European Microfinance Week 2017

INTRODUCTION

Germain BIRGEN, Banque de Luxembourg, opened this session by referring to the definition of geopolitical risk: the risk deriving by a decision taken by one country which impacts another country. He added that the definition needs to include local political risks, global movements and ideologies such as Boko Haram, ISIS, Al-Qaeda, nationalism, separatism, and populist movements. He then asked the panellists to briefly introduce the organisations they were representing, and continued the session by addressing each panellist with specific questions.

Bunmi LAWSON introduced Accion Microfinance Bank, which started operations ten years ago in Nigeria. She stressed that Nigeria offers significant opportunities because of its population size and lack of access to financial services for local populations.

Milena Loayza presented the Belgian Investment Company for Developing Countries (BIO), a governmental organisation with the mission of supporting the private sector in developing and emerging countries, and with a strong focus on SMEs.

Nejira Nalić introduced Mi-Bospo, a Bosnian microcredit organisation, affiliated to Women's World Banking which started operations in 1996, to provide economic support to women after the war.

Alexander REMY presented Oikocredit, a Dutch investment cooperative operating for over 40 years which invests mainly in inclusive finance, renewable energy and agriculture and is present in 31 countries and has partners in 71 countries.

Aurélien HOLLARD introduced Arendt & Medernach, the biggest law firm in Luxembourg. Hollard's team is involved in fund formation and structuring micro­finance investment vehicles (MVIs).

Birgen briefly presented the Banque de Luxembourg, which is currently acting as a custodian and depositary bank for microfinance banks structured under Luxembourgish law.

DISCUSSION

Birgen asked Lawson how Accion is managing geopolitical risk in their operations in Nigeria. Lawson emphasised that risk management involves learning from history. For example, Accion expects populist actions from governments before elections. She noted that it is important to have strong partners and senior management who understand the local environment, and that practitioners should plan ahead before a crisis effectively happens. Accion also analyses economic and poverty trends, and has observed a correlation between poverty and criminal activity. When poverty increases, Accion implements additional safety measures in their branches. Accion also stays out of the territories where Boko Haram is most active, as a risk mitigation strategy.

Nalić was questioned about Mi-Bospo's relationship with the local government in Bosnia. Nalić explained that the Bosnian government sees Mi-Bospo simply as a money-lending institution. She stated that the government is not open to discuss diversification of products, mobile banking, or deposit-taking licensing. The institutions are struggling as they do not have a way to become real commercial entities and have no corporate structures that will allow them to access markets. Nalić, currently the president of the Microcredit Association in Bosnia, wants to further collaborate with the World Bank as a way of mitigating political risks.

Birgen then asked Remy how Oikocredit mitigates political risks in the countries where they operate. Remy explained that mitigating risks is a twofold procedure. Firstly, one needs to assess the economic risks: looking at regulations, currency controls, Central Bank involvement, and government effectiveness. Secondly, it is also important to assess compliance risks, which effectively means knowing who you are working with. These techniques help Oikocredit pre-empt any political risk. Loayza agreed with those statements, further mentioning that investors should collect as much information as possible and be aware of the existing risks in order to make a well-informed decision. She added that risks can sometimes be anticipated if you stay alert to local conditions.

A question was posed to Hollard on whether legal documentation can be used to manage political risks, apart from purely informing the investor. Hollard explained that the first way of mitigating risks is through the legal environment, which essentially asks for funds to be regulated. In Europe, most cases require the implementation of a specific risk management procedure to get the approval of the financial authorities. Moreover, risk management can happen at the level of fund documentation itself, by making sure there is full disclosure of risks and sufficient risk diversification in the fund's portfolio. Hollard emphasised that it is not only a question of risk diversification and investment policy, but also a matter of the fund's mission. When investing in a fund, the investor is committing to the mission statement of the fund and to the related risks.

Birgen addressed all panellists, asking them how organisations can deal with more specific risks, for example demonetisation. Bunmi emphasized that risk management happens before the risk is manifested. It is thus important to gather market intelligence and engage government and regulators. Moreover, practitioners need to plan ahead for risks by keeping in mind the customer's perspective. Bunmi also explained that practitioners should try to minimise losses when the impact happens. This may mean restructuring or renegotiating with investors. Remy explained that for Oikocredit, demonetisation in India was hard to predict, but that the microfinance sector proved to be resilient. He pointed out, however, that no assessment could help investors anticipate what was about to happen. Oikocredit's reaction was to stay well-informed and reach out to institutions in case they needed additional funding. He added that the impact can vary a lot within the country, from region to region.

The moderator then asked the panel how investors can react to risks, or mitigate them, when governments block exports of currency. Loayza mentioned that one possibility is to trust specialised agencies that rate countries according to transfer risk before making an investment. Once the investment is made, solutions should be explored together with the client. Hollard emphasised that documentation flexibility is important when facing such risk. This will allow for restructuring or converting a loan into equity. If the fund documentation is too restrictive, then the risk management options are also limited.

The panellists also commented on their outlook for the future of microfinance and the influence of digitalisation. Lawson mentioned that there are great opportunities in Nigeria mainly due to its large population size. She added that the Nigerian government makes regulation in FinTech relaxed because it wants to promote FinTech further. Lawson also advised those wanting to invest in Nigeria to have diversified portfolios and to look for strong local managers, noting that microfinance banks need to adapt to the changes brought by digitalisation. Hollard referred to the new trends of technology, cryptocurrencies, direct lending and crowd funding, areas with strong demand and lighter regulation. He mentioned that we should find a good balance between benefiting from these new trends, and also staying on the safe side of regulation. Nalić mentioned that digitalisation and FinTech are good for clients and can bring a lot of new opportunities in the sector. Remy noted that political risk will not decrease in the future, but that the industry has matured and is better able to mitigate the risks when compared to the past. Loayza agreed, and mentioned that risks are always present and ever-changing. The impact of geopolitical risk is larger today due to globalisation.