FINDING SOLUTIONS TO THE FINDING SOLUTIONS TO THE CURRENCY RISK CHALLENGE FOR CURRENCY RISK CHALLENGE FOR

MFI’s, INVESTORS AND DONOR MFI’s, INVESTORS AND DONOR AGENCIESAGENCIES

GLOBAL MICROCREDIT SUMMIT 2011GLOBAL MICROCREDIT SUMMIT 2011Valladolid, Spain Valladolid, Spain

PilarPilar RamirezRamirezCONFIE Holding SLCONFIE Holding SL

� Local currency funding to MFIs that offer financial

services to low -income people managing microenterprises

and do not have access to commercial banks.

� 400 MFIs in LAC region .

LOCFUND: a response to Market Needs

� 400 MFIs in LAC region .

� International funding for MFIs is still mainly in hard

currencies, while microcredit clients deal in local

currencies.

� LAC countries have not developed efficient derivative

markets.

� Providing local currency denominated instruments to MFIs in the

region that are usually funded in hard currency and whose clients

deal with local currency.

� Approval of loans after a rigorous due-diligence process of the MFI,

specially designed by Locfund.

LOCAL CURRENCY LENDING APPROACH

specially designed by Locfund.

� Technical Support to the MFI in Asset and Liability Management and

FX Risk Management.

� Very close post disbursement follow-up of the MFI.

� LOCFUND manages the FX risk through currency diversification of its

portfolio and uses hedge tools when necessary and where available.

A SUCCESSFUL CURRENCY DIVERSIFICATION MODEL:

LOCFUND manages the foreign exchange risk through a portfolio of assets in various local currencies. Th is has generated positive results in normal times and has helped to avoid losses during crisis periods, based on thr ee main elements:

1. Investment policies that ensure low concentration i n a 1. Investment policies that ensure low concentration i n a single currency, low concentration in the structure of each loan repayment, and low correlation among the open positions in the different currencies that are part of its portfolio of loans.

2. A structure of terms of each loan, where the most important element is the application of variable ra tes aiming to follow trends in the local markets.

3. Application of FX forward transactions where availa ble (in Perú and Colombia).

SUPPORTING ACTIVITIES

1. Permanent analysis of foreign currency exchange systems in each country, ongoing analysis of volatility of exchange rates. It also monitors the correlation of exchange rates and cond ucts an ongoing analysis of macroeconomic trends in each co untry related to economic policies, interest rates, forei gn trade and situation of their international reserves.

2. Simulations of the components that may affect t he market interest 2. Simulations of the components that may affect t he market interest rates are made, and are compared to the variation o f the expected exchange rate, and other elements, in order to have an estimate of the final return of each loan in US dollars during its maturity.

IMPORTANT FINDINGS

• When local currencies have re-evaluated vis a vis t he USD, local interest rates have decreased; the opposite effect has occurred.

• Average correlations in exchange rates among local currencies vis a vis the USD have been consistently low.

.

OPERATIONS and RESULTS:

• Since its beginning in 2007, Locfund has completed 56 loan operations in local currencies in 35 second-tier MF Is in 13 countries of LAC, for a total of the equivalent of US$45 million to date.

• Locfund currently has a portfolio of US$30.718mm in loan operations, in 12 different currencies.

• Loans are structured based on the following factors : the • Loans are structured based on the following factors : the country where the loan is placed, the MFI to receiv e the loan, and local market rates.

• Variable interest rates for loan operations are adj usted every 3 months accompanying local market trends.

• Average interest rates have been declining due to a n overall improvement in risk in LAC countries, as we ll as a strengthening of local currencies.

• Locfund shows positive FX results in three of the four years of operations.

• Locfund’s returns for its investors have been positive in the four years.

• Portfolio return, including FX results for year 201 0 has been 13.49%.

• 2011 is showing increased returns. ROE of 14,3% as of • 2011 is showing increased returns. ROE of 14,3% as of June 2011.

“The resulting total return of the portfolio is attractive for the investors and, at the same

time, the loan operations are highly competitive in the local markets in each

country”

Evolution and Impact Indicators

27

30

33

36

39

42

45

48 Accumulated Dirsbursements (Millions of USD)

Total Disbursements: USD 45,1 Millions

Anual Average: USD 11,2 Millions

Loan Operations: 56

0

3

6

9

12

15

18

21

24

27

May-07

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-09

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

jan-10

Mar-10

May-10

Jun-10

Aug-10

Sep-10

Oct-10

Dec-10

Feb-11

Apr-11

Jun-11

Exposure per country as of June 2011

104 MFIs

approached and in

different stages of

negotiation

34 Microfinance

institutions reached

Paraguay7,69%

Peru13,16%

Nicaragua0,73%

Dominican Republic

El Salvador4,62%

Guatemala3,52%

Costa Rica4,95%

institutions reached

Current portfolio

size: USD 30,7MM

Successful model for

small and medium

MFIs

0,73%Honduras

3,69%

Colombia13,08%

Argrentina2,66%

Ecuador12,72%

Bolivia10,83%

México12,65%

9,71%

USD 45 MM were allocated in 56 loan operations to 34 MFIs in 13 countries

Locfund LP Impact and Developmental Objectives

Locfund provided 43 technical support processes to Microfiance Institutions focused on Assets and Liabilities Management and

Liabilities Management and other areas.

Contact Information

La Paz, Bolivia:Fernando Sánchez

fsanchez@locfund.comAv. Sánchez Bustamante esquina Calle 15

Edificio Torre Ketal, Piso 4 Oficina 404, Calacoto Phone: (591) - 2- 2799046 / 2-2113237Phone: (591) - 2- 2799046 / 2-2113237

Fax: (591) - 2 - 2799290

San José de Costa Rica:Rodolfo Quirós

rquiros@locfund.comCentro Corporativo Plaza Roble,

Edificio El Pórtico, Piso 1, EscazúPhone: (506) 2201-1492

Fax: (506) 2201-1414

Local Currency Fund