ResponsAbility Social Investments AG responsAbility Social Investments AG MFI – a risky business? October 2012 Viktoriya BYCHENOK

responsAbility Social Investments AGwww.responsAbility.com

responsAbility Social Investments AG

MFI – a risky business?

October 2012Viktoriya BYCHENOK

AMFA conferenceBaku, Azerbaijan


responsAbility Social Investments AG

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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.)

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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

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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

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* structured Product** closed-end fund


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

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responsAbility’s Investment Process

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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

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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


Thank you for your attention!

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ResponsAbility Social Investments AG responsAbility Social Investments AG MFI – a risky business? October 2012 Viktoriya BYCHENOK