1

The State of Microfinance in Central and Eastern Europe and the New Independent States, 2004-2005

2

According to MicroCredit Summit Campaign, at the end of 2004 microfinance institutions served over 90 million borrowers worldwide...

Asia87.8%

LA4.2%

Middle East0.2%

ECA0.2%

Africa7.6%

Source: Microcredit Summit Campaign

3

... additionally 140 million of clients were served by credit unions worldwide

South Pacific3%

Eastern Europe/CA

2% Asia8%

LA9%

Middle East4%

Western Europe3%

North America66%

Africa5%

Source: World Council of Credit Unions

4

In Eastern Europe and Central Asia:

over 4 million borrowers

credit unions

NGOs/NBFIs

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

2004 2005

downscaling banks

microfinance banks

5

Outreach by Sub-regions

Balkans1%

CEE69%

Russia/Ukr29%

Central Asia1%

Caucasus0.4%

Credit Unions

Central Asia42%

Russia/Ukr43%

Balkans3%

CEE1%

Caucasus11%

Downscaling Banks

6

Central Asia36%

CEE10%

Balkans29%

Russia/Ukr12%

Caucasus13%

Microfinance Banks

Outreach by Sub-regions

Balkans36%

CEE9%

Caucasus25%

Central Asia24%

Russia/Ukr6%

NGOs/NBFIs

7

In Azerbaijan:80,000 borrowers

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Azerbaijan

NBFIs

credit unions

microfinance banksdownscaling banks

8

Market Penetration of NGOs/NBFIs

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%B

iH

Kyr

gyz

stan

Arm

enia

Ko

sovo

Geo

rgia

Aze

rbai

jan

Alb

ania

Taj

ikis

tan

Ser

b/M

on

t

Kaz

akh

stan

Mac

edo

nia

Uzb

ekis

tan

Bu

lgar

ia

Ro

man

ia

Po

lan

d

Mo

ng

oli

a

Mo

ldo

va

Ru

ssia

Ukr

ain

e

9

MFI scale of outreach

0

10,000

20,000

30,000

40,000

50,000

60,000

10

Largest NGOs/NBFIs by outreach

Worldwide*

BRAC, Bangladesh 4,000,000

ASA Bangladesh 3,000,000

ACSI, Ethiopia 350,000

DECSI, Ethiopia 340,000

RDRS, Bangladesh 230,000

ECA

KAFC, Kyrgyzstan 36,000

FINCA, Azerbaijan 28,000

FMCC, Kyrgyzstan 25,000

EKI, BiH 23,000

Parnter, BiH 21,000

* 2004 data from MIX Market

11

Gross Loan Portfolio in ECA

0

1,000,000,000

2,000,000,000

3,000,000,000

4,000,000,000

5,000,000,000

6,000,000,000

2004 2005

microfinance banks

credit unions

downscaling banks

NGOs/NBFIs

12

Portfolio Growth Rate

NGOs/NBFIs

Balkans 23%

CEE 31%

Caucasus 67%

Azerbaijan 72%

Central Asia 35%

Russia/Ukr 5%0%

20%

40%

60%

80%

100%

120%

downscalingbanks

credit unions microfinancebanks

NGOs/NBFIs

2003

2004

2005

13

Median portfolio size

US$

Balkans 9,300,000

Caucasus 1,300,000

Azerbaijan 900,000

CEE 4,000,000

Central Asia 500,000

Russia/Ukraine 3,200,000

14

Depth of Outreach

22%

96%

226%

396%

197%

85%

323%

507%

0% 100% 200% 300% 400% 500% 600%

credit unions

NGOs/NBFIs

microfinancebanks

downscalingbanks

Azerbaijan

ECA

15

Women Borrowers

0%

20%

40%

60%

80%

100%

ECA Azerbaijan

men

women

16

Some highlights of 2004 performance

• NGOs/NBFIs in ECA are more profitable than microfinance banks ...

Return on Assets

Operational self-sufficiency

NGOs/NBFIs 2.1% 133%

Microfinance banks

0.3% 114%

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... even though their expenses are higher ...

0%

5%

10%

15%

20%

25%

30%

35%

NGOs/NBFIs microfinance banks

admin expense

personnel expense

LLPE

financial expense

18

... but portfolio yields are also higher

Portfolio yield (nominal)

NGOs/NBFIs 39.5%

Microfinance banks 24%

19

Operating costs of NGOs/NBFIs are higher because of smaller scale ...

0%

5%

10%

15%

20%

25%

30%

35%

40%

<$2M $2-5M $5-10M >$10M $10-50M $50-150M >$150M

Operating efficiency – operating cost/gross loan portfolio

Gross loan portfolio

NGOs/NBFIs Microfinance banks

20

... and because of higher cost of serving lower-end borrowers

0%

5%

10%

15%

20%

25%

30%

35%

0-50% 50-150% 150-250%

Operating efficiency – operating cost/gross loan portfolio

Depth of outreach

21

Key Constraints to Growth

0%

10%

20%

30%

40%

50%

60%

regulatoryenvironment

sources of funds competition

22

Regulatory Challenges

Regulatory Environment

56%

Sources of Funds

56%

• Aspects of regulations that continue to pose challenges include:

• Tax codes

• Collateral, especially cash collateral, laws

• Interest rate regulation

• Transformation options

• Non-profit status definition

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Constraints in accessing funds

• Restrictions on deposit mobilization by non-bank institutions

• Restrictions on the use of borrowed funds for on-lending

• Not-for-profit status deterring equity investors

• Lack of knowledge how to access funds

• Lack of visibility towards potential investors

• Lack of capacity for liability management and

foreign currency risk management

24

Competition faced by NBFIs

•Strongest competition in the Caucasus among NBFIs

•High level of competitive pressure for NBFIs from banks in Russia/Ukraine

•Balkans - 88% of NBFIs perceive competition from other NBFIs as quite strong

1

1.5

2

2.5

3

3.5

4

4.5

5

80% 85% 90% 95% 100%

Balkans: NBFI-NBFI

CA: NBFI-NBFI

Caucasus: NBFI-NBFI

Rus/Ukr: NBFI-banks

25

Trends

• Increasing leverage through better access to borrowed funds, including commercial sources

• Lowering interest rates as there is more competition and MFIs become more efficient

• Product diversification

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Leverage of NGOs/NBFIs

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2004 2005

shareholders

grants

earnings

other

commercial loans

concessional loans

27

Interest rates

• 55 percent of MFIs decreased interest rates, in particular in the Balkans

28

Product innovation

• New lending products for current clients

• New lending products for new clients

• New non-lending products