Commerzbank's Investment in ProCredit Bank: Rethinking the Role of National Development Finance Institutions in Africa

1. Johannesburg branch Commerzbank’s investment inProCredit Bank(a leading Global Micro Finance Group) 3rd Consultation on “Rethinking the role of National Development Finance Institutions in Africa”

2. Commerzbank has a stake in Micro Finance Since 2000 (starting in Kosovo) Commerzbank has acquired an equity stake in seven Microfinance Banks. They are all named ProCredit Bank. Former names in brackets: • Albania (FEFAD Bank, Tirana) • Bulgaria (ProCredit Bank, Sofia) • Bosnia-Herzegovina (MEB, Sarajevo) • Romania (Miro Bank, Bucharest) • Serbia and Montenegro (MFB, Belgr.) • Kosovo (MEB Kosovo, Pristina) • to be mentioned Georgia (MBG, Tbilisi) with around 2% 1

3. All ProCredit Banks in which Commerzbank has a holding: • have a similar shareholder structure; (i.e. public private partnership, commercialization of development aid in the financial sector) • share the same basic business-policy orientation • have received start-up support in the form of international experts and training to promote institution-building. No subsidies! • use the same innovative credit technology developed by IPC, a German management consulting firm based in Frankfurt which also provides the management of the investee banks 2

4. EBRD 20 % 20 % KfW/ 20 % 20 % 20 %* /IPC ProCredit Micro Finance Banks share similar structures and criteria Initial shareholder structure Current general criteria • total assets: mostly about EUR 400m • Paid in capital: up to EUR 34m • management: mostly delegated by IPC • staff: up to 1380 (trained and supported by IPC) mainly locals • Targeted ROE (after tax): 15% • Branches / offices reaching out into the regions * ProCredit Holding (formerly IMI) now holds a majority in most of the banks as some IFIs sold their stakes. 3

5. …ProCredit Group - Banks for “ordinary people” • 19 Micro Finance Banks • 425 branches in Eastern Europe, Latin America, Africa, • 5 African Countries, Angola Congo, Ghana and Mozambique. • 11,000 staff members • 656.000 business loans • 95% smaller than €10 000 and more than 50% for less than €1 000 • issued to small or very small enterprises • low level of arrears (< 1%) ProCredit Group views itself as a global leader in lending to households and enterprises that previously had very little chance to become clients of mainstream banks 4

6. As an example the branch network of ProCredit Bank Bulgaria 5

7. Key features of business policy • The target group for the banks’ range of financial services, (not only for their credit products), consists of the “lower end” of the market, i.e. micro and small enterprises and private households. • Target groups centred around retail business • Target groups in Bulgaria and Serbia orientated towards leasing • The shareholders measure the success and significance of the banks not only in terms of business volume and profit but also by the number of customers reached. • The banks are profit-oriented, but do not aim for short-term profit maximization. They seek a reasonable balance between social and economic goals. In this respect, they are following the continental European tradition of savings banks and co-operative banks. • As universal banks, they are able to perform every kind of banking operation, and indeed they provide all types of services as long as this does not conflict with the interests of the target group. • The banks strive to mobilize a sufficient volume of deposits from the general public to make retail deposits an important source of funding. • Increased use of investment banking products (e.g. bonds, securitisation) 6

8. Target-Group Orientation • Through a strategy of Target-Group Orientation, banks aim at improved & sustained economic growth by providing access to working capital for Micro clients and SMEs (about 80% loans). An example of the distribution of Loan Sizes in total portfolio of PCB Serbia as of Dec 2005 Sectors Portfolio (Volume) By Sectors Portfolio by Loan Size (TEUR) 7

9. (Symplified) example of an organisational structure Shareholders Audit Supervisory Board Management Asset - / Liability Management Credit Committee CEO CFO COO Treasury International Business Legal Dep. HR Balance, Accounting, Tax Communication & Marketing Administration IT Controlling & Reporting Branches Controlling Credit Credit Dep. 8

10. Provisioning policy • Despite the low level of arrears (< 1%), all ProCredit Banks apply a very conservative provisioning policy. • A general loan loss provision is maintained on the portfolio as a whole; for loans that are more than 30 days past due, an individual provision of 50% is set aside, and for those that are more than 90 days in arrears the provision is increased to 100% . The value of any items provided as collateral is not taken into account here. • As a result of this policy, the banks are accumulating a growing cushion of reserves (“hidden reserves”) which they could fall back on under extreme circumstances 9

11. Auxiliary business International Business • money transfer (no limitation) • letters of credits, • guarantees, • collections • All banks, Commerzbank has a stake in, are linked to SWIFT Commerzbank AG - a strong international partner: • domestic: branch-network in Germany (“Mittelstand, Multinationals” ) • international: integration of the banks into its worldwide network of correspondent banks (one of the largest in the world) • equity/debt financing • capital markets advisory/services 10

12. The South African Retail Banking market offers enormous & challenging opportunities: Commercial Non-commercial Commercial Banks Middle class Credit Unions Cooperatives Existing state Agencies (Khula, Umsobomyu) Salaried working class and self employed (small business) Commercial Micro-Loans Industry First Economy “ProCredit Model” Second Economy Economically Active Poor (Micro Enterprise) State Agency SAMAF Very Poor (Survivalist Enterprise) Developmental Microfinance Org. (NGOs) The ‘Hard Core’ Poor and Destitute ‘True microfinance’ is currently virtually non-existent in SA 11

13. South Africa displays a highly challenging microfinance environment… • Highest ‘salary burden’ in the world • Huge income disparities imply that local MFIs must recover “first world costs” from revenues derived from clients who can only afford “third world loans” • Lack of skilled professionals for the micro-finance industry • Rapid labor turnover • Small market for micro entrepreneurs due to two separate economies with virtually no interdependencies • Gap between the two economies too large, to be able to service 1st economy • Not able to compete with 1st economy in terms of productivity, quality and price level – even 2nd economy consumes mainly products of 1st economy • High competition from commercial banks regarding consumer finance • AIDS – 17% of black households have experienced income or job loss due to illness • Culture of mistrust, high delinquency rates, high consumption rates and high crime rates, mainly due to apartheid history • Poor infrastructure in rural areas • Microfinance customers poorly educated 12

14. …with some very attractive features • Strong government support of microfinance in terms of legislation, funding and SME institutions (DTI with Khula and SAMAF, IDC etc.) • Good infrastructure in urban areas • Sophisticated first economy financial services sector enabling access to capital markets for funding and hedging • Prudent macro-economic policies and environment • Sound legal environment • Weak competition regarding entrepreneurial microfinance • Difficulties experienced by most MFIs seems to be mainly due to lack of managerial capabilities, inefficiency and the lack of strong support in unprofitable roll-out phase (first 3-5 yrs.) • World-Cup 2010 13

15. Strategic path for microfinance providers to ensure access to financial resources and to growth IntegrationintoInternationalcapitalmarkets Increase in operational complexity and need for professional management Integrationintolocal Capitalmarkets Establishingfull Rangeofservicesforordinarycustomer, particularlydeposits Contributions to local financial market development Buildingprofessionalcreditinstitutions 14

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