1. responsAbility Social Investments AG
MFI – a risky business?
AMFA conference
Baku, Azerbaijan
October 2012
Viktoriya BYCHENOK

2. responsAbility Social Investments AG

3. Leader in Social Investments
Who we are
Leader in Social Investments
Founded 2003
>1 billion AuM
Products in various asset classes (debt, equity, etc.)
Focus on investment themes: Microfinance, Fair Trade and Emerging Infrastructure
Geographical focus: Developing countries and emerging markets
90 employees
5 offices in Switzerland, France, Peru, Kenya, India
FINMA-regulated asset manager
Strong focus on risk management, transparent reporting und corporate governance

4. Founding Organizations and Shareholders
Origins and Ownership
Founding Organizations and Shareholders
A Global Leader in Wealth Management
Largest Swiss Retail Banking Group
Traditional Swiss Banquier Privé
Traditional Swiss Asset Management Bank Leader in Structured Products
A Global Leader in Reinsurance
A Leading Social Investor
Staff and Management

5. Emerging Infrastructure
Investment Topics
Broad Range of Products
Microfinance
Fair Trade
Emerging Infrastructure
1.1 b USD AuM
50 m USD AuM
50 m USD AuM
responsAbility Global Microfinance Fund
responsAbility Microfinance Leaders
responsAbility Mikrofinanz-Fonds
responsAbility Participations
custom-made mandates
responsAbility Fair Trade Fund
responsAbility Ventures I
responsAbility Press Freedom (Voncert)*
responsAbility BOP Investments**
* structured Product
** closed-end fund

6. Emerging- and Frontier Markets
Investment Universe
Emerging- and Frontier Markets
Current Portfolio
70 Countries
253 Microfinance institutions
45 Fair Trade cooperatives
43 Small and medium-sized enterprises
2.1 Mio people benefit from independent media
potential investment universe
responsAbility local presences
Source: responsAbility Social Performance Report 2012

7. responsAbility’s Investment Process

8. Investment Process Sourcing Screening Investment Decision Investment
Execution
Monitoring
Reporting
Local deal sourcing
Strategic asset allocation
Country and market research
Due diligence
Credit Risk management
Approval investment committee
Portfolio allocation
Feedback and control
Risk Management

9. Risks we assess Country risk Market risk MFI default risk
Political stability
Economic context
Regulation and supervision
Market environment
MFI default risk
Instrument risk:
Asset quality
Operational risk:
Ownership
Governance
Embedded portfolio risk
Sustainability
Controls

10. MFI default risk: ownership and governance (best practice)
Internal Audit
Board of Directors
Audit Committee
Risk Committee
Remuneration and nomination committee
Board Credit Committee
Management
Credit Committee
ALCO
Risk management department …
Internal control department

11. MFI default risk: controls (best practice)
Internal Audit / Internal Control
Independence and effectiveness of Internal Audit Department
Physical cross checks with clients and files
Separate unit of Internal Control/Credit Risk management
Formalized procedures, adequately communicated and available to staff
Trainings
IT system as tool for internal control
Adaptation to the size and operations
Adequate infrastructure and security (data access, recovery)
Real-time information: reporting tool
IT support
External audit
Reputation and quality of report
Frequent change policy

12. MFI default risk: portfolio (best practice)
Client assessment
Adequate repayment capacity analysis
Several levels of credit approval
Client visits before disbursement and monitoring after disbursement
Creditworthiness check via Credit Bureau (clients, guarantors, family)
Separate unit of Credit Risk Management
Rotation of branch managers/credit supervisors
Portfolio diversification
Geographical, risky sector, product, branch, clients’ income source, large clients concentration
Adequate risk management policies in place defining limits
Constant monitoring and forecasting
Product design
Appropriate product design for targeted clientele (type of business)

13. Lessons learned: Central Asia
Account effects of toxic risk combinations
Weak governance and management (including key person risk)
Volatile macroeconomic environment
Absence of sound regulatory framework for microfinance
Difficult political context
High risk appetite
Weak controls
Inappropriate client analysis
Unreliable MIS data
Early warning signs
Deterioration of operating environment
Excessive growth
Possible changes of regulation
Risk related to other assets (placements, subsidiaries, investments)
Worsening economic outlook
Changes of underwriting standards
New products with inappropriate design

14. Thank you for your attention!