Promoting MSME Finance Latin America and Caribbean Region - Financial Markets November 2007

1. Promoting MSME Finance Latin America and Caribbean Region - Financial MarketsNovember 2007

2. The International Finance Corporation • Private sector arm of the World Bank Group • Established in 1956 • Shareholders: 179 countries • Net Worth: US$11.1 bn • IFC Mission • To promote sustainable private investment in developing countries, reducing poverty and improving people’s lives • To achieve its mission, IFC: • Provides loans and equity to viable projects • Mobilizes capital from multiple sources • Provides technical assistance and advisory services to companies and governments

3. IFC MSME Financing Institutions Portfolio • Global • US$ 4 billion of investments in Financial Institutions (FIs) targetting MSMEs, representing 56% of IFC’s Financial Sector Commitments • About 50% of IFC’s MSME FI receive technical assistance. • Latin America & Caribbean • $595.2 million invested in 32 MSME financial institutions. • Outreach to MSMEs: 2.8 million MSME esposures for US$ 9.1 billion • Micro Loans: US$ 2.2 bn • Small Loans: US$ 1.7 bn • Medium Loans: US$ 5.2 bn

4. Commitments by Sector Since 2000, IFC has funded US$1.35 billion in 53 investments plus 12 TA initiatives in the Caribbean region

5. Lack of Access to Financial Services • In Emerging & Transition Markets: • The bottom of the pyramid remains underserved: • Banking sector penetration of 5% to 25% vs. 70% to 90% in developed markets • Banks tend to focus on large commercialclients and top retail clients • Targeting the underserved: • Microfinance (up-scaling): Total reach: 70 million clients globally • Banks (down-scaling): Requires retail skills and systems • Non-bank financial institutions (diversifying):Leasing, factoring, housing, insurance Large Co’s and “A” Clients Well-served Under-served Retail, Micro and Small business market

6. Supporting the Financial Sector Expand, strengthen, deepen & integrate financial markets across the region & improve access to finance Objective • Grow financial institutions • Micro & SME institutions • Second tier banks • Regional Credit Bureau • Capital Market • Infrastructure, Housing • Insurance and risk mitigation IFC’s Investment and Technical Assistance Programs already on the way: IFC Product/ Service Up to $400m in additional financing and reaching 10,000-25,000 MSMEs in 5-6 countries in Caribbean region Development Impact

7. IFC’s MSME Finance Program • The program aims to augment the level of credit being made available to SMEs and micro entrepreneurs across the region by providing participating financial institutions with a package of investment and targeted technical assistance aimed at increasing the institution’s ability to serve lower and middle income borrowers. The objective of the Program is four-fold: • Objective • increase access to finance for underserved MSMEs; • encourage formal financial institutions to enter or expand MSME lending in a profitable and sustainable manner, based on operating efficiency and aggressive volume growth; • motivate financial institutions to move into frontier regions and new market segments, and to offer a wider range of products to their MSME clients; and • increase competition among financial institutions operating in the MSME segment, thereby improving the terms available to small businesses.

8. SME Banking - Conceptual Framework The SME Banking Challenge SMEs cannot afford high lending spreads Information on SMEs is not transparent • QUESTIONS: • What do other banks do? • How do they do it? • What performance metrics? • Cost-benefit analysis? • Does environment matter? SME transactions are small and numerous

9. Overall Framework of the Program The five-year program aims to provide investment and TA to over 50 financial institutions across the region and through them to reach over one million MSME clients. Participating financial institutions will work with IFC to develop a results framework, which will outline the agreed outreach strategy and quantify targets to be achieved under the program. For institutions new to the MSME market, targets will focus on overall portfolio growth. For institutions already operating in the MSME segment, targets will be related to growth in specific parts of the portfolio (e.g. new product area, new market segment or regional expansion). Results will be carefully measured and benchmarked against MSME lending world-wide, assisting partner financial institutions to measure their approach against global best practice.

10. Technical Assistance details The TA provided to each partner institution will depend on the needs of the individual institution, but is generally expected to include some combination of the following: Credit Policies and Procedures: to streamline the credit review process and adapt requests for information to a level appropriate for small enterprises. Credit Risk Management: increase emphasis on cash flow based lending, working with informal financial information, creating appropriate collateral policies, decentralizing decision making and introducing active portfolio management techniques. Training, Product Development and Marketing: assist in devising a strategy, identifying target client groups and finding the best sales channels for reaching them. IT System Development: develop specialized IT tools (such as credit scoring) in support of their lending strategies.

11. IFC’s MSME Finance experience • Mibanco – Peru • A microfinance bank targeting MSMEs across Peru. • IFC debt (senior and subordinated) and equity client. • IFC syndicated loan – bringing foreign investors to a new asset class. • Compartamos – Mexico • An NGO trasformed into a bank. • Outreach across Mexico. • Very successful IPO. • BCSC – Colombia • One of the top ten banks in Colombia • Bringing affordable financial services to the under-served

12. Programmatic Support in Housing Sector… value chain approach • Core Sector Problems • Lack of affordability • Demographics lead to worsening deficit • Dependence on public sector solutions IFC Solutions • Capital Markets Access • Asset Securitization • Property and Construction Finance • Lines of credit for developers • Regional Property Investment Fund • Support on sustainable construction • Primary Market Support • Long Term funding • Risk Sharing • Mortgage toolkit Impact • The Results • Welfare/economic gains • Private sector participation in housing • New asset class for investors The Results

13. Examples of Housing Transactions Construction Finance (Brazil) Risk Sharing (Ghana) Mortgage Finance (Mexico) • Up to US$30m IFC loan to Banco Brascan S.A. • Supports expansion efforts in the Brazilian housing sector, including financing of residential construction • IFC 50% risk share in The Trust Bank’s private schools loan portfolio for up to US$2.2m after 5% first loss • Associated TA to schools • Supports development of primary and secondary educational system by providing MT financing not available otherwise • US$20m equivalent credit line in local currency to Hipotecaria Credito y Casa (CyC), Mexico’s 3rd largest specialized mortgage lending institution for low-income housing • Warehouse-type credit line secured by pool of mortgages held in trust • Benefits of IFC loan: • Extends housing finance to large number of underserved low income households • Diversified CyC’s funding sources away from traditional federal mortgage lender; supported CyC’s securitization program Capital Markets Finance (Columbia) • 15-year US$210m equivalent mortgage backed bond in inflation-indexed local currency • Secured by mortgage flows and US$2.2m equivalent IFC partial guarantee • US$204m class A rated AAA + US$6.5m class B rated A by Duff & Phelps de Colombia • Developed domestic capital markets by introducing new LT highly-rated fixed income security • Established blueprint for further MBS issues in country

14. Scaling up in the Caribbean • Access to finance: Micro & SME programs, housing/mortgage programs, credit bureau, trade program & training • Infrastructure development (Advisory - PPPs) • Smaller economies: Executing 3-4 transactions Immediate Objectives Many are achievable but……….. ..........need some government support to achieve true potential • 5-8 Capital & Financial markets transactions including increasing cross-boarder flows • 5-8 Significant Infrastructure transactions • 1-3 Housing transactions • 2-3 Offshoreeducation transactions • 1-2 ICT transactions Medium-term Objectives Some are achievable but….. Making the Caribbean a more Attractive Investment Location ..............need significant government commitment & support