Pioneering ethical micro- fi nance in Africa while unlocking shareholder value ANNUAL REPORT 2008 WorldReginfo - 6c98614c-4207-4165-a060-85bf4831b579 Highlights Blue Financial Services Limited • Annual Report 2008 1 Salient highlights • Loan book increased by 133% from R207 million to R482 million • Earnings increased by 93% from R32 million to R61,7 million • Earnings per share increased by 41% from 10,37 cents to 14,58 cents Ratios For the year ended 2008 2007 % change EPS (cents) 14,58 10,37 41 Diluted EPS (cents) 13,93 8,77 59 HEPS (cents) 12,28 11,81 4 Diluted HEPS (cents) 11,86 9,89 20 PE ratio 35,10 31,82 10 PEG ratio 0,95 0,86 10 Cost to income ratio (%) 75,31 64,27 17 NAV (cents) 133,67 125,13 6 Tangible NAV (cents) 55,69 31,36 78 Debt to equity ratio (%) PEG = price earnings divided 78,59 32,50 142 by earnings growth and is During the year calculated by dividing historic under review, Blue PE by the past financial year’s issued 118 279 498 earnings growth rate. new shares. Turnover Net profit Headline earnings per share (000) (000) (000) 300 000 70 000 14 250 000 60 000 12 50 000 10 200 000 40 000 8 150 000 30 000 6 100 000 20 000 4 50 000 10 000 2 0 0 0 2005 2006 2007 2008 2005 2006 2007 2008 2005 2007 2008 Blue Financial Services vs AltX and Small Cap index on JSE Botswana listing: BFS share price rallies to 650 cps Blue announces formation of BIMFB in Nigeria – share breaks 600 cps for first time Latest interest rate hikes in South Africa First subprime scares hit market 01/03 22/03 12/04 03/05 24/05 14/06 05/07 26/07 16/08 06/09 27/09 18/10 08/11 29/11 20/12 10/01 31/01 21/02 13/03 03/04 24/04 15/05 05/06 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2008 2008 2008 2008 2008 2008 2008 2008 –– Blue –– AltX –– Small Cap WorldReginfo - 6c98614c-4207-4165-a060-85bf4831b579 Micro-finance in Africa: Past, present and future 2 Blue Financial Services Limited • Annual Report 2008 Different meaning to The principal difference between micro-financing in South Africa and the rest of the different continent is that the South African model traditionally revolved around personal credit to the people unbanked whereas in the rest of Africa micro-finance concentrated around NGOs, charity organisations and co-operative structures with the predominant aim of providing start-up capital for small enterprises. Salaried employees able to open bank accounts but without access to financial services HISTORY OF THE MICRO-FINANCE INDUSTRY MICRO-FINANCE IN SOUTH AFRICA Micro-finance is centuries old, but until recently remained Before 1993, most South Africans only had access to savings largely unstructured and informal. Evidence of this is the accounts-type financial products, which were primarily used Susus in Ghana, Chit Fund in India and Tortines in West Africa. for depositing salary payments. These typical South Africans, The advent of formalised micro-financing has its roots in the however, at times had special needs such as educational growth of credit unions in Europe in the 19th Century (Friedrich fees to finance, which many could not extract from their Wilhelm Raiffeisen in Germany 1870 and People Credit Banks savings or monthly salaries. Many inevitably turned to in Indonesia 1895. Latin America also saw significant growth informal lenders, who charged up to 100% interest and in credit unions in the 1900s). weren’t averse to strong-arm collection tactics. Government subsequently pressured existing financial THE ADVENT OF MODERN-day MICRO-FINANCE institutions to offer formal lending products to address these Micro-financing as we know it today developed as a result needs, but the institutions responded by motivating that of lending initiatives to poor farmers and villagers in South limitations imposed by the Usury Act made it unprofitable Asia and Latin America in the mid-1970s. The most notable for them to carry the risk and administrative costs of smaller of these was the Grameen bank in Bangladesh which loans to a lower-income market. developed a successful peer group micro-lending model that As a consequence, on 31 December 1992, the South African was later exported to other countries and copied by donor government promulgated an exemption to the Usury Act that organisations and non-governmental organisations (NGOs) enabled lenders to advance loans of up to R6 000 repayable that lent money for social and charitable causes. In 2006 over 36 months or less, without any limitation being placed the concept earned a Nobel Peace Prize for its originator, on the interest or costs that could be recovered from the Bangladeshi Professor of Economics Muhammad Yunus and borrower. the Grameen bank for their “efforts to create economic and Contrary to expectations, existing financial institutions didn’t social development from below”. seize the opportunity presented through the new legislation. In the early 1990s mainstream financiers started realising The first participants were a number of illegal lenders taking the potential of micro-lending as a profitable business, the opportunity to legitimise illegal lending operations. In and began to develop and offer micro-lending products. the new transparent and legalised environment, however, One of the main drivers of this interest was developments it soon became apparent that the market’s demand for in technology and scoring methodologies which enabled financial products was colossal and could hardly be served risk modelling and mitigation. By 2005 the popularity of by the initial market entrants. This opportunity was seized micro-finance had grown internationally to such an extent by a number of entrepreneurs, and the industry experienced that the United Nations (UN) declared 2005 as the year of unprecedented growth. This was not limited to turnover, micro-credit, to globally promote it as a “bottom up” financial but included an increase in sophistication which attracted approach that could be more effective than “top-down” commercial banks and other major role players. By 1999 development initiatives such as international aid and debt micro-lending had grown from a zero base into a R15 billion per annum industry, leading government to further revise relief at government levels. legislation and introduce a micro-finance regulator to protect WorldReginfo - 6c98614c-4207-4165-a060-85bf4831b579 Blue Financial Services Limited • Annual Report 2008 3 consumers. In 2006 the passing of the National Credit Act In this climate of socially responsible credit, micro- (NCA) gathered all credit transactions into the ambit of finance is attracting increasing institutional and individual standardised legislation. As with the earlier 1999 legislation, interest as a dual-purpose investment that delivers both the incoming NCA drove out dubious operators and smaller economic and social returns. operations that could not match the economies of scale of the heavyweight South African micro-financiers that had HOW BIG IS THE MICRO-FINANCING MARKET? emerged from the pack. The short answer is – demand far outstrips supply. In The South African micro-lending industry can now be 2007 the Deutsche Bank estimated that so far up to considered a mature and sophisticated R23 billion per USD25 billion had been loaned out to about 100 million annum (2006 figures) market, with a growth potential that people. The world presently has about 3 billion poor is unlikely to again match the explosive expansion of the people, however, of which about 1 billion are the working 1990s. poor who could support micro-finance products. The funding shortfall is therefore massive, at about MICRO-FINANCE IN SUB-SAHARAN AFRICA USD250 billion at current values. Entirely the reverse is true in greater Africa, however, as the vast majority of these populations remain unbanked and desperately in need of viable micro-lending products. Forecast of institutional and individual Micro-finance is not new in Africa, as NGOs and other investment (USD bn) institutions have been offering loans for decades, but 25 the supply is often mismatched to the demand. In many instances the potential borrowers are required to comply 20 with very specific circumstances to access the funds. The vast majority of salaried employees, probably in Blue’s 15 opinion the most stable target market, have also for various reasons been excluded. This mismatch is evidenced, 10x for example, in Uganda, where before Blue commenced 10 operations there, the purchase of assets could only be financed through an overdraft facility, which very few 5 Ugandans had the equity to obtain. 0 Blue believes that extending its business throughout Africa 2004 2005 2015 will not only deliver outstanding returns in the medium and n Institutional and individual investments long term, but it will also be instrumental in reviving the n International financial institutions economies of the communities where we become active. Source: Deutsche Bank Research, December 2007 SOCIALLY RESPONSIBLE INVESTMENT (SRI) Bangladesh, where modern-day micro-financing basically SRIs can be described as investments that provide the started, still only has a 35% penetration of its potential financial returns with positive social, environmental and borrowing market. Other countries with huge populations ethical consequences. These investments are made by of poor people such as India, Brazil, Indonesia and foundations, NGOs and increasing numbers of pension funds, Nigeria, have a market penetration of less than 3%. insurance companies, universities and religious institutions. In the following table the 2004 survey conducted by In the USA the volume of SRIs has grown from USD639 billion the Microfinancing Information Exchange (MIX) shows in 1995 to USD2,3 trillion in 2005, while in Europe SRI assets no African country breaching the 3% level, with many grew from EUR501 billion in 2003 to EUR1 trillion in 2006.