EUROPEAN UNION MINISTRY OF DEVELOPMENT PUBLIC WORKS AND HOUSING

Romanian Micro Credit Scheme

ROMANIA

EUROPEAN UNION MINISTRY OF DEVELOPMENT PUBLIC WORKS AND HOUSING

Micro Credit SchemeStakeholders

• Founders: European CommissionGovernment of Romania through the Ministry of Development, Public Works and Housing (MDPWH) European Bank for Reconstruction and Development Dezvoltare (EBRD) (matching funds)

• Beneficiaries: start-ups and micro-enterprises• Management: MDPWH– Contracting Authority

EBRD – Fund ManagerPartner Lending Institutions

EUROPEAN UNION MINISTRY OF DEVELOPMENT PUBLIC WORKS AND HOUSING

The Budget of the SchemeEU/RG – Total Contribution18,02 mil Eur

- 2,5 mil. Eur – Technical Assistance - 3, 0 mil. Eur – Risk Share Fund - 12,52 mil. Eur – On-lending funds for

Micro-financing institutions (MFIs)

EBRD- (matching funds):approx 50-60 mil. Eur

EUROPEAN UNION MINISTRY OF DEVELOPMENT PUBLIC WORKS AND HOUSING

Reimbursement SchemeFounders

EU and RO Gov.

Fund Manager

EBRD

PLI

MFIs, banks

Beneficiaries Start-ups and

micro-enterprises

Level 1

Level 2

EUROPEAN UNION MINISTRY OF DEVELOPMENT PUBLIC WORKS AND HOUSING

How the scheme works –Level 1

Founders

EU and RO Gov..

Fund Manager

EBRD

PLI

MFIs. Banks

Activities:• Negotiation of the

Contribution Agreement between the Gov (MDPWH) and EBRD.

• Transfer of funds to the Fund Manager.

• Design of the exit-route for the scheme by the end of programme

Activities:• Drafting ToRs for PLIs• Evaluation of PLIs capacity to

implement the scheme• Negotiation of the Loan

Agreements with PLIs • Funds disbursement to the PLI• Scheme monitoring• Reporting to founders

EUROPEAN UNION MINISTRY OF DEVELOPMENT PUBLIC WORKS AND HOUSING

How the scheme works–Level 2PLIs

MFIs, Banks

Beneficiaries

Start-ups and micro-enterprises

Activities:• Design financial products tailored to the

beneficiary• Promotion of the microcredit scheme• Credits award to final beneficiaries• Monitoring the beneficiaries• Collect the reimbursements• Reporting to Fund Manager

EUROPEAN UNION MINISTRY OF DEVELOPMENT PUBLIC WORKS AND HOUSING

Partner Lending Institutions (PLIs) selected:

OMRO –Opportunity Micro-credit Romania • Based in Targu Mures and has 8 branches throughout the region• Four year loan for a total of 2.8 MEUR

71% of the loan is financed by EBRD’s own resources and 29% by the resources of the Romanian Government and the European Commission through the EBRD administered Romania Micro Credit Investment Special Fund.

• As of end-June 2008 the institution disbursed a total of 1,324 loans for a total amount of EUR 4.5 million by using the RMCF funding. Compared to the previous period, this represents an increase of 27% in terms of number and 25% in terms of volume.

• The average monthly disbursement during the reporting period was close to EUR 148,000 in terms of volume and 47 loans in terms of number of loans. OMRO met fully the target clients of the RMCF: the vast majority of loans disbursed are micro loans to the smallest enterprises. The average amount of loans disbursed stood below the EUR 3,500 mark.

EUROPEAN UNION MINISTRY OF DEVELOPMENT PUBLIC WORKS AND HOUSING

• The portfolio at risk (PAR) for over 30 days is only just over EUR 42,000 representing 2.15% of the outstanding loan portfolio. This is aligned with a deterioration in the arrears rates of the overall loan portfolio of the institution; the portfolio at risk for over 30 days was approximately 6% as of end-April 2008. This is in part explained by a general trend observed on the Romanian lending market, which was expected to filter into the Facility’s funded portfolio. Nonetheless, the operational team is monitoring this development closely and is planning to support OMRO’s risk management operations with future TA projects.

EUROPEAN UNION MINISTRY OF DEVELOPMENT PUBLIC WORKS AND HOUSING

Banca Transilvania – Bucuresti/ Cluj Napoca • Banca Transilvania is a success story in the Romanian banking sector.

Founded in 1993 in Cluj Napoca by 40 local entrepreneurs, BT emerged as the largest bank in Romania and is still majority owned by local investors.

• A five year loan for a total of EUR 15 million from the Facility for on-lending to micro and small enterprises. EUR 6 million of the loan is financed by EBRD’s own resources, EUR 4 million from the resources of the Romanian Government and the European Union through the EBRD administered Romania Micro Credit Investment Special Fund. Very importantly, the EBRD and the government funding was successfully leveraged by commercial loan funds: EUR 5 million was syndicated to Caja Madrid.

• In terms of BT’s on-lending operations, the institution has disbursed 103 loans amounting to EUR 931,646. This represents a significant increase when compared to the last monitoring period, when the bank had significant delays in launching this product—in contrast to the NBMFIs that have MSE lending as their core products. The vast majority of the loans have been placed in the North-West region (46%), followed by Bucharest-Ilfov (16%), Centre (11%), South-East (9%), North-East (8%), South West (7%) and West (3%).

EUROPEAN UNION MINISTRY OF DEVELOPMENT PUBLIC WORKS AND HOUSING

Express Finance – Timisoara

• Express Finance (EF) has more than 11 years of experience in the MSME and housing lending market in Romania, initially as an NGO called CHF Romania, and beginning with January 2006 as a commercial company Express Finance S.A. EF is now one of the largest microfinance providers. Based in Timisoara (Western Romania), EF carries out its activities through 17 site-offices, and its operations cover 26 of Romania's 42 counties. EF's portfolio has grown from an initial USD 150,000 financing pool focused on the Timis County, to a current portfolio of EUR 10 million. Despite rapid growth and geographic expansion, EF maintained a high level of portfolio quality.

• EF received a three year loan for a total of EUR 2.25 million from the Facility for on-lending to micro and small enterprises. 51% of the loan is financed by EBRD’s own resources and 49% by the resources of the Romanian Government and the European Commission through the EBRD administered Romania Micro Credit Investment Special Fund.

EUROPEAN UNION MINISTRY OF DEVELOPMENT PUBLIC WORKS AND HOUSING

• As of end-June 2008 the institution disbursed a total of 380 loans for a total amount of EUR 2.4 million by using the RMCF funding. This represents an increase of 32% in terms of number and 140% in terms of volume when compared to the last monitoring report. The first disbursement was done in September 2007, and up to June 2008 the average monthly disbursements were over EUR 222,000 in 36 loans. As of June 2008, 5% of the Facility’s outstanding loan is comprised of loans granted to new businesses.

• The regional distribution of the financing is dictated primarily by the focus of EF’s branches, but is widely spread throughout the country. At present, 51% of the loans granted were in the west region, 18% in the North West, 16% in the Centre, 8% in the South West, 5% in South Muntenia, 2% in the South East and 1% in the North East, as per definitions included in the original project study provided by the European Union.

• EF’s loan portfolio is of good quality and the portfolio at risk for over 30 days was around 3.5% as of end-June 2008. In respect of the loans disbursed through the RMCF, the PAR for over 30 days was 2.8%.

EUROPEAN UNION MINISTRY OF DEVELOPMENT PUBLIC WORKS AND HOUSING

CAPA Finance

SC Capa Finance IFN is a non banking financing institution located in Romania, having its headquarters in Cluj Napoca and over 25 officers both in the urban and in the rural area of the country. Capa began its loan activity in Romania in 1996.

At the end of 2007 a group consisting of Romanian Enterprise Fund (RAEF) and Emerging Europe CAP Cooperatief U.A (EECAP) whose main shareholder is the Balkan Accession Fund (BAF), bought a consistent pack of CAPA shares, becoming the majority shareholder.

Following the change in ownership in CAPA Finance, the negotiations have been renewed in respect of including CAPA Finance in the Facility. At present a EUR 10 million loan is being considered and it is expected to be signed.

EUROPEAN UNION MINISTRY OF DEVELOPMENT PUBLIC WORKS AND HOUSING

A few conclusions:

• increased competition in the banking sector lead many commercial banks to seek new markets including microenterprises hence increased challenging environment for MFIs,

• relatively steep growth of MFIs' loan books leading to high leverage,

• overindebtness of borrowers (high level of consumer lending) combined with sharp increases in oil, energy and food prices are significant factors contributing to overall deterioration of quality of loan portfolios. This leads to higher recovery costs, high provisions eat into profits and even reduce capital base,

• the credit cruch lead to increase cost of funding and to a reduced availability of funds,

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Hence, at this stage crucial:• innovative products to maintain competitive edge,

• new capital to normalise leverage ratios and strengthen institutions allowing for further growth,

• strict control of the quality of the loan portfolios (for the provisions not to reduce profits or even result in losses which in turn reduce capital),

• not much can be done directly with the increased funding costs as such but MFIs must put in place risk management processes and controls to be able to react to funding changes.