business fundamentals

”.

For further details, please visit Citi Microfinance website

http://www.citi.com/citi/microfinance

THANK YOU

Mapping Risks

Commercial

7.

Corp Governance

Environment

6.

Too Little Funding

10. Political Interference 23. Ownership 16. Transparency 19. Mission Drift 15. Managing Technology 1.

Credit Risk Management

24. Product Development 3.

Macro-economic trends

22. Back Office 14. Staffing 20. Fraud 21. Depositor confidence 5.

Refinancing

18. Unrealizable expectations 11. Interest Rates 4. 17. Reputation 2.

Liquidity

12. Profitability Natural Catastrophes 25. Too much funding 9. Competition 13.

Inappropriate regulation 5.

Refinancing

Financial

8. Foreign Exchange 25. Too much funding

Client / Other ?

1.

Credit Risk

8. Foreign Exchange Strictly Private and Confidential

Deteriorating ROE – Credit provisions and declining efficiency

 MFIs’ performance is hit by increasing loan loss provision and costs linked to monitoring, collection and remedial management.

20,00% 15,00% 10,00% 5,00% 0,00% Dec. 31, 2008

Source: Symbiotics SYM50 Index

Jun. 30, 2009 Jul. 31, 2009

Credit Risk – Macro Economic Linkage

20% 15% Bank A Bank B Bank C Bank D CEE – MFI Example

Portfolio at Risk >30 days%

10% 5% 0% Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08 Nov 08