AMSSF Final Draft for Client - English 0606 Performanc… · 2003, AMSSF/MC’s debt: equity ratio remains well below the average. This offers some scope to increase debt funding,

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AMSSF/MC/MC – 1st Rating

Association

Contacts MicroRate:

Craig Kirkwood [email protected] Tel: +27 11 803 7117 Fax: +27 11 807 3490

PERFORMANCE RATING

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Date of visit November 2006 Date of previous rating n.a. Previous rating n.a.

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AMSSF

Main Performance Indicators Jun'05 Jun'06Gross Portfolio (‘000’s) $1,718.6 $2,867.6Number of active borrowers 11,273 14,147ROE 6.7% 7.0%Portfolio Yield 47.2% 47.2%Portfolio at Risk 0.4% 1.2%Operating Expense Ratio* 40.4% 41.4%Average Loan Size $152 $203Borrowers per staff 146 132*In local currency terms, the operating expense ratio for June 2006 is 39.3%.

a

MOROCCO

Report as of June 2006

Synopsis

AMSSF was founded as a social programme in 1994. AMSSF/MC, the microfinance arm, was created in 1999 following the publication of the Act N°18-97 which regulates micro finance activities. At this time operations were exclusively funded by donors (including AMSED and UNDP) with the Hassan II fund (a government initiative) providing additional financial support in 2000/2001. Despite rapid expansion of its branch network, AMSSF/MC remains relatively small by African microfinance standards. The MFI is almost exclusively focussed on group loans and is pilot testing a number of individual products. The loan portfolio grew by 66.9% to $2.9 million in the 12 months ending June 2006. Much of this growth has been funded by debt, which AMSSF/MC has successfully been able to repay. Whist the ability to negotiate commercial loans has been supported by a history of profitability MicroRate notes that margins are shrinking. This can be attributed to reduced portfolio yield and relatively low efficiency levels.

Highlights

POSITIVE

• Consistently profitable. • Increased product flexibility. • Sufficient liquidity to manage short term growth. • Potentially large market. • Despite a deterioration, portfolio quality remains good.

NEGATIVE

• Relatively low efficiency levels. • Thin margins. • Some exposure to foreign exchange risk. • Increased competition. • Weak governance structure.

AMSSF/MC/MC June 2006

[email protected] - 2 -

AMSSF/MC/MC

MOROCCO June 2006

Sources of Funding

Rating Rationale

40%

17%2%

41%

Commercial Borrowing Subsidized Borrowing

Deposits Equity

7.0%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

41.4

%

0%

20%

40%

60%

80%

1.2%

0%

3%

6%

9%

12%

15%

132

-

50

100

150

200

250

300

350

400

450

Ope

rati

ng

expe

nse

Bor

row

ers

per

Em

ploy

ee

RO

E *

Por

tfol

io a

t Ris

k

Poo

rE

xcel

len

t

Average in MicroRate's African Comparative Sample * ROE Adjusted for discrepancies in accounting policies and subsidies.

The operating expense ratio and ROE compared to all African MFIs rated by MicroRate with average loans < US$500.

• Hggkhk

Consistently profitable - Although AMSSF/MC has been consistently profitable, its financial performance has been characterised by rapidly shrinking margins since 2003. In the 6 months to June 2006, the institution reported net income of $50,500 and an ROE of 7.0% (2005: 5.3%). Low gearing – Despite total debt increasing 5 times since 2003, AMSSF/MC’s debt: equity ratio remains well below the average. This offers some scope to increase debt funding, however shrinking margins could reduce the institution’s ability to cover higher funding costs going forward. Thin operating margins – Resulting mainly from relatively high operating expenses, pressure on margins was further exacerbated by the consistent decline in portfolio yield, from 65.8% in 2003 to 47.2% in June 2007. This came largely on the back of lower interest rates charged by AMMSF. This downward trend in portfolio yield is expected to continue, following the reduction of certain fees on its group loans. Deterioration in portfolio quality - Although still good by microfinance standards, the quality of AMSSF/MC’s portfolio quality has deteriorated. In June 2006, PaR (over 30 days) peaked at 1.2% which is relatively high in comparison to other Moroccan MFIs. Exposure to foreign currency risk - Although the MFI has built up good experience in negotiating and paying back debt AMSSF is exposed to foreign currency risk. This being said, only around 13% of total borrowings are not hedged. Weak governance - Although the Board appears to function adequately, its influence in the day-to-day running of the institution is tangible. The concern here is that this could potentially undermine management’s ability to operate effectively. In addition, it is felt that a diversity of commercial skills would be of greater benefit to AMSSF/MC, especially in developing a more systematic approach to risk management.



Country Overview

Macroeconomic Information

Dec 02 Dec 03 Dec 04 Dec 05

Annual Inflation 2.8% 1.2% 0.4% 0.3%Exchange Rate per US$ 10.2 8.8 8.2 9.2Annual Currency Devaluation (12%) (14%) (6%) 12%Deposit Rate (Year Average) 4.5% 3.8% 3.6% 3.5%

Source: International Finance Statistics

The microfinance industry in Morocco is relatively young. The first programs date back to between 1993 and 1994. The microfinance industry has since grown rapidly. Cumulatively, more than 3 million loans have been disbursed and more than 630,000 clients served. Most lending is to solidarity groups but more recently, there is a movement towards both individual and housing loans. The market is potentially large and offers significant scope for growth. At the moment, the rural market remains largely untapped, with only 20% (approximately) of the bankable population served. Conversely, urban areas are becoming increasingly saturated, and given the lack of a credit bureau in Morocco, multiple borrowing is becoming a problem. Microfinance is regulated by law (N°18-97 and article 58-03) and does not allow Associations1 to collect savings. It also places restrictions preventing MFIs from diversifying its products away from traditional micro loans. Associations are lobbying for a change in this law, in order to be able to: first, respond to client needs by offering them a wider variety of products, and second, to mobilize cheaper sources of funding. The maximum loan size is currently limited to $5,580. Control of the sector lies with three main bodies: the Consultative Council of Microcredit, the Monitoring Committee and the National Federation of Microfinance Associations (“FNAM”). The first has a consultative role with the Ministry of Finance; the second supervises compliance with the law and the last establishes the rules and is responsible for the “proper” development of the sector.

1 An Association is defined as a not for profit institution, which has no capital or shareholders. Any capital provided by an individual or institution is regarded as a grant.

The banking sector is mainly concentrated in the urban areas. Although banks are increasingly interested in microfinance, as yet none have moved downscale. National banks already represent the second largest source of funding for Moroccan Microfinance Associations. Furthermore, consumer credit is about ten times the size of the microfinance market, but as yet these two markets do not overlap. Competition among Associations is not strong although there are indications that it is increasing. Today, there are 11 MFIs in Morocco. Four of them are large (Al Amana, Zakoura, Fondation Banque Populaire and Fondep), 2 are medium-sized and 5 are small MFIs.

December 2005 Portfolio size

MFI Name

US$ ‘000 % of total Active Clients

% of total

Al Amana 82,612 50.8 249,531 40.3 Zakoura 29,595 18.2 198,301 32.0 FBP 31,875 19.6 82,649 13.4 FONDEP 10,881 6.7 43,997 7.1 Others 7,580 4.6 44,302 7.2 Total 162,543 100 618,780 100

Together these large MFIs accounted for 92.8% of the total market at the end of 2005. This is significant and is mainly due to the disproportionate sharing of government funds in the early stages of the microfinance sector’s development. Those MFIs which received the bulk of funding grew quickly and through economies of scale have become extremely efficient. This is a characteristic which defines the larger MFIs which makes it difficult for other institutions to compete effectively. Association Marocaine Solidarité Sans Frontières Micro Crédit (“AMSSF/MC”) is one of the two medium sized MFIs and is firmly entrenched in the microfinance sector. In general the institution is well placed to grow both in terms of client numbers and portfolio size.



Microfinance Operations

Main Indicators 31 Dec-03 31 Dec-04 30 Jun-05 31 Dec-05 30 Jun-06 Gross Loan Portfolio (000’s) $1,056.2 $1,891.0 $1,718.6 $2,354.2 $2,867.6 Number of Active Borrowers 6,886 9,301 11,273 12,974 14,147 Asset Quality Portfolio at Risk / Gross Loan Portfolio 0.2% 0.5% 0.4% 0.6% 1.2% Loan Loss Provision Expense / Average Gross Portfolio 0.6% 0.8% 0.4% 1.8% 1.5% Loan Loss Reserves / Portfolio at Risk 100.0% 64.3% 4.5% 96.4% 4.3% Write-offs / Average Gross Portfolio 0.7% 0.6% 0.3% 1.0% 0.8% Efficiency and Productivity Operating Expenses / Average Gross Loan Portfolio 43.9% 40.8% 40.4% 35.9% 41.4% Cost per Borrower $57 $74 $60 $68 $75 Average Outstanding Loan Size $153 $203 $152 $181 $203 Number of Borrowers / Credit Officer 191 198 194 185 177 Number of Borrowers / Staff 144 143 146 138 132

Like the majority of MFIs in the country, AMSSF/MC is almost exclusively focused on group loans. Growth has been erratic and during the twelve months ending in June 2006 the portfolio grew at 66.9% to $2.9 million.

Portfolio Growth Rate

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Dec '03 Dec '04 Jun '05 Dec '05 Jun '06

$ '000

-20-100102030405060708090

%

Gross Loan PortfolioAnnual Change in Gross Loans

The loan is a solidarity product (98.7% of the portfolio) where 4-12 members form a group. Groups are self formed and loan sizes start at $55 per member. Clients can progress through the loan cycles to a maximum of over $1,100. Group Loan Product

Term 3-12 months Interest Rate 2% per month Interest Type Flat Min loan $55 Max loan $1,100 Deposit Nil Group size 4-12

At the moment, products are supply driven, but AMSSF/MC has made good strides to improve product flexibility (for example by increasing loan sizes and improving loan terms). Additional enhancements include reducing restrictions on group formation, which allows good clients to form smaller groups of just 4 members (previously the minimum was five). The impact of these refinements is reflected in the higher average outstanding loan size of $203 (June 2005: $152). However, to ensure that this is sustained, the institution must continuously adapt and diversify its product portfolio. AMSSF/MC realises this and already three individual products are being pilot tested (for trade, housing and rural tourism).

Portfolio and Ave. Out. Loan Size

0

500

1,000

1,500

2,000

2,500

3,000

3,500


$ '000

-

50.0

100.0

150.0

200.0

250.0

$

Gross Loan PortfolioAverage Outstanding Loan Size per Active Borrower

Once a client’s business has been verified, a basic income statement and balance sheet is compiled. The repayment capacity is based on the net income figure.



The approval process is time consuming (there are a number of process flows), but the methodology is generally well executed. One concern however is that staff might find the policies too demanding which could lead to methodology “short cuts”. Notably, there is also scope to improve training to ensure stronger group cohesion and group reinforcement. This is particularly relevant in branches where portfolios are highly concentrated. Ultimately, powers for a credit decision lie with the branch supervisor2 especially for first time loans. Loan applications are then sent to head office and a cheque is prepared. This method of disbursement greatly reduces operational risk and accordingly, there have been few incidences of fraud. Disbursements usually take around 7-10 days. Although difficult to measure, multiple borrowing is becoming increasingly problematic. Consequently, the institution has to rely on group members to identify those with several loans. In MicroRate’s experience, over-indebtedness of micro entrepreneurs is often a consequence of competition. This is particularly the case where – as in Morocco – there is no credit bureau. MFIs try to defend themselves against this danger by sharing client information and loan officers often liaise informally with each other. Both practices have recently become common in Morocco, but they usually are not completely effective. In this regard, MicroRate suspects that this is beginning to negatively impact on portfolio quality. Overall, products suit client demand and a renewed focus on client needs should reduce drop out from its current level of between 5%-10%. As this rate is higher than many other African MFIs, it indicates that further product modification is warranted. Portfolio Quality By microfinance standards, the quality of AMSSF/MC’s portfolio is good. However, PaR has consistently deteriorated since 2003 with arrears (over 30 days) peaking at 1.2% of the portfolio in June 2006. 2 The widely flung network is difficult to manage, but pressure on the operations department is alleviated through the employment of supervisors. Their role is to monitor loan officers and ensure correct implementation of policies and procedures. They visit each branch weekly.

Portfolio at Risk

Portfolio Quality June 2005 June 2006 Gross Portfolio $1718.6 $2867.6 PaR 0.4% 1.2% Write-offs 0.3% 0.8% PaR plus Write-offs 0.7% 2.0%

If higher write-offs of 0.8% are included, the portfolio at risk ratio jumps to 2.0%, which is a better reflection of portfolio quality. It is also noted that the institution does not track its group loan repayments at the individual level in the MIS. As such, portfolio at risk could well be double its present level or higher.

Portfolio and PaR

0

500

1,000

1,500

2,000

2,500

3,000

3,500


$ '000

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

%

Gross Loan Portfolio Portfolio at Risk

One contributing factor to the higher PaR is that certain branches’ portfolios are concentrated in one activity, namely agriculture. Recently hampered by floods, many clients have been unable to repay their loans. This is an area of focus for AMSSF/MC and mechanisms to diversify the portfolio into different sectors should be put in place. According to the MFI, arrears were also impacted by the closure of a number of competing associations. As these institutions failed to make any recovery on outstanding loans, the market became contaminated and a number of AMSSF/MC’s clients voluntarily defaulted. This was compounded by poor loan recovery techniques which have since been refined and improved. From a provisioning perspective, loan loss reserves to portfolio at risk decreased slightly, from 100.0% in 2003 to 96.4% in 2005. The risk coverage ratio reduced dramatically to just 4.3% in June 2006, which is extremely low and only a small fraction of the parameters prescribed by microfinance best practice. This can be attributed to the fact that AMSSF/MC only provides for loans at the end of the year.



Given the high level of write-offs and deteriorating portfolio quality, it would be prudent, in MicroRate’s judgement, if loan loss reserves fully covered portfolio at risk.

PaR and Loan Loss Reserve

-

10.0

20.0

30.0

40.0

50.0

60.0


$ '000

0.0

20.0

40.0

60.0

80.0

100.0

%

Portfolio at Risk (Actual Amount)Loan Loss ReserveLoan Loss Reserve / Portfolio at Risk

Organization and Management AMSSF/MC is headquartered in Fes and operates through a network of 32 branches and 3 sub-branches. As a small institution, the size of the management team is relatively large, comprising the CEO, Operations, Finance, Human Resources, MIS and Internal Audit. Following the restructuring of the operations department, there is also a manager in charge of Research and Development. The CEO is strong and has done well to manage institutional growth so far. As part of this restructuring, AMSSF/MC is in the process of decentralising much of its decision making to Supervisors. This is expected to improve the efficiency of head office staff and should enable the institution to cope with future growth. One concern however is the potential for the institution to attract and retain good quality staff. As the institution grows, boosting capacity at all levels of the organisation will be essential. At the moment, much of the MFIs recruitment is centralised and staff are hired on a needs basis. Although total staff grew by 39% since June 2005, the proportion of credit officers remains unchanged at 75%.

Portfolio and Staff Numbers

0

500

1,000

1,500

2,000

2,500

3,000

3,500


$ '000

0

20

40

60

80

100

120

Gross Loan Portfolio Total StaffNo. of Loan Officers

The percentage of loan officers is unusually high, a sign that AMSSF/MC has been able to keep administrative staff to a minimum. This can be explained by the fact that loan officers are responsible for administrative work as well (they take on multiple roles, including taking turns to manage the branch). For this reason, productivity levels have consistently declined since 2004 (the 38% rise in the number of credit officers is also a contributing factor). Staff Productivity AMSSF/MC’s productivity is low. In June 2006, the number of borrowers per loan officer decreased further to 177 (June 2005: 194) due in part to the rise in the number of loan staff. As such, AMSSF/MC remains well below MicroRate’s average of 310 borrowers per loan officer for African MFIs, and 309 in Latin America. The number of borrowers per staff followed the same trend and declined to 132, from 146 in June 2005. Again, this is below MicroRate’s average for similar MFIs in Africa.

Portfolio and Loan Officer Productivity

0

500

1,000

1,500

2,000

2,500

3,000

3,500


$ '000

165

170

175

180

185

190

195

200

Gross Loan Portfolio Number of Clients / Loan Off



This downward trend in productivity is cause for concern as is the rise in the cost per borrower (increasing to $75, from $60 in June 2005). Given that AMSSF/MC competes with highly efficient MFIs, this must be addressed in the short term and improving the incentive scheme would most probably go a long way in this regard. This is planned and recommendations for a new incentive scheme have been made. At the moment, loan officers only qualify for a bonus after 1 year which can be de-motivating. The majority of loan officers have not received a bonus, an indication that the criteria set by management are too high. There is also no focus on portfolio at risk which is essential if loan officers are to grow portfolios responsibly. Operating Efficiency In the year ending in June 2006, the operating expense ratio deteriorated slightly to 41.4% from 40.4% a year earlier (39.3% if calculated in local currency terms). This is significantly above the average operating expense ratio for African MFIs rated by MicroRate of 33.8%. Relatively high operating expenses are in part explained by AMSSF/MC’s very low average loan size of $203. On the other hand the institution is facing growing competition from much larger MFIs with significantly lower operating expenses. To remain competitive then, AMSSF/MC must not only stabilize its costs, but it must reduce them substantially.

Operating Expense Ratio

0500

1,0001,5002,0002,5003,0003,500


$ '000

-

10.0

20.0

30.0

40.0

50.0

Gross Loan PortfolioOperating Expenses / Average Gross Portfolio

Internal Controls AMSSF/MC’s internal controls are satisfactory and are strengthened by an Audit department of 2 individuals. At the moment, branches are visited at least once per year which is all that is possible given current capacity levels.

Whilst no fundamental control issues have been identified, fraud was discovered in some branches in early 2006. For this reason, AMSSF/MC should consider boosting the size of its audit department. With diversification of the portfolio (away from group loans) expected in the short term, developing and documenting a clear set of policies and procedures, which cover each loan product, will become increasingly important. Not only will this help to improve the lending methodology, but combined with the implementation of the new management information system, controls should be strengthened. Management Information and Accounting Systems AMSSF/MC uses mainly a Microsoft Excel© based loan tracking system, which was internally designed. Although this system is able to track most necessary data, it is inflexible and prone to error (due to the manual double entry of data). The system is currently not integrated with the accounting software, although the accounting interface is expected to be integrated with the MIS by the second quarter 2007. The MFI is in the process of implementing new management software called SIEM. It is a modular based programme that is widely used by MFIs. Although there is adequate support locally, MicroRate believes that the geographic location of the developers in Guatemala is a constraining factor and is likely to lead to delays in problem solving. Notably, AMSSF/MC has created a committee specifically to deal with this issue. The software has been tested for three months and the new MIS is only now being rolled out on a larger scale. This is expected to be completed in October 2007. Whilst reporting for SIEM is in line with the needs of the institution, problems relating to the modification of processes and data importing are known to exist in other institutions using the same software. In terms of data protection, AMSSF/MC will need to improve its backup policies. At the moment, there is no provision for off site storage, which heightens the risk of data loss in the event of a fire etc. Accounting at AMSSF/MC is centralised. Data are sent by branches to head office where they are consolidated. Reports are available monthly.



Governance and Strategic Positioning AMSSF/MC operates as an Association, and is governed by a General Assembly (“GA”), which includes 10 representatives from a variety of backgrounds. The Board of Directors is appointed by the GA and comprises of 7 individuals (6 of whom are Moroccan). The Board meets quarterly. In MicroRate’s opinion the board functions relatively well. The institution’s social objectives remain a high priority. It thus becomes essential that the MFI strike the right balance with that of remaining commercially sustainable. At the Board level there are no systematic risk management policies in place. For example, there are no committees for Audit, Asset and Liability matching or Liquidity risk. Despite the institution’s still small size, a systematic approach to risk management is desirable (particularly an Audit committee to whom the internal auditor can report). In MicroRate’s opinion, building the skills base within the board could go a long way to achieving this objective. The board exerts a strong influence over the management team, and is involved in day to day activities (e.g. the board still signs disbursements cheques and signs employment contracts). In MicroRate’s experience activist boards, which are common during the start-up phase of MFIs, must take special care not to undermine management’s authority. Though still small, AMSSF/MC has now reached the stage in its development, where a clear distinction between the respective roles of management and the board is highly desirable.

From a strategic positioning perspective, the MFI has positioned itself in the same niche as the majority of other MFI’s operating in the Moroccan market. The fact that almost all MFIs offer mainly group loans reflects the industry’s relative immaturity, but this is set to change. Competition is increasing and clients are demanding more sophisticated credit products. AMSSF/MC is responding to this demand, however products remain undifferentiated which could hamper growth going forward. Positively, AMSSF/MC is taking steps to address this by testing of a range of individual loans. Not only will this reduce portfolio concentration, but will enable the institution to grow vertically through higher loan sizes. MicroRate cannot overemphasise the need to test and refine individual loan products before they are rolled out on a large scale by an MFI that is hitherto used to group loans. Failure to do so could have serious consequences including higher arrears and ultimately lower margins. Furthermore, by offering individual loans, AMSSF/MC will be able to compete more effectively against its main rival – Al Amana. Already this institution is able to charge charges lower rates, which makes operating in the same market increasingly difficult. Therefore, finding ways for AMSSF/MC to differentiate and market itself will be crucial.

Financial Profile

Financial Ratios 31 Dec-03 31 Dec-04 30 Jun-05 31 Dec-05 30 Jun-06 Capital Adequacy Debt / Equity 0.3 0.7 0.9 1.1 1.0 Asset Quality Portfolio at Risk / Gross Loan Portfolio 0.2% 0.5% 0.4% 0.6% 1.2% Loan Loss Provision Expense / Average Gross Portfolio 0.6% 0.8% 0.4% 1.8% 1.5% Loan Loss Reserves / Portfolio at Risk 100.0% 64.3% 4.5% 96.4% 4.3% Write-offs / Average Gross Portfolio 0.7% 0.6% 0.3% 1.0% 0.8% Management Operating Expenses / Average Gross Loan Portfolio 43.9% 40.8% 40.4% 35.9% 41.4% Number of Borrowers / Credit Officer 191 198 194 185 177 Number of Borrowers / Staff 144 143 146 138 132 Earnings Net income / Average Equity (ROE) 20.4% 10.5% 6.7% 5.3% 7.0% Net income / Average Assets (ROA) 16.8% 6.7% 4.4% 2.8% 3.2% Portfolio Yield 65.8% 50.4% 47.2% 40.7% 47.2% Interest and Fee expenses / Average Gross Loan Portfolio 0.4% 1.1% 1.3% 2.3% 1.9% Interest and Fee expenses / Average Funding Liabilities 2.2% 2.5% 2.8% 4.0% 2.7% Liquidity Cash & Liquid Assets / Total Deposits 387.8% 966.6% 833.1% 744.9% 1339.9%



Although AMSSF/MC has been consistently profitable, its financial performance has been characterised by rapidly shrinking margins since 2003. For its size, the MFI is relatively inefficient, reporting operating expenses of over 40% of the average portfolio. Pressure on margins was further exacerbated by the consistent decline in portfolio yield, from 65.8% in 2003 to 47.2% in June 2006. This came largely on the back of lower interest rates charged by AMMSF. This downward trend in portfolio yield is expected to continue, following the reduction of certain fees on its group loans in order to remain competitive.

Margin Anlaysis

0.0

25.0

50.0

75.0


%

Operating Expenses Interest ExpensesProvisioning Net Operating MarginPortfolio Yield ROE

For this reason, AMSSF/MC will need to become more efficient because at the moment, current yields will not sustain the institution in the long run. This is particularly relevant given that’s funding costs (1.9% of the average portfolio in June 2006) are expected to rise in the short term. As the institution has been able to successfully negotiate and pay back debt, commercial borrowings comprised a significant 49% of capital in 2005. Access to more subsidised3 facilities reduced this to 39.6% in June 2006, with the bulk of new funding being equity. These commercial loans are priced up to a maximum of 7.75% and are largely unsecured. A loan from Societe Generale (“SGMB”) is backed by a guarantee from USAID.

3 This is a $640,000 facility from the French Development Agency. This is reflected as quasi-capital on the balance sheet owing to the fact that it is interest free and only two instalments are due (in 2010 and 2011 respectively).

Loan facilities as at June 2006

Amount Rate Term Commercial Borrowings

SIDI (French) $198,000 4% 7 years ADS* $115,000 0% 6 years F. Caja Granada $50,500 3.0% 5 years FUSM (Spanish) $225,000 4.0% 4.5 yearsSGMB $310,000 7.8% 3 years BEI $590,000 4.5% 10 years

*A local social development agency Although the MFI has built up good experience in negotiating and paying back debt AMSSF is exposed to foreign currency risk. This being said, only around 13% (SIDI) of total borrowings are not hedged. As hedging mechanisms are expensive, most MFIs rated by MicroRate tend to place foreign currency loans in fixed deposit and draw against this in local currency. At the moment, AMSSF/MC bears the exchange risk themselves. Overall, with a debt/equity at a low 1:1, the balance sheet remains healthy. Moreover, with cash and liquid assets comprising a higher 21.7% of total assets (2005: 15.3%), MicroRate has no immediate liquidity concerns. Future Prospects AMSSF/MC has set itself ambitious growth targets which have been clearly laid out in its 2006 business plan. It is hoped that the institution will grow its portfolio to roughly $15.5 million by 2010, with a total client base of 53,500. At current growth rates this is unlikely to be achieved and in order to grow sufficiently, the MFI will need to improve margins to absorb the impact of higher debt. Moreover, boosting the capital base through higher equity will become imperative if such targets are to be met. From a funding perspective, commercial banks are only slowly warming to microfinance in Morocco, but as yet there is no large scale funding. However, future funding for AMMSF/MC could come from a $2.2 million microfinance fund (negotiated between government and the Moroccan association of microfinance – FNAM). As government funds have been unevenly distributed in the past (leading to huge discrepancies in the sizes of institutions), it is hoped that small to medium MFIs (such as AMSSF/MC) will be the first to benefit in this new funding round.



Overall, the MFI plans to continue offering group loans in the medium to long term. At the moment, it is expected that individual loans will comprise no more than 10% of the portfolio. However, competition will increase and adapting products to suit demand will be crucial over the next 5 years.

(All amounts in USD '000s except as noted)

Income Statement for the year ended: 31-Dec-03 31-Dec-04 30-Jun-05 31-Dec-05 30-Jun-06

Interest and Fee Income 553.7 742.7 341.8 864.0 541.2 Interest and Fee Expense (4.1) (17.6) (9.2) (49.3) (22.1) Net Interest Income 549.6 725.1 332.6 814.7 519.1 Provision for Loan Loss (4.3) (8.2) (2.7) (29.2) (17.3) Net Interest Income After Provisions 545.3 716.9 329.9 785.5 501.8 Operating Expense (369.8) (604.9) (295.1) (772.2) (483.4) Net Operating Income 175.5 112.0 34.8 13.3 18.4 Other Income 7.4 22.7 7.4 64.0 32.1 Other Expenses - - - - - Extraordinary Items - - - - - Net Income Before Taxes 182.8 134.7 42.2 77.3 50.5 Taxes - - - - - Net Income 182.8 134.7 42.2 77.3 50.5

Balance Sheet as at:

Cash and Banks 162.3 576.9 544.7 457.6 844.4 Temporary Investments - - - - - Net Loans 1,055.1 1,888.6 1,718.2 2,348.5 2,866.2 Gross Loans 1,056.2 1,891.0 1,718.6 2,354.2 2,867.6 Performing Loans 1,054.1 1,879.8 1,710.4 2,325.6 2,817.4 Portfolio at Risk 2.1 11.2 8.2 28.6 50.2 Loan Loss Reserve 1.0 2.4 0.3 5.7 1.4

Other Current Assets 106.8 32.2 4.4 55.5 25.2 Current Assets 1,324.2 2,497.8 2,267.4 2,861.6 3,735.8

Long Term Investments - - - - - Property and Equipment 65.7 79.3 95.8 114.5 128.6 Other Long Term Assets 29.1 34.4 19.2 19.9 15.0 Long Term Assets 94.7 113.7 115.0 134.4 143.6

Total Assets 1,418.9 2,611.5 2,382.4 2,996.0 3,879.4

Demand Deposits - - - - - Short Term Time Deposits 41.8 59.7 65.4 61.4 63.0 Short Term Funding Liabilities - - - - - Other Short Term Liabilities 55.6 90.4 56.7 117.1 99.1 Current Liabilities 97.5 150.1 122.1 178.5 162.1

Long Term Time Deposits - - - - - Long Term Funding Liabilities 246.2 968.3 978.4 1,410.5 1,495.2 Quasi - Capital Accounts - - - - 636.3 Other Long Term Liabilities - - - - - Long Term Liabilities 246.2 968.3 978.4 1,410.5 2,131.5

Capital 120.6 145.4 124.0 93.4 128.9 Retained Earnings 361.0 518.9 471.8 584.4 672.6 Other Capital Accounts 593.7 828.8 686.1 729.2 784.4 Equity 1,075.2 1,493.1 1,281.9 1,406.9 1,585.8

Total Liabilities & Equity 1,418.9 2,611.5 2,382.4 2,996.0 3,879.4

Key ratios:

Asset QualityPortfolio at Risk / Gross Loan Portfolio (%) 0.2 0.6 0.5 1.2 1.8 Loan Loss Provision exp. / Average Gross Portfolio (%) 0.5 0.6 0.4 1.4 1.5 Loan Loss Reserves / Portfolio at Risk (%) 50.0 21.4 3.8 19.9 2.9 Write-offs / Average gross portfolio (%) 0.7 0.6 0.3 1.0 0.8

Efficiency and ProductivityOperating Expenses / Average Gross Loan Portfolio (%) 43.9 41.0 40.8 36.4 42.2 Cost per borrower 56.6 74.7 60.9 69.3 76.1 Average outstanding loan size 153.4 203.3 152.4 181.5 202.7 Number of Borrowers per Staff (no.) 143.5 143.1 146.4 138.0 132.2 Number of Borrowers / Credit Officer (no.) 191.3 197.9 194.4 185.3 176.8 Operating Expenses / Net Interest and Other Income (%) 66.4 80.9 86.8 87.9 87.7

ProfitabilityNet Income / Average Equity (%) (ROE) 20.4 10.5 6.7 5.3 7.0 Net Income / Average Assets (%) (ROA) 16.8 6.7 4.4 2.8 3.2 Portfolio Yield (%) 65.8 50.4 47.2 40.7 47.2 Net Interest Income / Average Gross Loan Portfolio (%) 65.3 49.2 46.0 38.4 45.3 Non Interest Income / Total Operating Income (%) 1.3 3.0 2.1 6.9 5.6

Financial ManagementInterest and Fee Expenses / Average Gross Portfolio (%) 0.5 1.2 1.3 2.3 1.9 Interest and Fee Expenses / Average Funding Liabilities (%) 2.6 2.7 2.8 4.0 2.8 Debt / Equity (:1) 0.3 0.7 0.9 1.1 1.4 Total Capital / Risk Weighted Assets (%) 105.2 121.0 123.0 111.0 101.5 Tier One Capital / Risk Weighted Assets (%) 85.6 73.4 69.8 55.4 52.3 Tier Two Capital / Risk Weighted Assets (%) 19.6 47.6 53.2 55.6 49.3 Cash and Liquid Assets / Total Deposits (%) 387.8 966.6 833.1 744.9 1,339.9 Cash and Liquid Assets / Liabilities to the Public (%) 166.5 384.4 446.2 256.3 520.9

Nominal Growth indicatorsAssets (%) 84.0 (8.8) 25.8 29.5 Loan Portfolio (%) 79.0 (9.1) 37.0 21.8 Shareholders Equity (%) 38.9 (14.1) 9.8 12.7 Deposits (%) 42.6 9.6 (6.0) 2.6 Net income (%) (26.3) (37.3) (8.5) 30.6 Note: The figures for June 2005 and June 2006 represent a 6 month period. All relevant ratios have been annualised.

AMSSF/MC

Annex A Page 1

1. Excellence in Microfinance Rating Definitions

Grade Definitions

α++

Those MFIs consistently exhibiting a clear, rational and balanced relationship among the social, financial and operational considerations of sound microfinance practice as compared to an international set of similar companies and emerging standards of the microfinance industry. Optimal efficiency and effectiveness. Very low risk. Excellent future prospects.

1 Optimal

α+

α 2 Good

α−

β+

β 3 Satisfactory

β−

γ+

γ 4 Poor

γ−

Those MFIs striving to balance a clear and rational relationship among the social, financial and operational considerations of sound microfinance practice as compared to an international set of similar companies and emerging standards of the microfinance industry. Good efficiency and effectiveness. Low risk. Good future prospects. Those MFIs working to define a clear and rational relationship among the social, financial and operational considerations of sound microfinance practice as compared to an international set of similar companies and emerging standards of the microfinance industry. Satisfactory efficiency and effectiveness. Acceptable risk. Satisfactory future prospects Those MFIs without a clear and rational relationship among the social, financial and operational considerations of sound microfinance practice as compared to an international set of similar companies and emerging standards of the microfinance industry. Poor efficiency and effectiveness. Very risky. Poor future prospects.

Scoring key:++ Optimal 1α Good 2β Satisfactory 3γ Poor 4

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