MICROCAPITAL STORY: Co-Operative Bank and Deutsche Bank to Launch a USD 50 Million Microfinance Fund to Directly Target Credit Unions and Co-operatives

Co-Operative Bank and Deutsche Bank (DB) have recently announced the launch of a USD 50 million microfinance fund to target credit unions and co-operatives directly. The “Global Co-operative Development Fund” (GCDF) is expected to launch this month and will be open to investors in the fourth quarter 2009. The fund aims to provide capital to the poorest communities with a geographical target of Central Europe, Asia, and Latin and Central America. The GCDF will be managed by Deutsche Bank and sub-managed by Oikocredit. The Co-operative Bank will be principal sponsor for the GCDF. No additional information regarding how the fund will function is provided.

Deutsche Bank’s involvement in microfinance is not solely limited to the establishment of the GCDF. In fact, Deutsche Bank has also arranged and managed 6 funds for a total of roughly USD 500 million in social investments. The first microfinance fund (Deutsche Bank Microcredit Development Fund (DB MDF)) was launched in 1997. The bank is now active in 45 countries, lending money to roughly 100 partners. In 2007, Deutsche Bank had also issued an USD 84 million securitization (db Microfinance-Invest Nr. 1) of subordinated microcredits.

In a recent MicroCapital report, Fitch has confirmed a downgrade of VG Microfinance – Invest Nr. 1 GmbH’s senior CDO notes to ‘BB+’ and assigned a Negative Outlook (with Deutsche Bank in its role as seller and protection buyer). According to Fitch, the downgrade of the senior CDO notes is the result of the rating agency’s concern for the political uncertainty and sharp asset deterioration of the Nicaraguan MFI, Asociación de Consultores para el Desarrollo de la Pequeña, Mediana y Microempresa (ACODEP’s) loan book. ACODEP currently represents 8.8 percent of the portfolio with default risks that have materially increased. However, given the credit enhancement of the deal, Fitch has stated that it “expects the CDO notes to be able to withstand the default of 5-6 names without incurring a loss.” In addition, Fitch notes that the credit risk associated with the majority of the portfolio has remained stable or in some cases has improved slightly.

Additional notable microfinance funding by DB include the bank’s 2006 investment of USD 47.9 million in the European Fund for Southeast Europe, part of which went to an asset securitization deal for a large Bulgarian MFI. In September 2007, 21 German investors funded the Deutsche Bank German Fund for Microfinance with USD 83.3 million. Deutsche Bank also invested USD 5.5 million in the fund. The sub-debt fund provided loans of up to USD 6.9 million to MFIs in 15 countries.

Oikocredit (sub-manager of the DB GCDF) was established in 1976. The company finances cooperatives, microcredit institutions and viable enterprises with a large number of beneficiaries in 58 countries mainly in Asia, Eastern-Europe, Latin America and Africa. Through its global network of 35 offices, Oikocredit offers loans and investment capital to farmers, cooperatives, microfinance institutions and small to medium enterprises (SMEs).

Between January and March 2009, Oikocredit provided USD 19.2 million in new loans in 69 countries. The organization currently funds 758 projects of which 501 are microfinance projects; the rest involving other types of social service.

Oikocredit also manages a microfinance investment vehicle (MIV). In a recent MicroCapital report, the Consultative Group to Assist the Poor (CGAP) ranked Oikocredit’s MIV 3^rd place in assets under management at USD 632 million as of December 2008. The CGAP report acknowledges that while emerging market funds have experienced a 20 percent sell-off, microfinance investment funds (MIVs) experienced positive returns in 2008.

Through microfinance alone, Oikocredit claims to reach 16.8 million people. Oikocredit distributes its funding as follows: 40 percent in Latin America, 14 percent in Africa, 27 percent in Asia, 18 percent in Central and Eastern Europe, and 1 percent elsewhere. In November 2008, MicroCapital reported that Oikocredit and USAID would partner together to contribute USD 36.2 million to microfinance institutions (MFIs) over the next ten years.

The MixMarket reports fund assets for Oikocredit (as of December 2007) at USD 614 million with the number of active microfinance investments at 309. Fund assets allocated to microfinance investments is listed at USD 304 million. For additional detail regarding microfinance investments (loans, debt securities, equity, guarantees, grants) for Oikocredit please see here.

Established in 1972, the Co-Operative Bank can trace it origins from formation of the Loan and Deposit Department of the Co-operative Wholesale Society. In 2002 the Co-Operative Bank formed the Co-operative Financial Services (CFS) which has over 3 million members and USD 59 billion in assets under management across its retail & corporate business. The DB GCDF is the fourth microfinance initiative that the Co-Operative Bank has participated in since 2005. Investors in previous funds included pension funds with a social remit.

MicroCapital previously reported that the Co-Operative Bank had created a USD 50 million fund in order to support the development of small businesses in the world’s poorest countries. The article can be found here.

In 2005, the Co-operative Bank committed USD 5 million to the Global Commercial Microfinance Consortium (GCMC), an USD 80 million syndicated fund (sponsored and managed by Deutsche Bank Community Development Group Loans from the GCMC) that has been committed to MFIs across the globe (in places such as Russia, Kosovo, Peru, Nicaragua, Colombia, Pakistan, Mozambique, Mongolia and Azerbaijan.) The scheme was endorsed by former US President Bill Clinton.

The Co-operative Bank has also made a commitment of USD 2 million to the Blue Orchard Loans for Development Fund, launched by Morgan Stanley and managed by global microfinance investment manager Blue Orchard Finance SA. The securitized fund comprises of loans to 21 Microfinance Institutions in 13 countries in Latin America, Eastern Europe, Asia and Africa.

By Zoran Stanisljevic

Additional Resources:

Financial Times, May 2009: Microfinance: Co-op and Deutsche fund will help poor localities

PR Newswire, June 2009: Co-operative Bank Launches First Development Fund for Co-Operatives in Developing Countries

MixMarket: Deutsche Bank Microcredit Development Fund, Oikocredit,

Co-operative Bank: Homepage

Deutsche Bank: Microfinance: Homepage

MicroCapital Story, May 2009: VG Microfinance – Invest Nr. 1 GmbH’s senior CDO notes downgraded by Fitch Ratings from ‘BBB’ to ‘BB+’ (assigned a Negative Outlook) with Deutsche Bank AG in its role as seller and protection buyer

MicroCapital Story, May 2009: Oikocredit Loans $2.3m to Microfinance Institutions Kitunda SACCO, Intellekt, FMFB Tajikistan, and PMRCA Perelik

MicroCapital Story, May 2008: ING Review of Deutsche Bank’s Microfinance Activities, the Microcredit Development Fund, and the Global Commercial Microfinance Consortium

MicroCapital Story, September 2007: The United Kingdom’s Co-Operative Bank Establishes USD 50 million Microfinance Fund