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ASSET & LIABILITYMANAGEMENT FOR

MICROFINANCE INSTITUTIONS

Best Practice Balance Sheet Management andCapital Planning

Workshop Overview

SIMARCH NVInterleuvenlaan 623001 HeverleeBELGIUMTel +32 16 39 4732Fax +32 16 39 4731Email: info@simarch.com

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SIMARCH NV

SIMARCH is a premium provider of tailor-made training solutions within theFinancial Services Sector. We assist banks and micro finance institutions in theenhancement of the skills and core competencies of their employees.

Our training programmes are designed to accelerate learning, knowledge transferand the change of behaviour. In order to ensure a powerful learning experience

and a successful delivery, we work with all levels of business leaders andmanagement within an organisation.

The founding principle of SIMARCH is based on the conception that humanresource development has to integrate seamlessly with the vision and overallstrategy of the organisation. Being a customer-focused organisation, we strive atall times to understand the business of our clients completely and to develop andmaintain long-term relationships with every client.

Since 1999 SIMARCH has been a full-service education organisation, specializingin the creation of timely solutions that assist our clients with the improvement oftheir business performance and competitive position.

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FOR MICROFINANCE INSTITUTIONS

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The workshop ASSET & LIABILITY MANAGEMENT FOR MICROFINANCE

INSTITUTIONS, designed by SIMARCH is used by various Financial Institutions in thetraining of their personnel.

Through the use of an ALM Simulation Program called GuardB@nk MFI, SIMARCH hasturned this training programme into an intensive and practical learning experience. Incombination with the classical training approach (class-room sessions), actual and bestpractice issues are discussed and explored.

The workshop provides participants with a solid understanding and overview of the Asset& Liability Management (ALM) function and processes within a microfinance institution.

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The training programme consists of a combination of two parts: a conceptual part and apractical part.

The conceptual part includes discussions and exercises on several theoreticaland practical elements of the ALM function;

The practical part involves several exercises and the taking of variousmanagement decisions as well as the management of the ALM functionthrough the use of a E-Learning simulation program, called GuardB@nk.

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KEY FEATURES OF THE CONCEPTUAL PART OF THEWORKSHOP

The focus of the workshop is to create a conceptual understanding of various ALMactivities (funding, trading, hedging) with current financial products available. The contentdiscussed will enable participants to keep an open mind, geared towards the identificationof market opportunities and the related risk management requirements.The workshop combines a conceptual overview of relevant products and markets withpricing techniques through practical case driven discussions and exercices. It will furtherintegrate an in-depth analysis of the ALM implications for microfinance institutions.

The following specific concepts are covered during the conceptual part of the workshop:

INTRODUCTION

The Financial Servioces Industrya. Financial marketsb. Rules & regulationsc. Organization, accounting, reporting, and audit of market driven transactions

Integration of market risk opportunities and strategies within the corporate strategy

The participants and major players in the market

Major Risks of MFIso Financial Risks

Credit Risk Transaction risk Portfolio risk Liquidity Risk

Market Risk Interest rate risk Foreign exchange Risk Investment portfolio risk

o Operational Risks Transaction Risk Human resources Risk Information & technology risk Fraud (Integrity) Risk Legal & Compliance Risk

o Strategic Risks Governance Risk Reputation Risk

External Business Risks

PRICE VOLATILITY RISK MANAGEMENT

Principals of risk management

Matched hedging

Basis risk

REGULATORY CONSTRAINTS

Trading, Market risk and ALM

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ALM CONCEPTS

Risk Management Framework and the ALM Process in MFIs

Scope of ALM

Roles/Responsibilities of ALCO

ALCO Reports Agenda Points for ALCO meeting

VALUE CREATION & BANK PROFITABILITY

Value Drivers of MFIs

Performance measurement of MFIs

Profitability measurement of MFIs

Risk-adjusted returns of MFIs

Capital-adjusted returns of MFIs

MFIs FINANCIAL MANAGEMENT

Balance Sheet structures

Off-Balance Sheet items

Asset Securitisation

LIQUIDITY RISK MANAGEMENT

Liquidity Risk Management Framework of MFIs

Liquidity Policy

Funding and Trading Liquidity

Liquidity Risk Limits

Dealing with Currency Risk

Liquidity Management - measuring and reporting

Contingency Funding Plan for MFIs

INTEREST RATE RISK MANAGEMENT

Understanding Interest Rates

Sources of Interest Rate Risk of MFIs

Earnings and Economic perspectives

Interest Rate mismatching (Interest Rate Gaps)

Gap Analysis (mechanics, assumptions, reporting) of MFIs

Financial Derivatives (futures, FRAs, interest rate swaps, options) Hedging Strategies of MFIs

FOREIGN EXCHANGE RISK MANAGEMENT FOR MFIs

Foreign Exchange Risk Management for MFIs with foreign currency liabilities,

Country risk in dollarized economies,

Understanding and pricing the products based on foreign exchange risk exposure(devaluation, appreciation, and depreciation of local currency),

Hedging against the foreign exchange risk (loan guarantees, options, swaps and back-to-back lending, forward contracts and futures), feasibility of utilization of hedging

techniquesalternatives, lending in local currency, and supporting policies to encouragelocal capital market development.

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CAPITAL MANAGEMENT

Capital Adequacy Requirements of MFIs

The Basel II Accord and MFIs

Measuring Capital Adequacy Risk-Based Capital Credit Risk

Risk-Based Capital Market Risk

Participants apply increasingly all of the concepts discussed/taught and realiseincreasingly the impact competitors have on their overall performance, as they strive tooptimise the performance of their financial institution and create shareholder value.

The simulation can cover up to eight quarters in order to allow the various management

teams to experience the full consequences of their decisions.

ALM TRAINING PROGRAMME COMBINATION OF THEORY AND PRACTICE

ALM TRAINING PROGRAMME COMBINATION OF THEORY AND PRACTICE

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KEY FEATURES OF THE PRACTICAL PART OF THEWORKSHOP

(Including the use of the GUARDB@NK MFI Simulation Program)

During the practical part of the workshop, a technology-based simulation program calledGuardB@nk, is used. The GuardB@nk simulation program depicts a microfinanceinstitution operating within a competitive environment.

Participants are divided into Management Teams, each managing their own financialinstitution. As in the real world, teams compete against one another. The teams have toprice loans and deposits and make marketing and strategic decisions.

Furthermore, they have to manage a portfolio of loans and securities, ensure that theirinstitution meets the capital adequacy requirements and that it manages the ALM functionwell. All this whilst monitoring various risks in an environment characterized by volatileinterest rates. Decisions are made within a given timeframe, called a period. Each periodis the equivalent of three months (a quarter). This process assists participants inexperiencing and measuring both the immediate and long-term effects of their decisionson the performance of their financial institution. Each participant to the program has the

opportunity to experience the complexities of managing the ALM function in a financialinstitution.

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In order to prepare themselves for the practical part of the programme, participantsreceive a User Manual, an initial set of Financial Statements and an Industry Report aspre-reading two weeks prior to the commencement of the training programme.

The programme ends with an assessment phase. On the final day of the programmeparticipants have to present to the Supervisory Board of their institution on the following

criteria:

Strategic agenda and any changes made

Corporate objectives set and achieved

Policy decisions taken

Pricing strategies and dealing with competition

Key Success Factors and difficulties experienced

Financial Results of their institution

Future outlook for their institution.

SSIIMMUULLAATTIIOONNPPRROOGGRRAAMMOOVVEERRVVIIEEWWThe following specific bankingactivities are included in thesimulation program:

Liquidity Risk Management;

Interest Rate Risk Management;

Credit Risk Management (fourdifferent industries each with theirown risk profile);

Distribution Channelmanagement;

Savings Deposits;

Current Deposits:

Long-Term Funding;

Capital Account Management;

Off-Balance Sheet items(commitments / securitisation/interest rate swaps

Each quarter the following results(output) is produced by the simulation

program:

Financial Statements, comprisingof:

Balance Sheet; Income Statement; Notes to the Financial

Statements; ALCO Reports; Industry Report;

Market Reports.

Other unique features of the programare:

The economic environment usedduring a session is tailored by thefacilitator in order to correspondwith the current economicsituation in a specific country.

The level of complexity of thesimulation can be adjusted as thefacilitator can adjust/determinethe following:

The parameters for theeconomic environment;

Several banking activitiescan be enabled/disabledfor the duration of thesimulation (see below) Mortgages (Fixed rate

& Variable rate);

Securitisation; Branches (open/close)

versus Fixed Network; Issuing of shares; Interest Rate Swaps; * Repos and Reverse

Repos. *

These banking activitiescan also be introducedlater in the trainingsession.

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After the course participants will:

Have an improved understanding of financial instruments and the consequencesof their utilization;

Have a solid understanding of risk and pricing constraints and hence of the returnrequirements;

Have an enhanced understanding of risk and regulatory constraints;

Understand the key Asset Liability Management (ALM) concepts;

Recognise how these concepts affect day-to-day decision-making in a bank;

Be able to design strategies to control risk within acceptable limits by usingappropriate products or instruments;

Possess an overview of how performance is measured and value created in afinancial institution;

Be able to function more effectively, directly or indirectly, as part of the ALMprocess in their institution.

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The workshop provides a unique learning experience for the following target groups:

Treasures and Risk Managers;

Asset & Liability and Funding Managers;

Personnel that form part of the ALM support function in an MFIs;

Chief Financial Officers;

Budgeting and Capital Planning Executives; Controllers/Auditors/Accountants.

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In order to ensure a powerful learning experience the number of participants per sessionis limited to 20 participants.

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The workshop is conducted over a period of three to five days and is intensive by nature.