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CAPA FINANCE IFN SA

Adrian ChindrisGeneral ManagerCAPA

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Romanian financial sector: present

Growth rates: among highest in the CEE / CIS regions – 30 to 40% increase p.a. in the last 4 years

Players: 44 authorized banks and 213 NBFI’s

Services: most institutions adopted a universal commercial banking model, but business drivers are either corporate or retail lending

Financial intermediation (assessed as Loans to private sector / GDP) reached 36.6% at FY’07 vs. 27.2% at the end of FY’06

Retail lending: has been the source of growth of the sector; loans to household per capita reached 920 EUR/capita at the end of 2007 (138 EUR/capita in 2004); however, since CEE average is 2,431 EUR/capita, there is still a significant gap

Commercial lending: focused mainly on large companies and medium enterprises

Financial Performance: high among other sectors in Romania, but still below the CEE / European levels

Overview

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Overview

non-banking financial institution (“NBFI”); market leader in the microfinance sector; started as a program of a world-wide non-governmental organization (World Vision) providing loans to entities without access to banks

in march 2008 it has become the single micro-finance NBFI listed in the Special Register of NBR; it triggers strict rules regarding risk management, prudential reporting, internal control systems, corporate governance

entrepreneurial and skilled management team with over 10 years of experience in the industry; 115 employees

business covering 10 regions across the country through 10 urban branches and 21 rural branches

6,100 individuals and 1,800 entrepreneurs as clients

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BS analysis

the table below presents IFRS data for 2006 and 2007 and Romanian accounting standards data for 2008

the growth of 150% in total assets in FY’07 vs FY’06 has been driven by the dynamic of the portfolio

• additional USD 10 million loans to customers were acquired by CAPA at year end from RAEF; they were originated by CAPA as well, as part of the exiting intermediation agreement

dynamic in cash and equity positions is derived by a share capital contribution of EUR 9 million paid in by the new shareholders

the company obtained lower ROA and ROE compared with banking industry averages, due to low profitability

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IFRS IFRS RAS000 EUR 31-Dec-06 31-Dec-07 31-Mar-08

Cash and due from banks 2,782 8,877 6,423 Loans to customers 10,119 23,875 26,841 Loans to customers, provisions (299) (446) (639) Intangibles 118 183 174 Tangibles 141 164 138 Deferred tax 66 19 - Other assets 174 321 328 Total assets 13,101 32,993 33,266

Borrowings 10,563 21,605 21,987 Other liabilities 879 275 (45) Total liabilities 11,442 21,881 21,942

Share capital 1,463 5,760 5,579 Share premium - 4,994 4,836 Reserves 44 49 47 Retained earnings 152 310 861 Total shareholder's equity 1,659 11,113 11,324

Total liabilities and equity 13,101 32,993 33,266

Net profit (period ended...) 106 195 488

Employees 78 110 115Total assets (KEUR) / employee 168 300 289 ROA 0.81% 0.59% 1.47%

ROE as at YE 6.38% 1.76% 4.31%ROE adjusted 9.14% 9.27% 17.40%

(1) (1) (2)

(1) - time weigthed

(2) - annualized

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The portfolio (1)

steady growth year after year reflected in doubling of portfolio (incl. for 2008 budgeted figures)

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PORTFOLIO EVOLUTION

4,54810,315

23,876

52,261

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10,000

20,000

30,000

40,000

50,000

60,000

31-Dec-05 31-Dec-06 31-Dec-07 31-Dec-08 YE

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Portfolio

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The portfolio (2)

Loans to MSE (micro and small enterprises) steadily grew, reaching a significant weight in the portfolio (65% in 2007)

product characteristics: slightly higher APR’s vs banking, amounts granted up to 40,000 EUR equiv; maturity: max. 5 years; purpose of loan: investment, working capital needs, real estate developments

Loans to individuals grew in absolute numbers, however at a lower pace

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EVOLUTION OF NO. OF CUSTOMERS

5,7006,102 6,311

615

1,823 2,065

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1,000

2,000

3,000

4,000

5,000

6,000

7,000

31-Dec-06 31-Dec-07 31-Mar-08

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MSE Indiv

EVOLUTION OF PORTFOLIO BY COUNTERPARTY

3,341

15,245

17,159

6,975

8,688 9,195

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2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

31-Dec-06 31-Dec-07 31-Mar-08

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MSE Indiv

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Funding

historically, business evolution was mainly driven by the funding availability Dec-07 meant a strong improvement of the financial position through the funding brought in by the new shareholders (EUR 9 mill new capital + USD 10 mil new borrowings) IFI and Banks providing finance comprise: specialized micro-lending funds (Lehman Bro, Microvest, DWM, World Bank, EFSE) and other lenders characteristics of funding at end of FY’07:higher APR’s, many and with small amounts per lender, leading to inefficiencies in funding management process

shareholders are the main source of funding in FY’08 new borrowings, amounting to EUR 20 million, are expected by the end of FY’08

EVOLUTION OF FUNDING

10,389

21,605 21,982

2,097

11,213 11,329

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5,000

10,000

15,000

20,000

25,000

31-Dec-06 31-Dec-07 31-Mar-08

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Loans from IFI, other banks and shareholders Equity

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SHAREHOLDER'S FUNDS ANALYSIS

1,633

8,5059,486 9,486 9,486

2,097

11,213 11,329

15,32915,329

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2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

31-Dec-06 31-Dec-07 31-Mar-08 30-Jun-08 31-Dec-08 (budget)

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Borrowings Equity

What type of investors/ funders…

…are playing roles in microfinance? NGOs and Development Agencies Specialised investment funds (with social

orientation and with claimed social orientation) Investment funds – non specialised Banks Private structures Other

Is there any difference between the approach of the other institutions?

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What investors are looking for?

MFIs with: Efficient operations/performing portfolio Scalability Profitable or getting close to profitability Extensive network/good outreach Strong middle management/strong staff Acceptable governance structure Good legal documents and procedures High leverage of assets Good quality liabilities Social impact

They are looking to invest into a commercially performing financial institution; 9

How to find capital?

The answer depends on the MFI quality/characteristics and the forecasted evolution of the national economies

Not all the MFIs are ready to receive commercial loans or equity investments

Good MFIs are contacted directly by investment funds and institutional investors (starting the second half of 2007)

Special MFI investment units were created in some large banks in order to ensure early acquisition of the MFIs within certain markets

As a result, any MFI needs to at least have an acceptable growth plan in accordance with the evolution of the national economy

The Board of the MFI need to decide what are the affordable terms of the borrowings from different resources and how does it match the growth plan of the institution

Depending on it, there are a number of sources that can be tapped

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New equity investor..

Need to be strong an have a high leverage capacity. If not, there are no commercial reasons to bring it in.

ADVANTAGES: Strong focus on risk management and improvement of efficiencies Capacity to increase equity and leverage (through the existence of more institutions or

through its own BS)on it in order to match the evolution of the market In some cases experience in developing and scale up financial services institutions Some of the investors had already developed models to be replicated in different

environments

DESADVANTAGES MFIs are risk takers and are compensating the risk through methodologies; a commercial

investors is usually avoiding such risks and as a result the declining of the outputs of such institution

In most of the cases the social impact remains a reporting issue rather than a part of the general goal

Commercial investors are tempted to follow models already existent and as a result the alignment to the classic financial institutions procedures and behaviour and the normal growth of the market.

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Recomendations

Ensure the legal status for the MFI that would allow investments (LLP or joint stock)

Drive the MFI on commercial principles and develop a risk management framework

Make sure you know what are the main advantages of the MFI and negotiate on indicators that are linked with them

Make sure you start negotiations before internal growth resources would dry; the rules of the game need to be dictated by the new investment

Do not accept within lending contracts covenants that would induce limits of the independence for decisions regarding equity investments

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