Commerzbank’s investment in

ProCredit Bank(a leading Global Micro Finance Group)

3rd Consultation on “Rethinking the role of National Development Finance

Institutions in Africa”

Johannesburg branch

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%

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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

All ProCredit Banks in which Commerzbank has a holding:

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ProCredit Micro Finance Banks share similar structures and criteria

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

Initial shareholder structure

EBRD 20 %

20 %

20 %

20 %

20 %*/IPC

KfW/

* ProCredit Holding (formerly IMI) now holds a majority in most of the banks as some IFIs sold their stakes.

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…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

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As an example the branch network of ProCredit Bank Bulgaria

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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)

Key features of business policy

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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).

Target-Group Orientation

An example of the distribution of Loan Sizes in total portfolio of PCB Serbia as of Dec 2005

Sectors

Portfolio by Loan Size (TEUR)Portfolio (Volume) By Sectors

16%

40%16%

28%

Production Trade Agriculture Others

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(Symplified) example of an organisational structure

AuditAudit

BranchesControlling Credit

BranchesControlling Credit

ShareholdersShareholders

Supervisory BoardSupervisory Board

ManagementManagement

Asset - / Liability Management

Asset - / Liability Management Credit CommitteeCredit Committee

Legal Dep.Legal Dep.

Communication & MarketingCommunication & Marketing

ITIT

Credit Dep.Credit Dep.

CFOCFO

TreasuryTreasury

Balance, Accounting, TaxBalance, Accounting, Tax

Controlling & ReportingControlling & Reporting

COOCOO

International BusinessInternational Business

HRHR

AdministrationAdministration

CEOCEO

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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

Provisioning policy

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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

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The South African Retail Banking market offers enormous & challenging opportunities:

Middle class

Salaried working class and self employed

(small business)

Economically Active Poor

(Micro Enterprise)

Very Poor (Survivalist Enterprise)

The ‘Hard Core’ Poor and Destitute

Commercial Banks

Commercial Micro-LoansIndustry

Credit UnionsCooperatives

First Economy

Second Economy

DevelopmentalMicrofinanceOrg. (NGOs)

Existing state Agencies(Khula, Umsobomyu)

State AgencySAMAF

“ProCredit Model”

Commercial Non-commercial

‘True microfinance’ is currently virtually non-existent in SA

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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

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…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

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Integration into International capital markets

Integration into local Capital markets

Establishing full Range of services for ordinary customer, particularly

deposits

Building professional credit institutions

Increase

in operatio

nal complexit

y and need fo

r

professional m

anagement

Contributio

ns to lo

cal fi

nancial m

arket d

evelopment

Strategic path for microfinance providers to ensure access to financial resources and to growth

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Name Contact details

Clive Kellow Commerzbank - Johannesburg Tel: +27 11 328 7601 Email: clive.kellow@commerzbank.com

Eckard von Leesen

Commerzbank - Frankfurt Tel: +49 69 136 23997 Email: eckard.von-leesen@commerzbank.com

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