Micro-funds to help the development of micro-credit.The KfW experience.

Open Days Brussels - 09 October 2008

Dr. Annette Fritz

Business Policy Europe

2

Overview.

KfW Bankengruppe.

Microfinancing. One Word – Different Meanings.

KfW Microfinancing Activities.

Framework Conditions for Micro-loans in Germany.

KfW Micro-loan Programmes in Germany.

Microfinance Fund Germany. - Key Elements.- The Structure.- Experiences.

Conclusions.

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KfW Bankengruppe in brief.

Promotional bank of the Federal Republic of Germany.

Founded in 1948.

Shareholders: Federal Republic of Germany (80%), German federal states (20%).

Headquarter: Frankfurt am Main;branch offices: Berlin and Bonn.

Balance sheet total at end-2007: EUR 354 billion.

Financing Volume 2007: EUR 87 billion (+ 13%)

Average number of employees in 2007: 3,700.

Rating: AAA/Aaa/AAA.

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Brand structure.

Promotion of developing and

transition countries

International projectand

export finance

Promotion of housing, environmental andclimate protection,

education, infrastructure,social issues

Promotion of SMEs,Business founders,

Start-ups

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Microfinancing.One Word – Different Meanings.

Microfinancing in Developing and Transition Countries- Financial sector development to improve lives and fight against poverty - Microfinancing has become an investment opportunity for private and institutional Investors.

Esp. in Transition Countries funding is increasingly commercial

Microfinancing in the EU Different framework conditions!

- Need to facilitate access to finance for start-ups and micro-enterprises - Inclusion lending

Cost coverage is more challenging

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KfW Microfinancing Activities.Overview

Developing and Transition Countries KfW Development Bank is one of the biggest financiers of microfinancing and brings in its know-how as financial institution.

Germany - KfW Start-up Coaching- KfW StartGeld

- Microfinance Fund Germany

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Basic products to support MFIs Credit lines Guarantees Equity Technical Assistance

Elaborate products (in order to mobilize private resources)

Structured finance, e.g. Mezzanine-Finance Microfinance Investment Funds

Securitization Deposit insurance schemes

KfW Development Bank employs and develops a range of different instruments:

KfW Microfinancing Activities in Developing and Transition Countries

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EFSE - Flagship Initiative in Development Finance

EFSE pursues a Tiered Funding Strategy

Donorfunds

Development Finance Institutions

PrivateInvestors

A-Shares and Notes

B Shares

C Shares

EFSE provides long-term funding to Partner Lending Institutions through a mix of different instruments.

Contribution to regional integration and cooperation.

Efficient use of public funds: Scarce public funds are used in a revolving manner. They constitute a risk cushion for leveraging private capital (public-private partnership)

Incorporation of local stakeholders through the Advisory Group (Central Bank Governors) / future transfer of current donor shares to local governments

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Framework Conditions for Micro-loans in Germany.

High density of banks in Germany Good promotional infrastructure

Nevertheless: Financing gap in the area of micro-financing !

Non-banks are not entitled to grant loans § 32 KWG (German Banking Act)

No “special law” on micro-lending in Germany

Micro-lending involves high risk

High administrative costs

Interest ceilings

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80% of the liabilityassumed by KfW

and EIF

80% of the liabilityassumed by KfW

and EIF

Senior loan amountup to 50.000 EUR

Senior loan amountup to 50.000 EUR

Monthly payments

of interest and principal Monthly payments

of interest and principal

Term up to 10y and up to 2y repayment free

Term up to 10y and up to 2y repayment free

No securityspecifications

No securityspecifications

Start-up and young enterprises

up to 3 years

Start-up and young enterprises

up to 3 years

Prepaymentfree of chargePrepayment

free of chargeWorking capital up to

20.000 EUR Working capital up to

20.000 EUR

KfW-StartGeld.

Second applicationpossible

Second applicationpossible

Simplified processesSimplified processes

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Integration of CIP-Guarantee into KfW-StartGeld

on-lendingbank

final borrower

assumption of liabilty 40%

80% release of liability

loanrefinancing

guarantee rate: max. 20%

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KfW Start-up coaching.

Start-up coaching in Germany Companies up to 5 years after business establishment Coachingperiod: max.12 months 75% (50%)* allowance for coaching by professional

advisor max. eligible daily net fee is EUR 800 allowance of max 4,500 EUR (3,000 EUR)* Eastern Germany (Western Germany and Berlin)

Special start-up coaching for unemployed Additional support tool by BMAS* and KfW First year after business establishment Coachingperiod: max 12 months 90% allowance for coaching by professional advisor max. eligible daily net fee is EUR 800 allowance of max. 3,600 EUR* Ministry of Labour and Social Affairs

New since

New since

1st October 2008

1st October 2008

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Microfinance Fund Germany.Key Elements

Start in September 2006 Pilot phase

Capitalisation of Guarantee Fund: 2 Mio. EUR (initially)

Fondsinvestors: BMWi*, BMAS**, GLS-Bank, KfW Bankengruppe

Target group: Start-up enterprises and micro-enterprises with no access to bank loans

Microfinance Institution (MFI): is responsible for screening und monitoring of borrower; MFI services and advices borrower on site MFI assumes 20 % default risk (first-loss !)

DMI: Coaching, support and accreditation of MFI

Microfinance Fund Germany: remaining 80% default risk

Bank: provides micro-loan to borrower (no risk - 100% cash collateral)* BMWi - Ministry of Economics and Technology**BMAS - Ministry of Labour and Social Affairs

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Microfinance Fund Germany.The Structure

Cash deposit(100%)

Recommendation on cooperation with micro-finance provider

DMIMicrofinance Fund

Germany

Loan agreement

•Qualification•Accreditation•Monitoring

Microfinance provider assumes 20% of the first loss

Loan recommendation

Bank

Start-up /young enterprise

Interest and redemption

Advice

Loan application

Fee

Microfinance provider (e.g. start-up centre)

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Microfinance Fund Germany.Experiences (1)

Increasing number of micro-loans increase of 15% to 20% expected in 2008

Loan commitments until 09/2008: some 180 loans and 1,1 Mio. EUR disbursed

Average loan size: ≈ 6,500 EUR (max. 10,000 EUR)

Average term: ≈ 20 months (max. 36 months)

Default Rate up-to-date: 4-5%

0

20

40

60

80

100

120

2006 2007 Sep 08

Loans active MFIs

2008exp.

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Microfinance Fund Germany.Experiences (2)

Low number of loans per MFI due to regional or local focus Lack of economies of scale and learning effects BUT: Success of MFIs can not only be seen in “number of loans”

MFIs are very heterogeneous and act in principle independently

20% First Loss Risk limits number and scale of MFIs Positive incentive Regional and local risk sharing solutions partially available

Capital Increase required Microfinance Fund Germany is looking for further investors

Network of different participants

Connection of participants taking part in the cooperation is costly

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Conclusions

Framework conditions in Germany differ significantly from other European member states.

Microfinance Fund Germany is still in an early stage of development.

Performance so far satisfactory.

Improvements on the way.

External support required for capital increase and technical improvements.

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Thank you for your attention!

Contact:

KfW Bankengruppe Liaison Office to the EU

Palmengartenstraße 5-9 Square de Meeûs 37

60325 Frankfurt am Main B-1000 Brussels

Germany Belgium

Internet: www.kfw.de