EFSE Supporting 16 Economies on their way to growth

Transcription

1 EFSE Supporting 16 Economies on their way to growth Annual report No. 6 AM AM Armenia stands at 6 in the ranking of 189 economies on the ease of starting a business Armenia stands at 6 in the ranking of 189 economies on the ease of starting a business AL

2 our investors Donor Agencies European Investment Fund and KfW as Trustees for the European Commission international financial institutions private institutional investors Versorgungsfonds des Ministeriums der Finanzen Land Brandenburg The fund s other private investors participate via

3 mission mission & CONTENTS The EFSE aims to foster economic development and prosperity in the Southeast Europe region * and in the European Eastern Neighbourhood Region ** through the sustainable provision of additional development finance, notably to micro and small enterprises and to private households, via qualified financial institutions. In pursuing its development goal, the EFSE will observe principles of sustainability and additionality, combining development and market orientations. * Southeast Europe in the context on this Annual Report comprises Albania, Bosnia and Herzegovina, Bulgaria, Croatia, FYR Macedonia, Kosovo (this designation is without prejudice to positions on status, and is in line with UNSC 1244 and the ISJ Opinion of the Kosovo Declaration of Independence), Montenegro, Romania, Serbia and Turkey. ** The European Eastern Neighbourhood region in the context of this Annual Report comprises Armenia, Azerbaijan, Belarus, Georgia, the Republic of Moldova and Ukraine.

4 contents 2 Mission 3 Key Figures Letter from the Chairperson of the Board of Directors 6 Greetings 8 Letter from the Fund Manager and Fund Advisor 10 A macro perspective of MSE finance the European Eastern Neighbourhood Region 14 A macro perspective of MSE finance Southeast Europe 18 A Journey through the regions 20 Belarus 21 Ukraine 22 Moldova 23 Romania 24 Serbia 25 Croatia 26 Bosnia and Herzegovina 27 Montenegro 28 Kosovo 29 Albania 30 FYR Macedonia 31 Bulgaria 32 Turkey 33 Georgia 34 Azerbaijan 35 Armenia AM 36 review of Investment and Development Facility Operations 36 Investment operations 39 EFSE Development Facility Highlights Operational Results 43 Financial statements 46 Investments 49 Funding 51 EFSE Development Facility 54 Development impact 58 Partner lending institutions 61 Appendices 62 Organisational structure 63 Board of Directors and Committees 66 Contacts

5 key figures , active sub-borrowers million euros outstanding subloans million euros investor commitments million euros outstanding investments partner lending institutions per cent share of private capital invested in the Fund per cent share of public capital invested in the Fund Since the EFSE s inception in December , billion euros volume of micro and small enterprise and housing loans disbursed number of micro and small enterprise and home improvement loans billion euros committed investments to partner lending institutions ,000 number of EFSE Development facility projects for institutional capacity building, financial sector support and applied research million euros volume of EFSE Development Facility projects for institutional capacity building, financial sector support and applied research jobs secured or created through the EFSE s investment activities

6 4 Introduction Macro level Journey Review Operational Results Appendices Letter from the chairperson of the board of directors The public-private partnership model remains at the core of the EFSE s success in achieving impact and outreach goals. The effects of the worldwide financial crisis may have eased, but they are still felt in some parts of the EFSE s target regions where unemployment remains at exceptionally high levels. As micro and small enterprises offer a very high potential for job creation, but are also vulnerable to disruptions, the role of the EFSE in financing micro and small enterprises is as crucial as ever. Although demand for additional credit lines in our target countries is growing at a slower pace than pre-crisis, the EFSE set an annual record volume in 2013 with EUR million in loans disbursed. Since its inception in December 2005, the Fund has financed loans to micro and small enterprises and private households in the regions totalling EUR 3.3 billion. The qualitative aspects of the liquidity injected by the EFSE are just as important. Longer tenures and flexible disbursement schedules, combined with subordinated debt to strengthen their capital base, enable partner lending institutions to deepen and broaden the scope of their product offerings to end-borrowers. The EFSE Development Facility, which operates hand in hand with the Fund s investment management, assisted partner lending institutions in improving credit approval process, helping them to better adjust to new economic realities and to remain on track even in challenging times. This close cooperation between the Development Facility and the Fund has led to broader and deeper institutional capacities for serving the final target group as well as to a loan portfolio with one of the lowest impairment levels of the industry. In an effort to further enhance impact and outreach, the EFSE Development Facility launched a comprehensive impact study in 2013 spanning over three years and five sub-projects. We expect to receive first insights, which will undoubtedly inform the Fund s investment strategy, already in The study is also innovative in that it actively involves all stakeholders and provides a platform for joint discussions and conclusions. In addition, the EFSE Development Facility managed 65 projects totalling EUR 3.7 million in 2013 up from 47 projects with a total volume of EUR 2.5 million in In view of the opportunities it creates for facilitating both access to financial services and lower transaction costs for clients and financial institutions alike, mobile banking remains high on the EFSE Development Facility s agenda. In 2013, the EFSE s 71 partner lending institutions a new record were able to propel the on-lending rate for EFSE investments to new heights. The EFSE aims to further generate impact at the development finance frontier by promoting the local currency agenda in our target markets, by providing risk capital in the form of subordinated loans and equity, and by promoting innovative approaches in mobile banking and agricultural lending. At the same time, we fully support the resurgence in housing finance. As the only microfinance fund to also finance housing loans, the EFSE has become one of the main providers of housing finance in the region, having provided more than 30,000 housing loans since its inception in The EFSE s commitment to housing finance is founded on four principles: first, decent shelter is a human right and hence part of the EFSE s core mission; second, investments in home construction and improvement create jobs in the local economy; third, creating and preserving

7 EFSE Annual Report real estate provides a long-term asset for the households taking out these loans; and fourth, modernization of housing leads to a reduction in energy consumption and CO 2 emissions, thus helping to counterbalance the effects of climate change. On the funding side, the EFSE benefitted from strong growth in private sector contributions both new and revolving investments that brought capital commitments to an all-time high of EUR 962 million. Funding in US dollars especially gained momentum with a 96.6 % rise to close to USD 212 million. The public-private partnership model at the core of the EFSE consistently proves to be the most effective approach for achieving the Fund s goals, both qualitatively and quantitatively. We remain committed to staying the course whilst maintaining the capability to adapt to new events and meet the multiple expectations of all our stakeholders. As micro and small enterprises offer a very high potential for job creation, but are also vulnerable to disruptions, the role of the EFSE in financing MSEs is as crucial as ever. Monika Beck

8 6 Introduction Macro level Journey Review Operational Results Appendices greetings The EFSE lives up to its key role of supporting EU development goals The EU s enlargement proceeds and continues as underlined most recently by the accession of Croatia on 1 July In the same year, Serbia was granted candidate country status and then started accession negotiations, joining other Southeast Europe countries such as Montenegro and Turkey. A successful accession process depends on a number of political and economic factors linked to the accession criteria. One of the necessary preconditions is the existence of a healthy financial sector with firmly anchored institutions to facilitate and guide investment, to prepare and maintain the ground for a sustainable and, more importantly, self-propelling economy. Here, the role of the European Fund for southeast Europe is evident. Since its inception in December 2005, three of the Fund s 16 target countries have joined the EU and accession negotiations with three more are underway. The EFSE consistently lives up to its role as a stabilising, supporting and driving force for economic growth built on entrepreneurship, job creation and innovation. EFSE investments in an expanding target region have grown from EUR 68 million at its start eight years ago, to EUR 826 million for the benefit of more than 470,000 end-borrowers. This led to the creation of 460,000 jobs covering trade, service, production and the agricultural sector, thus significantly paying in to the economic stability of the region. The success of the EFSE has also been confirmed by the EU s comprehensive Results-Oriented Monitoring system for EU projects, which attested the EFSE an A rating in all relevant metrics relevance, efficiency, effectiveness, impact and sustainability. Štefan Füle European Commissioner for Enlargement and European Neighbourhood Policy

9 EFSE Annual Report As trusted and capable an ally as ever in the pursuit of a common mission The year 2013 has again proved that the Federal Ministry for Economic Cooperation and Development could not have a better ally in promoting employment creation, providing decent shelter via public-private partnership investments, and enhancing financial sector development in Southeast Europe and the European Eastern Neighbourhood Regions. The EFSE more than lives up to its mission of fostering micro and small enterprises the backbone of local economies by facilitating ready and reliable access to the credit needed to grow businesses and create jobs. One of the EFSE s great success stories in 2013 has been the partnership with Agricover Credit in Romania, which benefited from both the funding and the technical assistance provided by the Fund. As Agricover not only offers farm equipment and input goods for agricultural production, but also financing via Agricover Credit Bank, farmers get everything from one source and can be sure that the financing conditions reflect their seasonal cash-flow and payment capacity. This also aptly illustrates how the EFSE consistently practices the Responsible Finance it preaches, and how it integrates environmental and social guidelines into its strategy. The BMZ supports the EFSE s increased focus on rural development, particularly through agricultural lending. In 2013, over 42,000 loans totalling close to EUR 200 million were issued to micro and small farming operations, representing 35 % of all the loans granted to enterprises and 20.1 % of total lending a remarkable achievement. The EFSE and its inclusive approach to development finance, combined with hands-on technical support for partner institutions that channel EFSE funds, are enabling the BMZ to achieve its goals in support of developing economies more efficiently and more speedily. Dr. Gerd Müller German Federal Minister for Economic cooperation and Development Source of picture: Bundesregierung / Kugler Aligning the components of success in development finance When we stood by its cradle in 2005, the European Fund for Southeast Europe pioneered the concept of leveraging public funding to attract private capital for development finance. Since then, the EFSE has taken the public-private partnership model to new heights, funding more than 470,000 sub-loans totalling EUR 3.3 billion in its target regions since the Fund s inception with more than 121,000 sub-loans with a total volume of EUR 1 billion disbursed in 2013 alone. Despite continued turbulence in some target countries, the EFSE remains a source of strength and stability. Prudent investment decisions, timely and effective risk monitoring, and targeted technical assistance to partner institutions all contributed to further improving its portfolio quality with a record low level of 0.5 % for the impairment ratio and no realised losses since the start of operations. The EFSE s investment strategy is informed by intensive research. Insights into the risks associated with foreign currency loans, for instance, led to concrete recommendations for shifting towards local currency lending. While these efforts are already bearing fruit, the EFSE Development Facility is conducting a long-range study to gauge the Fund s development impact and outreach. Invaluable guidance also comes from the twice-yearly meetings of the EFSE Advisory Group, which bring together the regions central bank governors and their representatives to exchange views and contribute to shaping the agenda. KfW sees the EFSE as a blueprint for successfully interlinking the different components of effective development, and achieving real returns, both financially and in terms of impact, for all stakeholders. DR. NORBERT KLOPPENBURG Member of the Executive Board of KfW Bankengruppe

10 8 Introduction Macro level Journey Review Operational Results Appendices Letter from the Fund Manager and Fund Advisor Qualitative growth probably best captures the focus of Fund Management activities during Despite the challenging environment, the EFSE s outstanding portfolio, invested in 71 partner lending institutions, grew to close to EUR 830 million. Even more noteworthy, however, are the dynamics behind these figures. First, around one quarter of the total portfolio was effectively repaid during 2013 and successfully placed again in new investments. The outcome was a record EUR 245 million in approved investments. Second, the EFSE welcomed nine new partner lending institutions over the course of the year, clear evidence of our active portfolio management approach to incorporate new clients with diverse institutional profiles who will responsibly provide financing to the Fund s ultimate target group. Furthermore, Fund Management efforts concentrated, on the one hand, on enhancing development impact whilst controlling portfolio risks on the other. We are particularly proud that all the investments granted to partner lending institutions were almost fully on-lent by year s end. Our partner lending institutions disbursed more than 121,000 sub-loans averaging slightly more than EUR 8,500, they clearly benefited micro and small enterprises for a total volume of EUR 1 billion. The agricultural sector in particular saw a significant uptick this year, accounting for one third of all loans and about 20 % of the total volume disbursed to micro and small enterprises. We see this as the result of well-designed financial products and efficient service delivery mechanisms, to which the EFSE Development Facility contributed significantly through tailored capacity building projects. The EFSE Development Facility closed a record year with 65 projects under management with a total budget of EUR 3.7 million. In addition to enhancing the development impact of our investment and technical assistance activities, the Fund Management was engaged in intensive risk monitoring and portfolio restructuring. As a consequence of our pro-active and hands-on risk management, the level of impairments in the portfolio dropped by half to only 0.5 % at year-end compared to one year ago well below the industry average. At the same time, it is worth noting that the Fund, completing its eighth year of operations, has never realised any losses. None of these results and achievements would have been possible without the continuous support and guidance provided by the Board of Directors and the various committees, for which we are deeply grateful. Finally, we also feel very privileged by the outstanding partnerships that have evolved over the past years with the diverse group of stakeholders of the Fund investors, partner financial institutions, central banks and other financial sector institutions. We therefore feel very well equipped to continue to provide significant funding and support to further strengthen and expand the fabric of micro and small enterprises in the EFSE s target regions in the years to come.

11 EFSE Annual Report MAX VON FRANTZIUS SYLVIA WISNIWSKI THOMAS ALBERT ELVIRA LEFTING CLAUDIA DAMBAx FLORIAN MEISTER Managing Director, Oppenheim Asset Management Services Managing Director, Finance in Motion Managing Director, Oppenheim Asset Management Services Managing Director, Finance in Motion Senior Associate, Oppenheim Asset Management Services Managing Director, Finance in Motion

12 10 Introduction Macro level Journey Review Operational Results Appendices A macro perspective of MSE Finance the European Eastern Neighbourhood Region by Professor Adalbert Winkler * Micro and small enterprises: the backbone of a market economy It is a common saying that micro and small enterprises (MSEs) represent the backbone of any market economy. In most countries these businesses usually account for more than 90 % of all enterprises and more than 50 % of employment. Moreover, MSEs are widely regarded as the engine of growth, development and innovation due to their alleged flexibility and entrepreneurial orientation. Modern empirical research suggests that most MSEs start and stay small, i. e. that the traditional view of MSEs and their contribution to economic growth applies only to a small number of MSEs the so-called gazelles. However, a healthy MSE sector overall remains a key prerequisite for any successful and stable market economy. Given the legacy of state planning in the countries of the European Eastern Neighbourhood Region (ENR), i. e. Armenia, Azerbaijan and Georgia (the Caucasus), as well as Belarus, Moldova and Ukraine, the emergence and development of MSEs is of even greater importance than in mature market economies. It is against this background that public policies as well as private-public partnerships, such as the European Fund for Southeast Europe, aim at supporting MSEs, concretely by facilitating MSE access to credit. yet a market economy is what provides the background for MSE development MSEs do not operate in a vacuum. Rather, as much as they influence growth and development, they, too, are exposed to macroeconomic conditions and outcomes. Whether the economy is growing in real terms at 5 % p. a. or more will decide on the success or failure of MSEs. Strong growth makes it easier to sell products and services, generate revenues and build up capital. Moreover, in good times, banks and other financial service providers are more inclined to engage in providing finance to MSEs at reasonable terms. Conversely, in a recession it is more difficult to ensure an adequate level of retained earnings. In addition, banks and other investors become more risk averse; credit constraints for MSEs are even more pronounced than in normal times. Access to finance becomes even more impaired if the recession is coupled with a financial crisis, when not only banks, but also bank investors and depositors become more risk-averse and new funding pressures loom over the banks. Crisis and MSE development two views This being said, there are two opposing views on the impact of a crisis on MSE development and subsequent contribution to a dynamic economy. On the one hand there is the view echoing the arguments just made: a crisis puts a special burden on MSE development because MSEs are given their size inherently fragile and, due to their often specialised product portfolio and focused regional orientation, more vulnerable to shocks. The other view holds that MSEs might benefit from tough macroeconomic conditions because at least in a comparative perspective they are more nimble and flexible than larger companies, which makes it easier for them to adapt to changing circumstances. Some also subscribe to the Schumpeterian view of creative destruction, according to which a recession creates fertile ground and opportunities for small businesses to replace obsolete technologies and products, and effectively take over from the industry dinosaurs represented by large corporations. * Adalbert Winkler is Professor of International and Development Finance at the Frankfurt School of Finance & Management.

13 EFSE Annual Report Chart 1 Real GDP in the ENR per capita = Armenia Azerbaijan Belarus Georgia Moldova Ukraine Source: IMF, own calculations Macroeconomic development in the European Eastern Neighbourhood Region converging to stagnation? Applying this perspective to the ENR is not easy, as economic development has been quite heterogeneous. Chart 1 shows that Armenia and Ukraine experienced a deep post-lehman recession, whilst the downturn was more subdued in Belarus, Georgia and Moldova. In Azerbaijan, reflecting the economy s reliance on natural resources, notably oil extraction, there effectively was no noticeable decline in output growth in Moreover, the chart also shows that recovery patterns were far from uniform. For example, whilst real GDP per capita in Ukraine is still far below pre-crisis levels, Armenia is back to real GDP figures recorded in Despite facing great turmoil in 2009, Georgia s growth performance over the whole post-crisis period has been so strong that, in relative terms, the post-2008 growth process has been more dynamic than in Azerbaijan. However, in 2012, and even more so in 2013, there was a notable convergence of growth patterns across the region, i. e. a decline in the differences. This move towards convergence has been accompanied by a decline in the average growth rate of the countries under review: in 2012 and 2013 real GDP growth was below 3 %, down from around 5 % in 2011 and Whilst projections made before recent events in Ukraine suggested that average growth would pick up slightly in 2014 by about one percentage point, the political turmoil in Ukraine is likely to make these projections obsolete.

14 12 Introduction Macro level Journey Review Operational Results Appendices Chart 2 Private sector credit to GDP ratio in the ENR IN % Armenia Azerbaijan Belarus Georgia Moldova Ukraine Source: EBRD, World Bank (Moldova ), central banks (2013 figures), IMF, and own calculations The outlook for growth domestic demand and private sector credit Given the slowdown in growth and stagnating per capita income, domestic demand is not likely to be stimulated by consumption. This holds true even though until end-2013 a continuous flow of remittances supported spending by private households. Moreover, given rising government debt levels in all countries under review, in particular in Armenia and Ukraine, there is barely room for fiscal expansion. Thus, within the domestic demand components, investment would have to support growth. However, in contrast to the pre-crisis period, the credit boom is not only over, but in some countries, i. e. Ukraine and Belarus, substantial deleveraging has taken place (Chart 2). This is also reflected in high non-performing loan ratios for several countries within the region as a legacy of the previous boom-bust cycle and the slow recovery. Finally, credit conditions are not likely to improve given the spillovers of monetary tightening in the United States to emerging markets in general. Political upheaval in Ukraine and its potential implications for the region as a whole have added an exacerbating local component to this aspect.

15 EFSE Annual Report Chart 3 Current Accounts in the ENR IN % Armenia Azerbaijan Belarus Georgia Moldova Ukraine Average Average Source: IMF (World Economic Outlook Database, October 2013), own calculations Outlook will exports drive growth? Given the dismal prospects for domestic demand, countries of the ENR might have hoped for a revival of external demand as a source for growth. Indeed, Armenia, Belarus and Ukraine recorded, on average, higher current account deficits in the post-crisis period than in the pre-crisis period (Chart 3), a clear indication that the external dimension of regional growth is far from satisfactory. With the end of the recession in Europe and the projected further expansion in the United States, the outlook for a pick-up in demand for exports from ENR countries seemed promising. However, positive signs from mature economies are counterbalanced by comparatively low growth in emerging market countries, notably Russia. The political and economic fallout of recent events in Ukraine might even lead to a worsening outlook, reflecting the importance of the Russian market to the region, not only with regard to exports but also as a source of remittances. Conclusion: MSE development in a volatile macroeconomic environment MSEs are the backbone of any market economy, but macroeconomic developments have a substantial impact on MSE activities. In recent years MSEs in the ENR have been facing a diverse macroeconomic environment ranging from deep recessions related to financial crisis to booms reflecting high oil prices, from strong post-crisis recovery to a low growth trajectory. For 2014, early projections indicated a transition towards a somewhat stable but low growth scenario in all countries. The events in Ukraine effectively nullify these projections. Hence, MSEs are confronted with yet new challenges that will test their flexibility and expose their vulnerabilities or strengths.

16 14 Introduction Macro level Journey Review Operational Results Appendices A macro perspective of MSE Finance Southeast Europe by Velimir Šonje * Different economic realities in the region Southeast Europe (SEE) was severely hit by the European economic crisis. The second leg of the Great Recession (2012 / 13) limited external demand and capital inflows after the initial negative shock in late However, the negative impact was very different across countries. Turkey recorded the highest growth rate since 2011, the size of its economy and long-term growth prospects helping to sustain the investment boom financed by globally more diversified sources of capital inflows in comparison to other SEE countries. Among other SEE economies, only Kosovo and Albania achieved 2 % or better growth, on average, for The above-average economic growth of these two countries was due to their low starting point and continued financial inflows, which were reflected in current account deficits that remained high at 10 % of GDP. FYR Macedonia and Montenegro, by contrast, recorded growth rates between 1 % and 2 %. The rest of the region experienced very low growth or prolonged recession (Table 1). Stalling capital inflows were most obvious in Croatia and Bulgaria where no significant deficits of the current account of the balance of payments occurred in the last couple of years. However, this does not suggest that the revival of capital inflows (and associated external deficit) is a necessary ingredient for rekindling economic growth. The experience of Bosnia and Herzegovina, Serbia and Montenegro since 2011 shows large deficits of the current account of the balance of payments (associated with capital inflows) without high rates of economic growth. Therefore, the absence of a growth dynamic across most of SEE should be attributed to fundamental factors other than capital inflows. Indebtedness, financial market imper fections and institutional Weaknesses as obstacles to growth The three obstacles to economic growth in SEE discussed here are indebtedness in sectors that had easy access to finance during the cycle s last boom phase, financial market imperfections, and institutional weaknesses. First, indebtedness is still relatively high in vital economic segments across the region. The vital segments are governments and large corporations that had easy access to finance during the last boom cycle. Government debt to GDP ratios (43.4 % on average) are relatively high for medium income countries (Bulgaria being the notable exception). Private debt (mainly corporate debt) is also relatively high given the income per capita: bank loan to GDP ratios average 56.7 %. However, there is a relatively small share of lending to households everywhere except Croatia. Therefore, a reduced capacity to raise additional debt within sectors that had easier access to banks in the past will continue to limit debt-related capital inflows in the future. This, however, does not apply to households in most countries in SEE. * Velimir Šonje is Director of Arhivanalitika, a consultancy based in Zagreb, Croatia. He worked as a macroeconomic and financial consultant on projects in Croatia, Bosnia and Herzegovina, Montenegro, Romania and Ukraine.

17 EFSE Annual Report Table 1 MAIN MACROECONOMIC INDICATORS for SEE, AVERAGES Population in million GDP PER CAPITA at PPS * in % of EU average Real GDP growth rate in % Total investment as % of GDP Gross national savings rate as % of GDP BoP ** current account balance as % of GDP Gross government debt as % of GDP Unemployment rate in % Inflation rate in % Albania Bosnia and Herzegovina Bulgaria Croatia Kosovo n/a n/a 3.4 n/a n/a 10.6 n/a n/a 4.0 FYR n/a macedonia Montenegro n/a 3.2 Romania Serbia Turkey SEE average Source: IMF (World Economic Outlook Database, October 2013, data for 2013 are IMF s forecasts, Eurostat (for GDP at PPS per capita) * Purchasing power standard ** Balance of payments Universal commercial banks dominate financial sectors whilst international banking groups dominate local banking systems (Turkey is a notable exception, see Table 2). Given the advanced stage of international banking integration, it is tempting to conclude that banking sector problems in Europe led to a sudden stop of capital flows via international banks, which severely slowed down economic growth across the region. Following this logic, the recovery of European banks, which will hopefully follow the forthcoming Banking Union within the EU, will help revive capital inflows via banks and bring credit flows back to former levels. However, this narrative is too simple in terms of providing a complete picture of economic growth and financial development prospects. In gauging these prospects, the imperfect mechanisms of capital allocation in SEE, which is the second main impediment to economic growth, must be taken into account. Banks and members of international banking groups served the bankable segments of local markets too well before the crisis. For this reason, large debtors facing the prolonged recession or low growth environment have an immediate need for more capital and/or debt restructuring. As far as new capital is concerned, this is where local capital allocation mechanisms proved dysfunctional, reflecting weak capital markets, low venture capital availability (see Table 2) and a lack of focus on smaller, healthy businesses on the part of large banks. Some segments of the micro and small enterprise (MSE) sector and low-income households were financially underserved during the previous boom cycle. The future of banking in the region, therefore, is mainly associated with retail and MSE lending, coupled with financial development programmes that should lead to a greater supply of equity. The future also lies in supporting larger companies with a potential for faster growth in international markets.

18 16 Introduction Macro level Journey Review Operational Results Appendices Table 2 SEE FINANCIAL AND INSTITUTIONAL INDICATORS Share of foreign-owned banks in % of assets Commercial bank branches per 1,000 km 2 Deposits as % of GDP Bank loans as % of GDP Bank loans to households as % of GDP Albania Bosnia and Herzegovina Bulgaria Croatia Kosovo n/a FYR Macedonia Montenegro Romania Serbia Turkey SEE average Sources: EBRD survey on share of foreign banks (2011 data), IMF s financial access survey on bank branches, deposits and loans to GDP (latest data available included in the table), World Economic Forum Global Competitiveness Index for ease of access to credit and venture capital availability indices, IFC / The World Bank Doing Business report (country ranking for credit access, registering property, enforcing contracts and resolving insolvency) Weak institutions represent the third impediment to economic growth in SEE. Promoting risk-taking and swift reallocation of capital and labour where they can be best utilised requires a well-functioning institutional environment. This includes labour market regulation that does not discourage official employment, swift insolvency and bankruptcy procedures and the like. Whilst the problems with corruption and weak democratic institutions across the region are well known, the focus here is on the economic institutions that are crucial to the smooth functioning of the financial sector. Easier access to credit, according to the IFC / World Bank Doing Business 2014 report, is not a problem because the average ranking of SEE countries is 38 th out of 189 countries included in the ranking (see Table 2). However, three institutional aspects directly related to capital reallocation and debt restructuring prove problematic: the average SEE country ranks 79 th with regards to registering property; when it comes to enforcing contracts, SEE countries rank 94 th on average; and the average rank with regard to effective insolvency proceedings is 84 th among the 189 countries in the Doing Business survey. Economic recovery seems to be around the corner In spite of weaknesses and shallow growth, economic recovery is around the corner according to the IMF s Autumn 2013 forecasts. Each SEE country is expected to grow at 2 % or faster on average throughout However, these growth rates are relatively low in view of the high growth rates achieved prior to 2009 and bearing in mind the income per capita gap vs. the EU average. This gap ranges from approximately 30 % of the EU average in Albania and Bosnia and Herzegovina to 62 % of the EU average in Croatia. The prospects of reducing the development gap in the years to come will mostly depend on institutional reforms and on the ability to correct financial market imperfections.

19 EFSE Annual Report Ease of access to Credit * Venture capital availability * Credit Access Country Rating ** Registering property country ranking ** Enforcing contracts country ranking ** Resolving insolvency country ranking ** n/a n/a * 1 7, with 7 being the most desirable outcome ** total 189 countries Figure 1 Estimated AVERAGE GDP GROWTH RATES IN SEE in percent Kosovo Turkey FYR Macedonia Bosnia and Herzegovina Romania Albania Montenegro Serbia Bulgaria Croatia Source: IMF s Autumn 2013 Economic Forecast Encouraging risk taking and conducive policies are essential for economic development In conclusion, weak capital markets within a still-developing institutional framework impose high transaction costs and discourage risk taking and capital reallocation. This deficiency is one of the major obstacles to closing the development gap with the EU. Some of the well-known recommendations for real convergence by attracting foreign direct investment still have the potential to facilitate economic growth and employment in SEE, especially when considering the relatively low labour costs in the region. However, the internal capacities for economic dynamism within SEE countries must be roused and strengthened. Risk taking should be encouraged; capital should be permitted to enter and exit economic activities freely and swiftly in the process of creation and creative destruction. Availability of risk capital should be substantially increased. Policies should aim at improving institutions, protecting property rights, reducing bureaucracy and transaction costs, and supporting growth of MSEs. Each and every private venture, no matter how small, is important in this respect. Here, access to finance is vital because the future of SEE, to a not insignificant degree, rests on entrepreneurial spirit.

20 18 N W E S MD moldova 3 romania 4 croatia 6 serbia 5 bosnia and herzegovina 7 montenegro 8 kosovo 9 albania 10 Bulgaria 12 AL FYR macedonia 11

21 EFSE Annual Report A journey through the regions Belarus 1 The EFSE aims to foster economic development and prosperity in 16 countries in Southeast Europe and the European Eastern Neighbourhood Region. These countries lie like a string of pearls in the centre of the continent, each with its individual profile. The following pages showcase the key successes of the EFSE and the EFSE Development Facility in each of these countries throughout ukraine 2 tr az georgia 14 turkey 13 azerbaijan 15 armenia 16

22 20 Journey through the regions 1 Belarus Minsk by Muzaffar Zukhurov Principal Banker, EBRD Loan Syndications Department 5 by Belarus EFSE and EBRD join forces in syndication Belarus ranks 5 th worldwide by patent activity, indicating a very high scientific and technical potential. The EFSE continued to support private micro and small enterprises (MSEs) in Belarus by syndicating with the EBRD to build capacities at its partner lending institution there, Belgazprombank, to provide sustainable financial products to the MSE market. The EUR 30 million credit facility, with the EFSE s participation totalling EUR 20 million, is the second syndicated loan between the EFSE and EBRD. the European Fund for Southeast Europe is one of the key non-bank participants in the EBRD B loan program in the financial institutions sector, having already participated twice in EBRD B loans in the past, in Moldova and Belarus. The EFSE has played an important role for EBRD in its co-financing efforts in countries where attracting foreign private capital from traditional commercial banks is more challenging. The EFSE brings together private and public sources of financing to provide sustainable funding to micro and small enterprises in Southeast Europe, and its ability to provide medium-term financing alongside EBRD makes it a very welcome lender for borrowers who are otherwise able to raise only short-term funding from traditional commercial banks. EBRD s A / B loan structure is one where EBRD remains the lender of record for the entire commitment, and commercial banks and other institutional investors derive benefit from the EBRD s preferred creditor status by participating in the B loan. EBRD itself is not part of the syndication and provides finance via the A loan only. The participation agreement will transfer all risks to the participating B lenders who share preferred creditor status. Muzaffar Zukhurov, Principal Banker, EBRD Loan Syndications Department Area: 207,595 km 2 Minsk currency: Belarusian ruble (BYR) Population (2013): 9.6 million GDP (2013, nominal): EUR 50 billion

23 Journey through the regions 21 2 Ukraine Kyiv Ukraine Promoting financial literacy in partnership with NABU The EFSE Development Facility (DF) supported a pertinent initiative of the independent Association of Banks in Ukraine (NABU) in Launched in cooperation with KfW Development Bank, NABU s financial literacy initiative addressed the information gap between financial institutions and the general public. During the course of the project, the EFSE DF sponsored the development and printing of a brochure on the topic of financial services for elderly people. The brochure was presented to all 80 NABU member banks and subsequently distributed throughout the Ukraine. EFSE DF funds were also used to co-sponsor a series of trainings, workshops, press conferences and open-house events (mainly at banks) as well as financial education sessions for schoolchildren. Kyiv GDP (2013, nominal): EUR 127 billion Area: 603,628 km 2 Population (2013 estimate): 44.6 million currency: Ukrainian hryvnia (UAH) UA 1 UA Ukraine has the best black soil in Europe and therefore a strong agricultural potential.

24 22 Journey through the regions 3 Moldova Chis ina u md Mobile Signature project: The Moldovan government received the Best m-government Award for its mobile signature project at the annual GSMA Mobile World Congress in md Moldova BUILDING MICROINVEST S CAPACITIES TO ADDRESS THE RURAL MARKET The Republic of Moldova is the 7 th country in the world where citizens can store an electronic signature on their mobile phones. Given the various challenges the Moldovan financial sector has to overcome, the EFSE emphasised combining investments with targeted technical assistance (TA) to support individual institutions in internal process optimisation and in institutional capacity building. The EFSE s partner lending institution Microinvest benefitted from a large-scale TA project to enhance its sales management capabilities and to achieve greater efficiency and scale. The dedicated consultancy was accompanied by a senior rural loan facility that enables Microinvest to provide financial support to micro and small enterprises (MSEs) in rural areas, individual farmers and agricultural producers. Microinvest is one of the few microfinance institutions in Moldova to serve rural MSEs, ensuring access to finance for entrepreneurs and agricultural businesses countrywide. The main achievements of the TA project were the successful integration of the sales force effectiveness concept in Microinvest s daily operations and the extensive sales tool training for 70 staff members. The people at Microinvest quickly demonstrated a strong sense of ownership with the TA project; the knowledge transfer is expected to have a sustainable impact on the institution. A new project with Microinvest is scheduled for early 2014 with a key focus on financial planning and management capacities, specifically with regard to local currency funding. currency: Moldovan leu (MDL) Area: 33,846 km 2 Chisina u GDP (2013, nominal): EUR 6 billion Population (2013): 3.6 million

25 Journey through the regions 23 4 romania Bucharest Romania SUBORDINATED LOAN TO BANCA transilvania STRENGTHENS CAPITAL BASE FOR ON-LENDING In view of the challenging operating environment in Romania, which is reflected in the deteriorating asset quality of its financial sector, the EFSE has focused on the areas where it can achieve the highest possible impact. One such opportunity in 2013 was to contribute towards strengthening the capital base of one of Romania s leading banks, Banca Transilvania. An EFSE partner lending institution since 2006, Banca Transilvania will leverage a EUR 15 million subordinated loan through on-lending to micro and small enterprises (MSEs) throughout Romania. Over the years, the EFSE has time and again proved a valuable partner, providing our bank with long-term funding facilities that helped us to offer attractive financing solutions to our customers. Our partnership has a long history, having started in 2006 with a EUR 10 million housing loan agreement. Other notable projects helped to strengthen Banca Transilvania s capital base via three subordinated loan agreements. Besides indirect funding to the MSE sector in Romania, the EFSE also contributed to enhancing micro and small enterprise business management by preparing an educational booklet on the risks inherent to foreign currency borrowing. We appreciate the EFSE s involvement in and its commitment to our region, and we look forward to continuing our outstanding cooperation. Omer Tetik, CEO, Banca Transilvania S.A. ro GDP (2013, nominal): EUR 133 billion Area: 238,391 km 2 currency: Romanian new leu (RON) Population (2013): 21.3 million Bucharest ro 3.5 % Romania posted one of the highest GDP growth rates in the EU in 2013 with 3.5 %.

26 24 Journey through the regions 5 Serbia Belgrade Serbia Intesa Leasing GROWING THE LEASING SEGMENT In Serbia, the EFSE established a new partnership with Intesa Leasing Belgrade through a EUR 5 million loan. Intesa Leasing leverages the nationwide network of its parent, Banca Intesa Belgrade, a long-standing EFSE partner lending institution, to provide much-needed long-term finance to fuel the growth of micro and small enterprises (MSEs) as well as agro producers. Intesa Leasing Belgrade is proving very effective at helping these customer segments to overcome the barriers posed by the collateral requirements of traditional commercial bank financing. Intesa Leasing Belgrade was also the first to offer local currency leasing in Serbia, thus significantly contributing to the promotion of financial products in local currency. At first, the company was focused only on financing new passenger and commercial vehicles. By the end of 2006, however, the scope of business was expanded to cover the financing of plant and equipment and in 2013 to the lease of commercial buildings. Intesa Leasing Belgrade also recognised the numerous challenges of the economic crisis, which confronted all the participants in the financial markets, in time, and shifted its financing focus towards production equipment and commercial vehicles. This immediately reduced exposure to the risks and problems that the passenger car industry was facing then and still faces today. Intesa Leasing Belgrade also places a strong emphasis on the MSE segment, i. e. primarily family-owned businesses in manufacturing for exports or services such as domestic and international logistics. It is precisely this client segment, recognised as the healthiest part of the company s corporate sector, which proved to be the most resilient. These businesses faced the crisis by redoubling their efforts, making new investments and improving their efficiency. The synergies Intesa Leasing Belgrade achieved with these clients, by supporting them financially in the most difficult times, contributed significantly towards establishing long-term cooperation and partnership relations and towards positioning Intesa Leasing Belgrade as a leader in long-term financing for plant and equipment as well as for commercial vehicles. currency: Serbian dinar (RSD) GDP (2013, nominal): EUR 32 billion Belgrade Population (2013): 7.2 million Area: 77,474 km 2 RS RS 20.9 % Average capital adequacy of banks in Serbia was 19.9 % as at Q

27 Journey through the regions 25 6 croatia Zagreb HR HR 47 Croatia ranks 47 out of 187 in the UN Human Development Index, which makes it no. 1 amongst the EFSE target countries. Zagreb GDP (2013, nominal): EUR 43 billion Area: 56,594 km 2 currency: Croatian kuna (HRK) Population (2013): 4.4 million Croatia Zagrebacǩa banka participates in the Micro & SME Banking Summer Academy Zagrebac ka banka (ZABA) is the EFSE s first partner in Croatia and is very much aware of its role in contributing to economic development by supporting entrepreneurship, particularly for micro and small enterprises (MSEs) in the country. Small business clients are served through a close-knit network of 131 branches and 60 entrepreneurial centres with MSE-dedicated staff. The EFSE s credit line enables ZABA to further explore new opportunities and create new products in the MSE segment. The logical next step was for the EFSE Development Facility to facilitate a training programme for key ZABA personnel on developing and implementing products specifically destined for the MSE segment. Upon their return to Croatia, the three ZABA delegates actively shared their know-how throughout the bank s branch network, enabling relationship managers to in turn present new products to MSE clients as well as to better recognise and address the needs of this target group.

28 26 Journey through the regions 7 Bosnia and Herzegovina Sarajevo BA BA 92.6 % 92.6 % of enterprises in Bosnia and herzegovina belong to the MSE sector. Bosnia and Herzegovina Boosting the strategic cooperation between an MFI and a commercial bank Despite the difficult economic times and increasingly evident strategic challenges for the microfinance industry in Bosnia and Herzegovina, the EFSE continued to facilitate access to finance for micro and small enterprises (MSEs) in the country through these important socially oriented conduits. The thrust of these efforts was focused on Mikrofin Group, an EFSE partner lending institution in Bosnia and Herzegovina, in the form of both financial and, via the EFSE Development Facility (DF), capacity building support at its two specialised institutions: the microfinance institution Mikrofin and the commercial bank MF banka. Providing a choice to MSEs, expanding the financial services to them and leveraging the strength of both institutions, namely the finance company Mikrofin and the bank MF banka, was the key objective for the EFSE. The EFSE is proud, especially in these difficult economic times, to support an institution that strives to defy the conventional thinking and is consistently making headway in the right direction. currency: Convertible mark (BAM) Area: 51,197 km 2 the idea to integrate the financial support for MSEs under one roof proved to be exactly what our customers needed. The benefits of such cooperation between the leading microfinance institution and a commercial bank are numerous, both for the two institutions and for their respective clients. This, however, would not have been a success without the understanding and continuous support of the EFSE, our long-term partner. Aleksandar Kremenovic, Chairman of Mikrofin Group Sarajevo Population (2013): 3.9 million GDP (2013, nominal): EUR 14 billion

29 Journey through the regions 27 8 Montenegro Podgorica Montenegro Hipotekarna BANKA receives Technical Assistance for MSE lending In 2013, the EFSE Development Facility provided Hipotekarna Banka in Montenegro with technical assistance (TA) in the area of micro and small enterprise (MSE) lending, supporting the bank in addressing this customer segment. The TA covered comprehensive trainings and workshops for management and staff in specific techniques and skills for effectively assessing and selling MSE loans as well as managing the associated risks. The project equipped the bank s staff with the knowledge to implement effective MSE lending throughout the entire loan cycle. The training of trainers approach will enhance the project s sustainability, as selected staff will provide future refresher courses within the institution. Population (2013): 0.6 million ME GDP (2013, nominal): EUR 4 billion Area: 13,812 km 2 1 EUR The minimum paid-in capital for establishing a new company in Montenegro is only one euro. Podgorica ME currency: Euro (EUR) Regional: MSE brochures on FX risk A regional financial education project will help the EFSE partner lending institutions raise financial literacy within their MSE client base this in turn is expected to result in better-informed, and better performing clients. In 2013, the EFSE Development Facility finalised the adaptation of a client educational booklet on foreign exchange lending for MSEs into eight languages. Distribution of the 150,000 copies to 14 financial institutions in eight countries (Albania, Armenia, Azerbaijan, FYR Macedonia, Moldova, Romania, Serbia and Ukraine) will be completed in 2014.

30 28 Journey through the regions 9 Kosovo Prishtina KO 3 DAYS KO The time it takes to register a business in Kosovo. Kosovo Investigating the potential of Agrilending The Agrifinance in Kosovo study aimed to assess the main supply and demand patterns for financial services in Kosovo s agricultural sector a topic of particular relevance given the strategic importance of agriculture and its financing gaps. Whilst the study found that there is high demand for agricultural finance in Kosovo, it also identified specific barriers. Its recommendations cover various aspects ranging from improving the enabling environment, understanding farmer needs and specifics of this important economic segment, a tailored risk assessment and respective agronomic tools, options for advancing in value chain finance, exploring innovative products, improving cost-effectiveness, and the needs for providing technical assistance to overcome these barriers. currency: Euro (EUR) Prishtina Area: 10,908 km 2 GDP (2013, nominal): EUR 5 billion Population (2011 estimate): 1.7 million

31 Journey through the regions Albania Tirana Albania Nurturing the seedlings of success As a grower, you understand that some things take time and that what you get out of something depends on what you put in. It s the same with business. Not only does NOA share that philosophy, but they also take pride and pleasure in seeing my little farm grow from a small greenhouse into a robust enterprise. Ali Dedja, greenhouse grower green beans, that s the ticket. Green beans. It s strange how a decision like that can make the difference between a good year and a less good one, muses Ali Dedja, scratching his chin. We get a much better yield than with tomatoes, which is what we grew last year. So switching was actually an easy decision, Ali adds. With the first loan from NOA in 2009, which was for just over EUR 8,500, he had erected his first greenhouse on the land behind his house to grow more vegetables, both in terms of quantity and diversity. Good sun exposure and little wind, plus the soil is very healthy. Most important, though, is that my wife and I make a very good team, he says. Area: 28,748 km 2 Tirana Population (2013): 3.3 million growing produce in his greenhouse enabled Ali to substantially increase productivity, and, more importantly, to achieve a more consistent harvest. A consistent product, especially with consistent quality, that s really what counts for my customers, Ali observes. When it comes to consistency, especially for what we grow, there is really no way around a greenhouse. the latest loan from NOA, in July 2013, for just over EUR 2,000 went towards purchasing new seeds. This investment enabled Ali to better align his cultures with market demand as well as grow a type of produce that was better adapted to the climate and soil conditions. We thought long and hard about it, but switching from tomatoes to green beans has so far been one of the best decisions we ve made. currency: Albanian lek (ALL) GDP (2013, nominal): EUR 9 billion AL 18 % AL Name: Ali Dedja Business: Greenhouse grower Bank: NOA Agriculture contributes with 18 % to total GDP in Albania and is the only sector that continuously positively contributes to GDP growth.

32 30 Journey through the regions 11 Macedonia Skopje FYR Macedonia Adapt. Innovate. Grow. believing in yourself and your skills is good. It can be enough to get you started. But what keeps you going is when others begin to share your vision and join in to help you to make it become reality. I knew I could count on my family. With NLB, I found out I could also count on my bank. Aleksandar Aleksovski, locksmith When I was out of a job in 1991, all I had was my background in engineering and my skills as a welder. I had to adapt. When I decided to start my own business, my family backed me up 100 %, explains Aleksandar Aleksovski. speaking of family support, Aleksandar s two daughters, Angelovska and Blagica also work in the business, Komont. From a small locksmith s workshop, Aleksandar leveraged his welding skills into a metal fabrication workshop. Eventually, there was enough business to add importing and exporting to Komont s activities. Skopje currency: Macedonian denar (MKD) GDP (2013, nominal): EUR 8 billion Population (2013): 2.1 million my greatest satisfaction? To be able to build on my experience and my skills and create a business that not only sustains me and my family, but also enables me to create jobs! exclaims Aleksandar. As the economy developed and consumption increased, so did advertising. Komont soon made a name for itself by fabricating aesthetically pleasing yet robust outdoor billboard carriers, especially very large ones. Honestly, I never dreamed I d be welding frames as tall as a house, Aleksandar admits. the EUR 50,000 loan from NLB Tutunska Banka in 2011 enabled Komont to stabilise cash flow. We re building strong relationships with major media companies. This puts us on a solid footing so we can branch out to larger projects, like hall structures. Aleksandar adds, Everything one step at a time. Area: 25,713 km 2 Name: Aleksandar Aleksovski Business: Locksmith, metal working Bank: NLB Tutunska banka AD Skopje 25 MK FYR Macedonia ranks 25 among 189 countries in ease of doing business according to the WB / IFC s Ease of Doing Business report. MK

33 Journey through the regions Bulgaria Sofia BG BG 13.5 % In Bulgaria construction permits for new individual homes in 2013 increased by 13.5 %. Area: 110,994 km 2 GDP (2013, nominal): EUR 39 billion Sofia currency: Bulgarian lev (BGN) Bulgaria Fostering home improvement Population (2013): 7.2 million The economic crises in the Eurozone have had a strong impact on Bulgarian business and consumption, with the country s economy slowly recovering from its five-year slump. One of the sectors that suffered the most was construction development, which changed the dynamics of building stock availability in terms of quality and supply. Coupled with the increase in private household income instability, this resulted in many banks being more averse to expanding their housing loan portfolios. Providing adequate support to private households for financing home purchases and renovation was becoming an increasingly acute necessity. Despite the difficult environment, EFSE partner lending institution Raiffeisenbank Bulgaria remained committed to supporting this segment. raiffeisenbank (Bulgaria) EAD disbursed more than 600 loans to lower income households with the help of a EUR 20 million EFSE credit line for financing house improvements, renovations, enlargements, and reconstructions, as well as for purchasing homes. these funds were used for financing housing loans at attractive interest rates with an extended repayment period of 30 years. the transaction reaffirmed the EFSE s commitment to strengthen its presence in Bulgaria s financial sector and to increase the range of financial products offered to customers from the segments of the economy that are still not well serviced by the banks. Raiffeisenbank

34 32 Journey through the regions 13 turkey Istanbul Name: bülent Incebayraktar, AZIM SU ARMATURLERI SAN. TIC. LTD. STI. Business: Kitchen and bathroom fixtures Bank: Alternatifbank tr 7 tr Turkey is Europe s 7 th largest economy Turkey Tapping the potential for growth When you re in business as long as we ve been we re the second generation you see good times and less good times. And when the going gets tough, you realise the importance of having a strong foundation for business. That and a strong partner like Alternatifbank is what gets you through when the going gets tough. Bülent Incebayrakta, AZIM SU ARMATURLERI SAN. TIC. LTD. STI. people are always building new houses or renovating them, so there s always a demand for bathroom fixtures, says Bülent Incebayraktar. Then 2010 happened, he whispers. in 2007, Bülent took over the reins from his father who had built up the business from scratch in Istanbul s old commercial district of Karakoy in It was also time for a new name, Azim Su Armaturleri San. Tic. Ltd. Sti., to better reflect the activity that was the passion of two generations of Incebayraktars: the manufacture of bathroom fixtures. of course we were concerned as the financial crisis unfolded halfway around the world. But at that time, we felt very little of the repercussions here in Turkey, Bülent says. By 2010, we felt them, I can assure you. Population (2013): 76.5 million Istanbul Ankara the problem wasn t with the company s business plan, its product offering or its management. The macroeconomic situation by then the financial crisis had become a full-blown global economic crisis resulted in accounts payable taking on worrisome proportions. But business was strong and the collections situation would eventually get better. The question was whether Azim could hold out long enough until that happened. With a TRY 250,000 loan from Alternatifbank, Bülent stabilised the cash flow. The company has kept punctually repaying the loan in instalments since reinvigorated, it has since also increased its portfolio to 50 products and is now even exporting bathroom fixtures. currency: Turkish lira (TRY) Area: 783,562 km 2 GDP (2013, nominal): EUR 595 billion

35 Journey through the regions Georgia Tbilisi Georgia Expanding Credo s outreach to rural borrowers Credo, Georgia s largest microfinance institution, recognised a clear need among its clients for better access to agricultural information that is directly relevant to farmers day-to-day lives. More specifically, farmers currently lack reliable and current information on modern technologies, agricultural inputs, efficient farming production, relevant intermediary and processing channels and sales techniques, which could improve their operations within the local market. The EFSE Development Facility therefore initiated a technical assistance intervention to support Credo in filling the current agricultural information gap that is putting microfarmers at a disadvantage. The key objective of the project was to identify the optimum way for microfarmers in Georgia (current and prospective clients of Credo) to access agricultural knowledge and market information that is germane to their everyday activities so they may improve their yields. A follow-up project could then reach out to farmers using the most effective channels, e. g. online, literature or even via mobile phone. ge 1 GE Georgia is the number 1 economic reformer in the world according to the WB/IFC s Ease of Doing business report. currency: Georgian lari (GEL) GDP (2013, nominal): EUR 12 billion Tbilisi Area: 69,700 km 2 Population (2013): 4.5 million

36 34 Journey through the regions 15 AZerbaijan BAku Azerbaijan Promoting responsible finance practices In line with its commitment to Responsible Finance, the EFSE was the first to address the issue of over-indebtedness in Azerbaijan. Applying the lessons learned from other markets, the Fund recognised the risk of overheating of the microfinance sector in Azerbaijan, a market that had seen very rapid growth in recent years. For this reason, it commissioned an over-indebtedness study in late 2012 in co-operation with the Azerbaijan Microfinance Association (AMFA). The findings of the study, made available in 2013, confirmed early signs of market overheating and potential over-indebtedness, prompting the EFSE to further engage in actively promoting Responsible Finance practices in the country s financial sector. In the autumn of 2013, the EFSE co-sponsored the AMFA Investors Fair in Baku, which was attended by more than 100 delegates from microfinance institutions and banks, leasing companies, investors, government agencies, international organizations and AMFA partner institutions. As part of the event, the EFSE team organised a technical workshop on Responsible pricing and client education: everyone wins, which highlighted the importance of transparent pricing and client education in strengthening both borrowers and financial institutions. The workshop revealed the need to further improve financial literacy among borrowers as a key prerequisite for effectively addressing the risk of over-indebtedness. Following up on the conclusions drawn by the workshop, the EFSE Development Facility will provide capacity building technical assistance in the microfinance sector, specifically in the area of financial literacy. To further promote the sharing of experiences and lessons learned in meeting the challenges of over-indebtedness, the EFSE is planning to arrange an exchange visit between Azerbaijani and Bosnian microfinance institutions in i would like to reiterate our big thanks for your financial and technical assistance in organising an amazing workshop on Responsible Finance during AMFA s Investors Fair that was highly appreciated by every stakeholder group that attended our event government officials, practitioners, investors, media, members, board. Everyone enjoyed your workshop very much and took something useful out of it. Jhale Hajiyyeva, Director of AMFA az currency: Azerbaijani manat (AZN) 52 % az GPP (2013, nominal): EUR 55 billion Population (2013): 9.3 million Area: 86,600 km 2 BAKU The non-oil share of the economy increased to 52 % in 2013 from 35.6 % of total GDP in 2007.

37 Journey through the regions Armenia Yerevan Stepan Gishyan CEO of ACBA-Credit Agricole Bank CJSC and ACBA Leasing CJSC AM 6 AM Armenia stands at No. 6 in the ranking of 189 economies on the ease of starting a business GDP (2013, nominal): EUR 7 billion currency: Armenian dram (AMD) Armenia Facilitating local currency lending with Central bank support Yerevan Area: 29,743 km 2 Population (2013): 3.3 million Owing to continued funding support in Armenian drams, totalling AMD 1,175 million or EUR 2.1 million, from the Central Bank of Armenia, a strategic local currency investor to the Fund, three EFSE partner lending institutions in Armenia ACBA-Credit Agricole Bank, Araratbank and Inecobank benefitted from senior loans in local currency to cover the financing needs of micro and small enterprises (MSEs) in rural areas as well as individual farmers and agricultural businesses, that exclusively rely on local currency income. Furthermore, the Fund expanded its operations in the country by initiating two new successful partnerships with ACBA-Credit Agricole Bank and ACBA Leasing, the market leaders in primary agricultural finance to foster MSE lending in Armenia. Stepan Gishyan Shortly before going to press, we were apprised of the passing of Stepan Gishyan. The EFSE s commitment to Armenia owes much to his determination, integrity and engaging personality. We will continue to build on the foundations he laid for the development of the country s banking sector, most recently in promoting agrilending. ACBA Credit Agricole Bank is a key player in the Armenian banking system, with a strategic focus on micro, small and medium enterprise (MSME) lending. Together with ACBA Leasing, our subsidiary specialised in leasing services, our wide branch network covers both urban and rural areas of Armenia. our partnership with the EFSE began in We are proud to have a new strong partner like the EFSE, and believe that this new cooperation will enhance our market position in lending to MSEs, particularly in the agricultural sector. In addition, our partnership will give ACBA Leasing s clients new opportunities for modernising their fixed assets and therefore achieving sustainable profits as a result of productivity gains. We are sure that facilitating access to lending and leasing for MSEs, especially in the local currency, is vital to the economic development of our country, and we are very pleased that EFSE cooperates with us in this field of our activities. Stepan Gishyan, CEO of ACBA-Credit Agricole Bank CJSC and ACBA Leasing CJSC

38 36 Introduction Macro level Journey Review Operational Results Appendices Investment operations 2013 stands out as another record year for the EFSE with 33 investments approved for an aggregate value of EUR million. At year-end, the EFSE s outstanding investment portfolio with its 71 partner lending institutions (PLIs) totalled EUR million. It is also important to note the extent and speed at which these funds were channelled to the EFSE s ultimate target group, micro and small enterprises (MSEs). Across the board, the on-lending rate stood well above 90 %, underscoring the high effectiveness with which the Fund s investments were employed. More than 80 % of the investment volume approved in 2013, i. e. EUR million, was disbursed before 31 December. In 2013, the EFSE financed more than 121,000 sub-loans issued by its 71 PLIs a total credit volume of EUR 1 billion. The average sub-loan in 2013 amounted to EUR 8,510, further demonstrating the Fund s unique and specialised role in facilitating MSE finance. We are particularly pleased to report that, in continuation of a trend that started in 2012, more than 25 % of all sub-loans disbursed by our PLIs benefited the rural and agricultural sector, which traditionally suffers from a lack of access to credit. Staying the course Despite another challenging year for many economies in the EFSE target regions, the Fund further confirmed its value-add as a specialist provider of long-term funding for micro and small entrepreneurs and low-income households. The MSE portfolio in particular, accounting for 78.5 % of total investments outstanding at year-end, gained momentum. However, with approximately EUR 180 million earmarked for housing, the EFSE is also a significant provider of home improvement and housing finance in the regions. In this capacity, the EFSE not only facilitates the creation of decent shelter for needy people, but also supports business growth and job creation in the construction sector, the backbone of many local economies. Given the importance of the agricultural sector in terms of contribution to GDP and employment creation, the EFSE focused particularly on promoting agricultural lending combined with technical assistance (TA) delivered by the EFSE Development Facility (DF). By year-end 2013, specialised rural credit lines represented ca. 14 % of the total investment portfolio. This development is also a consequence of PLIs with a strong rural and agricultural profile joining the Fund in With regard to geographic distribution, European Eastern Neighbourhood Region (ENR) countries saw their share of the investment portfolio increase in 2013 from 23.8 % to 27.5 %, with the Caucasus region as the primary source of growth. In Southeast Europe (SEE), investments in Turkey and Serbia rose substantially. At 24.2 % of the portfolio at year-end, Serbia remained the largest target country in terms of investments, followed by Bosnia and Herzegovina. After only two years of investment activities, Turkey already represents the third largest share of the Fund s investment portfolio.

39 EFSE Annual Report The EFSE maintained its inclusive approach to partnering with local financial institutions, which is illustrated by the diversity of business models represented in the investment portfolio. Microfinance institutions specialised in serving micro and small entrepreneurs account for about one third of the Fund s PLIs, small and mid-sized banks for another, and the remaining third is split between large banks with nationwide networks and non-bank financial institutions. The latter part of 2013 saw a marked increase in the number of non-bank financial institutions, most notably leasing companies. The diverse business models represented in the EFSE s roster of PLIs underscores the Fund s strategy to maximise access to financial services for the target group both in quantitative as well as in qualitative terms, in urban as well as in remote areas, and with a special focus on traditionally underserved market segments. Considering the EFSE s set of financial instruments, subordinated loans were granted on a selective basis, supporting long-standing partners with a demonstrated commitment and solid track record in terms of impact with the Fund s final target group. Despite a difficult operating environment, the EFSE has not recorded any capital loss since inception. Furthermore, intensive and hands-on risk management activities contributed to halving the level of impaired assets compared to the previous year to 0.5 % of total portfolio. This positive trend is also confirmed by significant improvements in the asset quality of underlying sub-loans: at 4.2 % at year-end, PAR > 30 (portfolio at risk for loans due more than 30 days) was considerably better than overall financial sector averages. Notwithstanding this generally positive trend, some markets suffer from persistently high levels of non-performing loans; here, Albania and Montenegro are receiving special attention. PLIs are at the pulse of the economies they operate in, enabling the EFSE to respond to the evolving economic and financial sector landscapes in the regions was a record year for the Fund not only in terms of new approvals, but also with regard to the speed and efficiency with which funding requests were addressed. Given changing demand from the real sector, long-term planning when it comes to funding is a major challenge for PLIs. Hence, funding requests tend to become more ad hoc: careful tranching in line with sub-loan portfolio growth along with overall flexibility as to terms and conditions are becoming increasingly important. In this regard, the Fund Advisor s local offices and the very efficient decision-making processes of the Fund and its bodies combine to ensure a clear understanding of market realities and trends. The result is another year in which the Fund s subscriptions were immediately on-lent, and, more importantly, its portfolio with MSEs continued to maintain its value. AT A GLANCE Investment Operations On-lending rate: 90 % Sub-loans to the rural and agricultural sector: > 25 % Outstanding investments for housing loans: EUR 180 million Impaired portfolio: 0.5 % of total portfolio Local currency loans to PLIs disbursed in 2013: 8

40 38 Introduction Macro level Journey Review Operational Results Appendices The EFSE is a tested strong, stable and dependable platform for development finance, enabling its partner lending institutions to maintain the focus on facilitating access to credit, and thus to growth and prosperity, for the EFSE s ultimate target group. The tandem of the EFSE, which focuses on investments, and the EFSE Development Facility (DF), which focuses on maximising the impact and outreach of the EFSE s investments, continues to prove highly successful in engaging with PLIs to address the most pressing issues in skills and product development as well as systems and procedures. Whilst PLIs are established professional ventures, changing realities in the economies in which they operate are creating new difficulties. Developing financial products and services, optimising processes to ensure healthy returns and addressing competitive pressures these are just some of the significant and complex challenges that require in-depth knowledge and understanding and very often external support, if they are to be met. In 2013, 20 PLIs received direct technical assistance (TA) to address such challenges. The successes achieved by the EFSE DF in assisting its partners through targeted TA continue to exceed expectations. The same applies to the EFSE DF s applied research activities and sector work, in particular in the area of Responsible Finance. The outlook for the EFSE DF looks strong for 2014 as well. Local currency finance deservedly received much attention in 2013, both on the asset side of the Fund as well as in terms of the sub-loan portfolios generated, i. e. in terms of the currencies used for on-lending to MSEs and low-income households. Like other funds, the EFSE faces legal, regulatory and operational constraints in placing local currency funding with financial institutions. The Fund, however, continues to do its utmost to work with available hedging counterparties and instruments to provide the currency of choice. Eight transactions totalling the equivalent of EUR 18.2 million were completed in 2013, and more such deals are planned for In line with the Fund s objective to provide quality access to finance for micro and small enterprises and households for home improvement, the actual currency PLIs use for on-lending to the real sector and households is regularly reviewed and analysed. It is gratifying to see that more than 51.3 % of all funds were on-lent to the target group in local currency. These and other trends, which contribute to strengthening Responsible Finance, will be further supported in The information campaign developed jointly with PLIs on the risks of foreign currency loans in 2013, which also involved booklets in several languages that were distributed to MSEs and households, is just one example of a simple, straightforward and yet effective TA measure to support the Fund s general strategy. Overall, the EFSE looks back at a very successful 2013 in which the funding required could be delivered to its partners with speed and efficiency. Yet again, the EFSE is a tested strong, stable and dependable platform for development finance, enabling its partner lending institutions to maintain the focus on facilitating access to credit, and thus to growth and prosperity, for the EFSE s ultimate target group.

41 EFSE Annual Report EFSE Development Facility Highlights 2013 Key Indicators 2013 marked another record year for the EFSE Development Facility (DF) with 65 on-going projects under management for a total volume of EUR 3.7 million, up from 47 projects and EUR 2.5 million in A total of 37 projects were approved and launched in 2013 alone, another record. The EFSE DF s technical assistance (TA) activities extended to partner lending institutions (PLIs) in all 16 partner countries of the Fund. This brings the total number of projects approved and total volume of funds disbursed for TA since the EFSE DF s inception in 2006 to 226 and EUR 9.8 million, respectively. 75 PLIs, financial and sector institutions have so far been benefitting from the EFSE DF s targeted, hands-on support. Individual TA and training Individual TA remains at the core of the EFSE DF s capacity building strategy, directly reflecting the need to ensure flexibility, speed and competence in planning and implementing smaller and more complex projects where they best serve the needs of the individual PLIs. It is therefore only consistent that individual TA and training remained centre stage in The EFSE DF provided direct, tailored capacity building support to PLIs, implementing 38 such projects in Its aim was to provide flexible assistance at consistently high quality levels by concentrating on individual institutional needs, recruiting the best consultants, and improving project management efficiency. That PLIs value the quality of the support provided by the EFSE DF is evidenced by the fact that, on average, they covered 32 % of TA costs despite difficult market conditions. Examples of successful individual TA projects in 2013 include responsible micro and small enterprise (MSE) lending, agricultural and rural finance, credit risk management, increasing operational efficiency (e. g. management information systems, internal controls), loan officer training with a focus on sales, strategic transformation, and designing housing loan products. Financial sector strengthening The EFSE DF also managed 16 TA projects aimed at strengthening the financial sector in three main areas. First, Responsible Finance, where successes include the Training Sponsorship Programme with PLIs from five partner countries (Armenia, Croatia, Georgia, Montenegro and Turkey), a workshop on responsible pricing and client education in Azerbaijan as part of the Investors Fair held by AMFA (Azerbaijan Microfinance Association), and two workshops on local currency lending. The EFSE DF also commissioned various publications and tools directed at MSEs as well as retail housing loan customers, e. g. a brochure on the risks to be borne in mind with foreign currency loans for MSEs, slide presentations for MSEs, and a mortgage information brochure for retail loan customers. In Bosnia and Herzegovina, the EFSE DF sponsored the U PLUSU Debt Counselling Center, which was set up to counter the negative impact of over-indebtedness through financial education, counseling, mediation and debt resolution. In Ukraine, the National Banking Association of Ukraine benefitted from EFSE DF financial support with its project in financial education for elderly people, journalists and youths (over 2,000 people reached with the EFSE DF s support in 2013). Kosovo Banker Magazine could also count on EFSE DF assistance by way of sponsorships and editorial contributions. The EFSE DF conducted projects on specific themes highly relevant to the Fund s financial landscape as well, including a technical workshop for 20 PLIs on the practical development of branchless banking services. In terms of promoting local currency lending, the EFSE DF is working together with Mantis, a consultancy providing expert forecasting and risk quantification services in frontier and emerging markets, and TCX, the Currency Exchange Fund, a special purpose fund that provides OTC derivatives to hedge the currency and interest rate mismatch that is created in cross-border investments between international investors and local borrowers in frontier and less liquid emerging markets. One of the pivots of this cooperation is the Local Currency Yield Curve Monitor, an analytical tool to enhance knowledge of local currency lending opportunities.

42 40 Introduction Macro level Journey Review Operational Results Appendices The EFSE DF s technical assistance activities extended to PLIs in all 16 partner countries of the Fund. This brings the total number of projects approved and total volume of funds disbursed for TA since the EFSE DF s inception in 2006 to 226 and EUR 9.8 million, respectively. Applied Research The EFSE DF lead-managed 11 applied research projects aimed at strengthening the financial sectors of the Fund s target countries and providing the Fund with a clear picture of development finance impact, markets, trends and opportunities on the horizon. Studies covered such key topics as agrilending and rural finance in Kosovo and Romania, but also served to gauge progress and necessary adjustments in previous areas of interest. The Overindebtedness Revisited in Bosnia and herzegovina study, for instance, contrasted the current landscape of small enterprises with the findings of the previous over-indebtedness study in 2009 on micro clients. Other projects included assessing MSE lending opportunities in Turkey, a mobile banking feasibility study in Moldova, Albania and Turkey, and a local currency lending feasibility study in Georgia, Armenia and Serbia. The EFSE DF also strengthened its strategic partnerships in 2013, including with the Central Bank of Armenia (CBA), National Bank of Moldova, ACRA (Private Armenian Credit Registry), and Azerbaijan Microfinance Association (AMFA). The EFSE DF encouraged the use of exchanges and cross regional knowledgesharing initiatives, for example by partnering with the MSE Fund for the MENA region, SANAD, and inviting representatives of the Palestinian Monetary Authority to join the workshop on the use of Armenian Credit Registry Data for future research activities of the CBA held in August AT A GLANCE EFSE DF Highlights On-going projects under management: 65 Projects launched in 2013: 37 Average costsharing by PLIs: 32 % Languages in which the brochure Improve your financing decision on risks of FX lending was published: 8 Total volume of funds disbursed for TA since the EFSE DF s inception: EUR 9.8 million

43 EFSE Annual Report Showcase projects of the EFSE DF include the following: Agricultural and rural finance In 2013, the EFSE DF completed the development of an innovative agricultural risk assessment tool (CAT) for Megabank Ukraine. The implementation was accompanied by a series of workshops and trainings. Megabank was very satisfied and pointed out that the joint development and integration of CAT based on the initial needs assessment, along with supportive instruments was a perfect example for the targeted approach towards maximising new market opportunities in an unfamiliar sector. As an EFSE partner lending institution in Azerbaijan, expressed interest in learning agrilending from Megabank, an exposure visit by a delegation is planned for Responsible Finance Financial empowerment through customer education this, in a nutshell, is the idea behind the EFSE DF s development of effective channels for PLIs to raise the financial literacy of their customer base. Measures included educational brochures on foreign currency lending risks for micro and small enterprises (MSEs) and mortgage holders as well as slide presentations enabling end-borrowers to calculate the costs of housing and MSE loans. The brochures were translated into eight languages; close to 200,000 copies will be distributed in eight EFSE partner countries in Housing The EFSE DF supported Farm Credit Armenia in developing innovative housing microfinance products for rural households looking to build a house, purchase one or improve their current home. The consultant first conducted a market assessment study to obtain an overview of the current demand and supply of housing microfinance products and services in rural areas in Armenia. First results were made available in early March Branchless / mobile banking The technical workshop on Mobile Financial Services in the EFSE regions: What is the Business Case? was held in November It brought together representatives from 20 PLIs and sector institutions, providing an excellent opportunity for insightful exchange on the opportunities and challenges of mobile banking in the EFSE regions. The workshop also yielded practical tools for developing realistic business cases to advance products and services in a responsible and efficient manner. Positive feedback across the board, an enriching learning experience, and high interest in follow-up TA cooperation with the EFSE DF: all delegates agreed that the workshop exceeded expectations by far.

44 42 Introduction Macro level Journey Review Operational Results Appendices Operational Results

45 EFSE Annual Report Financial statements balance Sheet In EUR as at 31 December Assets Gross loans to partner lending institutions 820,443, ,820,071 Un-amortised discount (4,407,415) (5,028,186) Loan loss allowances (4,305,719) (8,021,534) Loans to partner lending institutions 811,730, ,770,351 Interest accruals on loans 5,628,278 5,504,905 Cash at bank 74,114,862 32,971,218 Equity investments 4,478,167 5,193,280 Share of investment in associates 1,474,058 Other receivables 1,702,340 2,161,072 Total assets 899,128, ,600,826 Liabilities Notes 145,986, ,805,126 Payable resulting from interest on Notes 309, ,070 Payable resulting from savings related to Double Taxation Treaties 4,065,186 6,160,086 Accrued expenses 3,226,691 3,091,232 Withholding tax payable 1,855,033 1,370,759 Other payables 32,856,846 8,844,988 Distribution to holders of redeemable ordinary shares payable 14,425,958 8,398,589 Net assets attributable to holders of redeemable ordinary A shares 285,553, ,492,040 Net assets attributable to holders of redeemable ordinary B shares 93,940,221 93,940,222 Total liabilities 582,218, ,339,112 Equity Total share capital (C Shares) 272,946, ,367,389 Total share premium (C Shares) 1,562,553 1,562,654 Available-for-sale reserve (C Shares) 1,046,867 1,441,367 Total retained earnings (C Shares) 41,354,152 34,890,304 Total equity (C shares) 316,909, ,261,714 Total liabilities and equity 899,128, ,600,826

46 44 Introduction Macro level Journey Review Operational Results Appendices income statement In EUR for the period 1 January to 31 December REVENUE Interest income on loans 35,369,985 38,202,159 Interest income on deposits 64,728 64,689 Dividend income on equity investments 116,968 Net change in discount amortisation 620,771 1,034,642 Realised and unrealised gain on derivatives 6,239,144 12,059,752 Realised and unrealised gain on exchanges 4,106,336 6,250,318 Reversal of loan loss allowance 3,715,815 (2,326,126) Reversal of available-for-sale reserve during the year 596,525 Other income 6,628,300 4,030,715 Total investment income 57,458,572 59,316,149 EXPENSES Interest expenses on Notes 3,878,168 3,045,689 Withholding tax on interest income 1,223, ,342 Operating expenses 14,049,579 14,040,387 Development Facility 1,159,620 1,129,808 Realised and unrealised loss on derivatives 3,033,630 12,944,195 Realised and unrealised losses on exchanges 6,907,153 6,178,060 Other expenses 4,388,100 3,288,100 Total operating expenses 34,640,102 41,446,581 Operating profit before tax 22,818,470 17,869,568 Savings related to Double Taxation Treaties (1,928,664) (2,136,522) Distribution to holders of redeemable ordinary shares (14,425,958) (14,007,920) Profit for the year 6,463,848 1,725,126 OTHER COMPREHENSIVE INCOME Net gain on available-for-sale financial assets 202, ,115 Reversal of available-for-sale reserve during the year (596,525) Other comprehensive income for the year, net of tax (394,500) 454,115 Total comprehensive income for the year, net of tax 6,069,348 2,179,241

47 EFSE Annual Report Cash flow statement In EUR as at 31 December OPERATING PROFIT BEFORE TAX 22,818,470 17,869,568 Adjustment for Un-amortised discount (620,771) (1,034,642) Loan loss allowance (3,715,815) 2,326,126 Reversal of available-for-sale reserve (596,525) Foreign exchange conversion of USD shares (2,608,807) Operating profit before working capital changes 15,276,552 19,161,052 Net (increase)/ decrease in other accrued income and prepaid expenses (123,373) 2,080,107 Net (increase)/ decrease in other receivables 458,732 (1,462,230) Net increase /(decrease) in accounts payable and accrued expenses (1,886,092) 1,893,758 Net increase /(decrease) in other payables 24,011,858 (24,748,720) Savings related to Double Taxation Treaties (1,928,664) (2,136,522) Withholding tax paid on interest income 484,274 (236,291) Distributions paid to holders of redeemable ordinary shares (8,398,589) (14,197,979) (Increase) in share of investment in associates (556,920) Cash flow used in operating activities 27,337,778 (19,646,825) Cash flow provided by investing activities Net (increase) in gross loans to partner lending institutions (18,623,869) (70,814,264) Cash flow provided by investing activities (18,623,869) (70,814,264) Cash flow provided by financing activities Cash received on Notes issued /(redeemed/ matured) * 27,181,404 12,798,586 Cash received on Shares issued 78,444,531 44,256,029 Cash paid out on Shares redeemed (73,196,200) Cash flow provided by financing activities 32,429,735 57,054,615 Net increase / (decrease) in cash and cash equivalents 41,143,644 (33,406,474) Opening cash and cash equivalents 32,971,218 66,377,692 Closing cash and cash equivalents 74,114,862 32,971,218 * Net amount

48 46 Introduction Macro level Journey Review Operational Results Appendices Investments outstanding investment portfolio Since inception in December 2005 Total outstanding investment portfolio as at 31 December 2013: EUR million eur million Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 In 2013, the net portfolio increased at a slower pace EUR 19.5 million due to substantial repayments throughout the year. Disbursements in 2013 totalled a record of EUR million, whilst repayments totalled EUR million. outstanding investment portfolio by financial instrument Based on total outstanding investment portfolio Total outstanding investment portfolio as at 31 December 2013: EUR million 81.1 % Senior loans 16.4 % Subordinated loans 1.8 % Hybrid capital 0.7 % Equity Senior loans continue to account for the majority of the portfolio. Though the share of subordinated loans is slightly down, there have been no other significant changes compared to previous years.

49 EFSE Annual Report Outstanding investment portfolio by country Based on total outstanding investment portfolio Total outstanding investment portfolio as at 31 December 2013: EUR million Southeast Europe (SEE) Serbia Bosnia and Herzegovina Turkey Romania Albania Kosovo Bulgaria Montenegro Croatia FYR Macedonia 4.2 % 3.3 % 2.8 % 2.5 % 2.4 % 2.3 % 7.0 % 9.1 % 12.3 % 24.2 % European Eastern Neighbourhood Region (ENR) Georgia Azerbaijan Armenia Belarus Ukraine Moldova 1.2 % 2.5 % 4.8 % 4.4 % 5.6 % 9.0 % Cross Country 2.4 % Serbia remains the Fund s single largest position. The share of the European Eastern Neighbourhood Region reached 27.5 % of the EFSE portfolio (up from 23.8 % in 2012).

50 48 Introduction Macro level Journey Review Operational Results Appendices Outstanding Investment portfolio by product Based on total outstanding investment portfolio Total outstanding investment portfolio as at 31 December 2013: EUR million 64.7 % Micro and small enterprise loans (urban) 21.5 % Housing loans 13.8 % Micro and small enterprise loans (rural) The share of rural micro and small enterprise credit lines to financial institutions including the purpose of funding agriculture clients increased substantially in the year under review from 10 % in 2012 to 13.8 % by year-end The share of housing loans was down somewhat to 21.5 % (from 22.7 % in 2012). Outstanding investment portfolio by currency Based on total outstanding investment portfolio Total outstanding investment portfolio as at 31 December 2013: EUR million 74.5 % EUR 23.4 % USD 2.1 %* Local currency The share of local currency loans increased slightly to 2.1 % as new local currency portfolios were added in Albanian lek and Azerbaijani manat. Further local currency loan deals are in the pipeline for * 0.9 % AZN (Azerbaijani manat) 0.5 % RON (Romanian new leu) 0.2 % ALL (Albanian lek) 0.2 % AMD (Armenian dram) 0.2 % MKD (Macedonian denar) 0.1 % MDL (Moldovan leu)

51 EFSE Annual Report Funding Committed funds from investors Total volume of committed funds from investors as at 31 December 2013: EUR million eur million Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Rollovers of redeemed funds and new commitments totalling EUR 118 million in 2013 demonstrate continued investor confidence in the EFSE s strategy and potential. Investor commitments by investment class As at 31 December 2013 Investment class Volume (EUR million) Share (%) Notes A shares B shares C shares Total Subscribed For the second consecutive year, the Fund mobilised large sums from private investors, increasing the leverage of DFI / IFIs and donor contributions. The Fund also succeeded in promoting US dollar denominated notes and shares, which optimise its asset / liability management and offer an attractive alternative for investors.

52 50 Introduction Macro level Journey Review Operational Results Appendices Investors by type of investment class As at 31 December 2013 Notes Crédit Coopératif ESPA VINIS Microfinance Omidyar-Tufts Sal. Oppenheim Steyler Bank Versorgungsfonds des Ministerium der Finanzen Land Brandenburg Other private investors Private investors via Deutsche Bank Private investors via Sal. Oppenheim B shares Mezzanine tranche Central Bank of Armenia EBRD EIB Finance in Motion FMO IFC KfW OeEB A shares Senior tranche BN&P Good Growth Fund EBRD EIB FMO IFC KfW OeEB Waterloo Foundation Other private investors C shares Junior tranche Central Bank of Armenia European Commission Government of Austria (ADA) Government of Denmark (DANIDA) Government of Germany (BMZ) Government of Switzerland (SDC) OeEB Republic of Albania

53 EFSE Annual Report EFSE Development Facility Total scope of activities Based on total project volume Cumulative, from inception of the EFSE Development Facility in 2006 to 31 December Approvals Volume (EUR) Share (%) Volume (EUR) Share (%) Agricultural finance 434, , (Fund) Market development 388, Comprehensive capacity building 1,197, , Business and product development 1,564, , Responsible Finance 1,449, , Local currency finance 628, , Trainings sponsorship 355, , Internal controls and auditing 206, Risk and delinquency management 1,688, , Impact assessment 780, Management accounting 401, MFI transformation 482, , Housing finance 51, , Other 173, , Total 9,803, ,781, In 2013, the EFSE Development Facility (DF) managed 65 projects totalling EUR 3.73 million up from 47 projects with a total volume of EUR 1.5 million in The EFSE DF has three main areas of focus: first, tailored support to the Fund s partner lending institutions as they grow and reach out to end borrowers (135 projects since inception); second, activities which strengthen the financial sector as a whole (21 projects since inception); and, third, applied research on innovative financial topics (35 studies since inception). A comprehensive impact study was launched in 2013 to further refine strategic and tactical approaches towards maximising impact and outreach. First actionable insights are expected in 2014.

54 52 Introduction Macro level Journey Review Operational Results Appendices TA Project distribution by country Based on number of projects Cumulative, from inception of the EFSE Development Facility in 2006 to 31 December 2013 Bosnia and Herzegovina Kosovo Republic of Moldova Romania Montenegro Serbia Regional Armenia Albania Azerbaijan Ukraine Georgia FYR Macedonia Turkey Croatia Belarus Bulgaria 3.1 % 2.4 % 1.3 % 1.2 % 1.1 % 0.1 % 0.1 % 0.1 % 8.4 % 7.2 % 6.7 % 6.3 % 5.5 % 4.6 % 14.0 % 16.4 % 21.5 % The EFSE Development Facility (DF) has so far implemented projects in all 16 EFSE target countries, in partnership with 71 partner lending institutions throughout the target regions. The EFSE DF s technical assistance activities focus on six core themes: Responsible Finance, MSE finance, rural (including agricultural) finance, mobile / branchless banking, local currency lending and housing finance.

55 EFSE Annual Report TA FUNDING Contributions by funding source Based on amounts approved All projects Cumulative, from inception of the EFSE Development Facility in 2006 to 31 December 2013 Volume (EUR MILLION) Share (%) Total number of projects: 226 Total project budget Partner contribution (PLIs and sector institutions) EFSE waterfall (profits) EFSE DF donors (and 3 rd parties) Donor contributions, which supplement the funding through the EFSE s profits, continue to enable the EFSE Development Facility to secure technical assistance where it is needed and where it achieves the greatest impact. Approximately 70 % of the funds are dedicated to institutional technical assistance, i. e. capacity building projects at partner lending institutions. The balance is accounted for by financial sector technical assistance and applied research projects. Individual TA projects only Cumulative, from inception of the EFSE Development Facility in 2006 to 31 December 2013 Volume (EUR MILLION) Share (%) Number of projects: 157 Project budget PLI contribution EFSE waterfall (profits) EFSE DF donors (and 3 rd parties) The cost of technical assistance provided by the EFSE Development Facility is partially borne by the partner lending institutions (PLIs) receiving the assistance, an approach that maximises impact and reinforces ownership. In 2013 as well PLI contributions averaged about 30 % of total technical assistance and training costs. The share of costs borne by partner lending institutions ranges between 5 % and 70 %, depending on the health and financial strength of the partner lending institution.

56 54 Introduction Macro level Journey Review Operational Results Appendices Development impact Outstanding sub-loan portfolio Since inception in December 2005 Total outstanding sub-loan portfolio as at 31 December 2013: EUR million Total outstanding number of sub-loans as at 31 December 2013: 132,947 Total outstanding sub-loan portfolio (EUR million) 800 Total outstanding number of sub-loans (Thousands) Volume of sub-loans Number of sub-loans Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 The headway made in broadening the EFSE s geographic scope, with increased investments in the European Eastern Neighbourhood Region, further supported the upward trend of sub-loan portfolio growth in Both total number and total volume of loans grew at a similar pace, and substantially, by 19.4 % and 20.3 %, respectively versus 2012.

57 EFSE Annual Report Outstanding sub-loan portfolio by product As at 31 December Outstanding sub-loan portfolio to end-borrowers (EUR million) Micro and small enterprise loans urban / rural Housing loans Number of active end-borrowers 132, ,353 Micro and small enterprise loans urban / rural 125, ,072 Housing loans 7,644 9,281 Average outstanding sub-loan amount (EUR) 5,778 5,730 Total sub-loan volume disbursed (EUR million) 1, Micro and small enterprise loans urban / rural Housing loans Total number of sub-loans disbursed 121,422 49,649 Sub-loan disbursements by economic sector in 2013 micro and small enterprise (MSE) loans only Total number of MSE sub-loans disbursed in 2013: 120,214 Total volume of MSE sub-loans disbursed in 2013: EUR million 24.0 % 19.4 % 23.9 % 30.3 % 17.1 % 30.2 % 35.0 % 20.1 % Compared to 2012, the year under review saw a notable increase in sub-loans dedicated to agriculture and industry. Whilst the former s share grew from 14.5 % to 20.1 % in volume terms (from 29.8 % to 35.0 % in terms of number of sub-loans), the latter s increased from 12.7 % to 17.1 %. Services Trade Industry Agriculture Based on number of MSE sub-loans disbursed Based on volume of MSE sub-loans disbursed

58 56 Introduction Macro level Journey Review Operational Results Appendices Sub-loan disbursements by purpose in 2013 micro and small enterprise (MSE) and housing loans Total volume of MSE sub-loans disbursed as at 31 December 2013: EUR million Total volume of housing sub-loans disbursed as at 31 December 2013: EUR 38.1 million 39.7 % 45.2 % 15.1 % 96.9 % 0.2 % 2.9 % The share of mixed purpose loans increased considerably, from 28.4 % in 2012 to 39.7 % by year-end Whereas home improvement was the focus of housing loans in 2012, 2013 saw a marked increase in loans used for home acquisition. MSE loans Mixed Working capital Fixed asset Housing loans Purchase construction home improvement Sub-loan disbursements by size in 2013 micro and small enterprise (MSE) and housing loans Total number of MSE and housing sub-loans disbursed for the year to date as at 31 December 2013: 121,422 Total volume of MSE and housing sub-loans disbursed for the year to date as at 31 December 2013: EUR 1.0 billion 3.0 % 6.4 % 90.6 % 23.3 % 23.3 % 53.4 % In terms of both total number and volume, the vast majority of sub-loans do not exceed EUR 20,000, which is the microfinance threshold for the EFSE target regions. Where these loans accounted for 85.6 % percent of the number of loans and 42.0 % of total sub-loan volume, respectively, in 2012, they account for 90.6 % and 53.4 %, repectively, in > EUR 50,000 EUR 20,000 EUR 50,000 < EUR 20,000 Based on number of MSE and housing sub-loans disbursed Based on volume of MSE and housing sub-loans disbursed

59 EFSE Annual Report Outstanding sub-loan portfolio by currency Based on total outstanding sub-loan portfolio Total outstanding sub-loan portfolio as at 31 December 2013: EUR million Turkish lira Bosnian convertible mark Euro (as local currency) Euro (currency board) Romanian new leu Azerbaijani manat Albanian lek Georgian lari Belarussian ruble Ukrainian hryvnia Macedonian denar Moldovan leu Bulgarian lev Armenian dram Euro (as foreign currency) United States dollar 2.9 % 2.5 % 1.8 % 1.8 % 1.3 % 1.1 % 1.1 % 0.7 % 0.4 % 0.2 % 5.8 % 6.8 % 9.2 % 13.0 % 15.7 % 35.7 % Whilst local currency lending rose overall throughout 2013 in line with the EFSE s strategy to reduce lender exposure to FX risks, the share of sub-loans issued in Turkish lira increased substantially it effectively tripled from 5.2 % in 2012 to 15.7 % at year-end 2013.

60 58 Introduction Macro level Journey Review Operational Results Appendices Partner Lending Institutions Overview of Partner Lending Institutions by country Country Albania Commercial banks Banka Kombetare Tregtare Banka Kombetare Tregtare, Kosovo Branch Credins Bank sh. a. Microcredit organisations NOA sh. a. Microfinance banks ProCredit Bank sh. a. Armenia Commercial banks ACBA CREDIT AGRICOLE BANK CJSC Nonbank financial institutions ARARATBANK OJSC Byblos Bank Armenia CJSC Converse Bank CJSC Inecobank CJSC ACBA Leasing CO CJSC, Armenia Azerbaijan Commercial banks Bank Respublika, OJSC Microcredit organisations Microfinance banks FINCA AZERBAIJAN Non-Bank Credit Organization LLE AccessBank CJSC Belarus Commercial banks Belorusian-Russian Belgazprombank Joint Stock Bosnia and Herzegovina Commercial banks Intesa Sanpaolo Banka d. d. Komercijalna Banka A. D. Banja Luka NLB Banka d. d., Tuzla NLB Razvojna banka a. d., Banja Luka Nova Banka AD Banja Luka Raiffeisen Bank d. d. Bosna i Hercegovina Sberbank BH d. d. Sarajevo Microcredit organisations MCF EKI MCF MI-BOSPO MCF Sunrise Microcredit Company Mikrofin PARTNER MIKROKREDITNA FONDACIJA Tuzla Microfinance banks MF Banka a. d. Banja Luka ProCredit Bank d. d.

61 EFSE Annual Report Country Bulgaria Commercial banks Raiffeisenbank (Bulgaria) EAD Microfinance banks ProCredit Bank (Bulgaria) AD Croatia Commercial banks Zagrebacǩa banka d. d. FYR Macedonia Commercial banks Halkbank AD, Skopje Microfinance banks NLB Tutunska Banka AD Skopje ProCredit Bank AD Skopje Georgia Commercial banks JSC Bank of Georgia JSC Bank Republic Microfinance banks JSC ProCredit Bank, Georgia Kosovo Commercial banks NLB Prishtina sh. a. Microcredit organisations KEP Trust Kreditimi Rural I Kosoves LLC Microfinance banks ProCredit Bank Kosovo Moldova Commercial banks BC Moldova Agroindbank S. A. Microcredit organisations JV MFO Microinvest LLC Microfinance banks CB ProCredit Bank S. A. Montenegro Commercial banks Crnogorska Komercijalna Banka Erste Bank AD Podgorica Hipotekarna Banka A. D. NLB Montenegrobanka a. d. Podgorica Microcredit organisations MFI Alter Modus LLC Romania Commercial banks Banca Transilvania S. A. Microcredit organisations Patria Credit IFN S. A. S.C. Opportunity Microcredit Romania IFN S. A. OMRO Microfinance banks S. C. ProCredit Bank S. A. Nonbank financial institutions AGRICOVER CREDIT IFN S. A.

62 60 Introduction Macro level Journey Review Operational Results Appendices Overview of Partner Lending Institutions by country Country Serbia Commercial banks Banca Intesa a. d. Beograd Cǎcǎnska Banka a. d., Cǎcǎk Komercijalna banka AD Beograd RAIFFEISEN BANKA AD BEOGRAD Sberbank Serbia a. d. Beograd UniCredit Bank JSC Microfinance banks Opportunity Bank A. D., Novi Sad ProCredit Bank a. d. Belgrade Nonbank financial institutions Intesa Leasing d. o. o., Beograd Turkey Commercial banks Alternatifbank A. S. FIBABANKA A. S. SEKERBANK T. A. S. Nonbank financial institutions Garanti Finansal Kiralama A. S. Ukraine Commercial banks Megabank, PJSC Cross Country Nonbank financial institutions ProCredit Holding AG TCX TCX

63 Appendices EFSE Annual Report

64 62 Introduction Macro level Journey Review Operational Results Appendices organisational structure General Shareholder Assembly Board of Directors Advisory Group Investment Committee EFSE Development Facility Committee Custody and Fund Administration Fund Management and Management of the EFSE Development Facility Regional Offices investment & technical assistance transaction management QUALIFIED PARTNER LENDING INSTITUTIONS Commercial Banks Microfinance Institutions Others MICRO AND SMALL ENTERPRISES PRIVATE HOUSEHOLDS Initiator and Lead Investor:

65 EFSE Annual Report Board of Directors and Commitees Board of Directors From left to right Dr. Christoph Achini, Franz-Josef Flosbach, Marc Schublin, Klaas Bleeker, Peter Reiniger, Roland Siller, Monika Beck (Chairperson), Syed Aftab Ahmed, Dr. Jochen Böhmer

66 64 Introduction Macro level Journey Review Operational Results Appendices INVESTMENT COMMITTEE From left to right Ulrike Lassmann, Peter Reiniger, Monika Beck (Chairperson), Karlo de Waal, Syed Aftab Ahmed EFSE DEVELOPMENT FACILITY COMMITTEE From left to right Hans Ramm, Kristin Duchâteau, Ulrike Lassmann (Chairperson), Eva van den Heuvel

67 EFSE Annual Report EFSE ADVISORY GROUP The Advisory Group to the EFSE s Board of Directors comprises high-ranking representatives of the central banks in the EFSE s target regions. Serving as a link to local realities, concerns and needs, its members share local experiences and convene to make recommendations with regard to Fund policies and operations. The Advisory Group plays a pivotal role in forging successful regional cooperation, which has become even more important in developing a joint approach towards mitigating the risks made evident in the aftermath of the global financial crisis and in the unfolding Eurozone debt situation.