APPROACH AND METHODOLOGY
Deutsche Bank (DB) has long experience in creating and managing microfinance funds, and will leverage this methodology in the structuring and launch of Global Commercial Microfinance Consortium II ('Consortium II'). Deutsche Bank and its partners intend to launch this fund in February 2012 with approximately $40 million in portfolio placed. The portfolio will ramp up to $100 million over the course of approximately one year. DB's Community Development Finance Group will serve as Fund Manager, originating loans and monitoring them. The loan origination process will involve in-depth on-site and desk due diligence. In addition, DB has partnered with the Smart Campaign, an initiative founded around a core set of client protection principals for microfinance, to enhance its own due diligence process with the goal of ensuring that its review of potential partners incorporates each of the key elements of client protection. The due diligence process also will involve an examination of the MFIs' social commitment and performance as measured by the DB in-house social scorecard. The scorecard will help DB identify the MFIs that are focused on client care, and it will serve as a monitoring tool, administered annually to measure evolution of social performance.
Throughout the selection process, DB will be seeking MFIs that have incorporated their social missions into the fabric of their day-to-day operations in a way that puts the best interest of their clients at the center of their business. For example, these could be MFIs that have achieved the following:
- Developed high quality policies and practices around the Smart Campaign's client protection principles;
- Set both social and financial goals and actively track and report on their achievement of each from the board level to the branch level;
- Developed user-friendly client feedback systems and have acted on the information received through these channels to improve the quality of client service; and
- Worked to develop new products to meet the changing needs of their target client base, such as the high demand for affordable new housing microfinance products.
The due diligence process will identify MFIs' areas of strength and weakness connected to client protection, customer service, and social commitment, and DB will work with each MFI to set targets for improvement. A key factor in determining an MFI's eligibility for the fund will be its willingness to improve areas of weakness and its openness to participating in a Smart Campaign certification.
IMPLEMENTATION, TIMELINE, AND DELIVERABLES
February 2012: Fund launch with at least $40 million placed and all investor funds (~$101 million) identified and committed; minimum investment size of EUR 150,000 ($215,685) with reasonable returns.
May 2013: Fund reaches maximum $100 million portfolio size.
February 2019: Fund matures.
The last year has brought to light several very well publicized examples of harmful microfinance practices that emerged with the industry's rapid growth over the past decade. In certain instances, the pursuit of rapid growth and aggressive profitability goals has overshadowed the social intent of improving the well-being of microfinance's end clients, the original objective of the microfinance movement. The loss of focus illustrated by these isolated cases has hurt the credibility of the industry overall, but while these cases have drawn widespread attention, most MFIs are still working toward social goals and to create positive change in the lives of their clients. At this critical moment for the industry, Consortium II seeks to encourage those MFIs that are implementing practices that reflect high standards of consumer protection and customer service. In doing so, the fund will signal to the marketplace that investors are keen to support this level of social mindfulness on the part of MFIs. Deutsche Bank, with a 14-year history of work in microfinance, believes that microfinance remains an important tool to improve the circumstances of the working poor when it is practiced with a focus on the customer. In launching Consortium II, Deutsche Bank and its partners are structuring a financial vehicle that will highlight, fund, and support those MFIs that are leading the way in ensuring that the focus of the microfinance industry remains on the customer.
The fund breaks new ground in its specific goal to emphasize client care, but it also builds upon a successful CGI commitment that was set forth in 2005: The Global Commercial Microfinance Consortium I ('Consortium I'). In 2005, Consortium I was launched by a group of social investors to meet the need to bring a broader range of investors, including institutional investors, to microfinance and to provide funding to MFIs in local currency. During its five-year term, the $80.6 million Consortium I provided senior debt to 41 MFIs in 24 countries, among them 13 start-up or early stage MFIs and 17 intermediate stage MFIs, while seeking to offer local currency through hedging instruments.