José Fernando Figueiredo President of AECM European Mutual Guarantee Association

1. Microcredit a field of close cooperation between financial institutions, private or social entities and Guarantee Schemes José Fernando Figueiredo President of AECM European Mutual Guarantee Association SMEs and entrepreneurship - successful local strategies Porto, Portugal, 7 December 2007

2. AECM : overview • Founded in 1992 • Open, democratic, independent Association • Statute: international non-profit association • Based in Brussels, Capital of EU.

3. AECM : overview 34 active schemes in 18 countries Key figures (31.12.2005, in €1.000.000) Own Funds 4.532 Guarantees issued in 2005 20.057 Outstanding commitments 47.205 Leverage Cap / commitments > 10 x SMEs beneficiaries > 2 Million

4. Microcredit: a formula which makes sense ? YES, AT CONDITION… • Credit amount in line with the medium-term ambition of the project : no « under-financing », no under-estimation of the liquidity, unless quick, disastrous failure • Selection : Not a gift, but a financial product demanding a good and specific assessment. • Subsidization : Not a gift but a price in line with market interest rates + normal risk premium. • Management : Cheap but steady, monthly instalments • Monitoring : simple toolbox, peers, volunteers – either subsidized accompaignement • Correct marketing: Start-ups with low level funding needs, Business without «growth objectives», Social rehabilitation , Insertion (!? Special niche)

5. Microcredits: some issues • Cost of collecting relevant data increases information asymmetry • Assessment is costly relatively to amount and margin • Lack of collateral or high cost of forming securities • Credit back-office (drafting contract, loan disbursement) and credit follow-up are labour intensive • Long and costly prosecution for small amounts and weak recoveries • Beneficiary of a microcredit has not yet created his creditworthiness and is given up in case of difficulties • Loser: personal + social damage.

6. Distribution Channels : a rough overview • Specialised institution: mostly « social » role, public support to borrower and lender, special niches, limited resources depending on budget allocation • Financial institution: unlimited funding pool, efficient back office, but standardised, not «business oriented» products (personal loans, overdrafts based on personal assessment) because of the weak profitability • Financial institution + Guarantee scheme : professional loans with outsourced risk margin gives a better chance to a project assessment • Financial institution + Guarantee Scheme + Monitor : gives the best survival chances and leverages future quality business relationship

7. Guarantee schemes and microcredits • Philosophy : • non-profit activity • midway bank – SME (Financial intermediaries) ___________________________ • Micro businesses = typical market target • Micro guarantee = very common practice • Recruitment: direct or through banks • Assessment: sustainability (not Social oriented) • Follow up: is unfortunately not the rule

8. BANK + GUARANTEE SOCIETYA joint action • G.S. remove significantly (up to 80%) the default cost from the bank and thus reduces the reluctance to lend. • G.S. do not « de-responsibilise » the borrower. • Many G.S. share the loss « downwards » with counter-guarantors, an other incentive to take risks • G.S. pool the probability of default into large portfolios • G.S. insert the loan application in the context of a business credit with a analysis of project sustainability • Many G.S. have simplified criteria grids or submit the file to a peers’ assessment (added value of mutual) • Some G.S. collect information for the banker (Confidi) or deliver a complete credit file (BüBanken, CESGAR).

9. BANK + GUARANTEE SOCIETY Challenges • G.S. should much more « package » the microcredit in a special product • Go further with the analysis of discretionary success factors, leading to simplified criteria and less administrative burden and cost • Every microcredit should be granted with specialised follow up • Should additional securities be pledged than the personal guarantee of the borrower ? • With Basel 2, « triggering » banks will become more difficult, specially for microloans

10. BANK + GUARANTEE SOCIETYIdeas • Quality follow up: develop the EIF microloan windows with smaller contracts, flexible reporting. • Specialised microfinance global loans of multinational banks (EBRD, EIB, Council of Europe Dev. Bank) could be offered to a joint distribution « Bank + Guarantor » • Banks choosing Basel IRB approach should be allowed to stick to Standardised Approach for their microlending activity : application of the « partial use » rule giving a 75% standard weight

11. BANK + GUARANTEE SOCIETYGood practice : SOCAMA « Prêt Express Européen SOCAMA » • Co-operation Socama + Banque Populaire • 25.000€ and 2 to 7 years maturity for existing craft micro-firms • Simplified assessment (6 criteria) • Full protection : 100% • No collateral taken on private havings, never ! • Interest rate : market rate + 1% • EIF counter-guarantee • Objective : total outstanding value of

12. BANK + GUARANTEE SOCIETYGood Practice : Spanish SGR • €25.000 at 3 to 5 years duration for all types of business with difficult access to finance • No special collateral requirement. • SGR fills in the credit application = no cost for the bank • Distribution through all banks and Saving Banks • Protection 100%, with counter-guarantee 75% of CERSA, itself counter-guaranteed by EIF • Galicia : IGAPE (Promotional institut.) subsidies the premium → int. Rate : 4,75% in 2003.

13. BANK + GUARANTEE SOCIETYGood practice : Finsardegna • Special agreement with Artigiancassa and Regional Banks which agree to lend 20x the deposit of risk funds of the Confidi. • €25.000 for working cap + investm. at medium term, with rate Euribor 3 months +1,5% • Bank file composed by the Confidi which makes the first assessment. Decision in 15 days. • Special handbook for a simple credit evaluation • Risk sharing : 30% bank + 25% local confidi + 10% regional confidi + 35% Artigiancredito Sarda