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responsAbility Social Investments AGwww.responsAbility.com
responsAbility Social Investments AG
MFI – a risky business?
October 2012Viktoriya BYCHENOK
AMFA conferenceBaku, Azerbaijan
responsAbility Social Investments AGwww.responsAbility.com
responsAbility Social Investments AG
Page 2
responsAbility Social Investments AGwww.responsAbility.com
Who we areLeader in Social Investments
Focus on investment themes:Microfinance, Fair Trade and Emerging Infrastructure
Geographical focus: Developing countries and emerging markets
FINMA-regulated asset manager
Strong focus on risk management, transparent reporting und corporate governance
90 employees
5 offices in Switzerland, France, Peru, Kenya, India
Founded 2003
>1 billion AuM
Products in various asset classes (debt, equity, etc.)
Page 3
responsAbility Social Investments AGwww.responsAbility.com
Origins and OwnershipFounding Organizations and Shareholders
A Global Leader in Wealth Management
Largest Swiss Retail Banking Group
Traditional Swiss Banquier Privé
Traditional Swiss Asset Management BankLeader in Structured Products
A Global Leader in Reinsurance
A Leading Social Investor
Staff and Management
Page 4
responsAbility Social Investments AGwww.responsAbility.com
Investment TopicsBroad Range of Products
responsAbility Global Microfinance Fund
responsAbility Microfinance Leaders
responsAbility Mikrofinanz-Fonds
responsAbility Participations
custom-made mandates
50 m USD AuM50 m USD AuM1.1 b USD AuM
responsAbility Fair Trade Fund
responsAbility Ventures I
responsAbility Press Freedom (Voncert)*
responsAbility BOP Investments**
Microfinance Fair Trade Emerging Infrastructure
Page 5
* structured Product** closed-end fund
responsAbility Social Investments AGwww.responsAbility.com
Investment UniverseEmerging- and Frontier Markets
responsAbility local presences
Source: responsAbility Social Performance Report 2012
potential investment universe
Current Portfolio 70 Countries 253 Microfinance institutions 45 Fair Trade cooperatives 43 Small and medium-sized enterprises 2.1 Mio people benefit from independent media
Page 6
responsAbility Social Investments AGwww.responsAbility.com
responsAbility’s Investment Process
Page 7
responsAbility Social Investments AGwww.responsAbility.com
Investment Process
Approval investment committee
Investment Decision
InvestmentExecution
MonitoringReporting
ScreeningSourcing
Local deal sourcing
Strategic asset allocation
Country and market research
Due diligence
Credit Risk management
Portfolio allocation
Feedback and control
Risk Management
Page 8
Risks we assess
Regulation and supervision
Market environment
Instrument risk:
Asset quality
MFI default risk
Operational risk:
Ownership
Governance
Embedded portfolio risk
Sustainability
Controls
Market risk
Political stability
Economic context
Country risk
MFI default risk: ownership and governance (best practice)
Board of Directors
Management
Risk Committee
Remuneration and nomination committee
Audit Committee
Board Credit Committee
Inte
rnal A
udit
Credit Committee
ALCO Risk management department
…
Internal control department
MFI default risk: controls (best practice)
Internal Audit / Internal Control
IT system as tool for internal control
External audit
• Reputation and quality of report
• Frequent change policy
• Independence and effectiveness of Internal Audit Department
• Physical cross checks with clients and files
• Separate unit of Internal Control/Credit Risk management
• Formalized procedures, adequately communicated and available to staff
• Trainings
• Adaptation to the size and operations
• Adequate infrastructure and security (data access, recovery)
• Real-time information: reporting tool
• IT support
MFI default risk: portfolio (best practice)
Client assessment
Portfolio diversification
Product design
• Appropriate product design for targeted clientele (type of business)
• Adequate repayment capacity analysis
• Several levels of credit approval
• Client visits before disbursement and monitoring after disbursement
• Creditworthiness check via Credit Bureau (clients, guarantors, family)
• Separate unit of Credit Risk Management
• Rotation of branch managers/credit supervisors
• Geographical, risky sector, product, branch, clients’ income source, large clients concentration
• Adequate risk management policies in place defining limits
• Constant monitoring and forecasting
Lessons learned: Central Asia
Account effects of toxic risk combinations
Early warning signs
• Weak governance and management (including key person risk)
• Volatile macroeconomic environment
• Absence of sound regulatory framework for microfinance
• Difficult political context
• High risk appetite
• Weak controls
• Inappropriate client analysis
• Unreliable MIS data
• Deterioration of operating environment
• Excessive growth
• Possible changes of regulation
• Risk related to other assets (placements, subsidiaries, investments)
• Worsening economic outlook
• Changes of underwriting standards
• New products with inappropriate design