ProCredit Group Central Bank Mandatory Reserves Coverage

Project Description

This summary covers an investment by ProCredit Holding AG & Co. KGaA in its subsidiary in Bolivia. ProCredit Holding AG & Co. KGaA has applied for a MIGA guarantee of €8 million (about $10.9 million equivalent) for a period of up to 10 years against the risk of expropriation of funds for mandatory reserves held by the subsidiary in the central bank of its jurisdiction.

This project is part of a master contract that MIGA has issued. ProCredit Holding AG & Co. KGaA is headquartered in Germany and is the parent company of 21 banks (ProCredit group). The ProCredit group is a provider of finance to some 750,000 very small, small, and medium enterprises in Latin America, Eastern and Central Europe, and Africa. Throughout the world, banks are required to maintain mandatory reserves with the central banks of their respective jurisdictions. Currently, the ProCredit group’s capital adequacy ratio (CAR) is calculated according to Basel II, but in the future it will also be calculated according to the German Banking Act. Under this act, at a consolidated level, reserves deposited at the various central banks can attract a risk weighting of 100 or even 150 percent depending on the country. This risk weighting determines the amount of equity required to maintain a specified CAR in accordance with the German Banking Act.

ProCredit Holding AG & Co. KGaA has approached MIGA to obtain capital relief from the capital adequacy ratio requirements. By obtaining MIGA’s insurance against the risk of expropriation of funds, the risk weighting for mandatory reserves held at the central bank can be reduced. A lower risk weighting would allow ProCredit Holding AG & Co. KGaA to free up equity currently tied up for CAR maintenance purposes, thereby allowing these funds to be injected into its subsidiary banks. This in turn will allow ProCredit Holding AG & Co. KGaA’s emerging market subsidiary banks across its network to increase its lending activities.

Environmental Categorization

This project has been classified as a Category FI project. The International Finance Corporation (IFC) is an investor in ProCredit Holding AG & Co. KGaA and invests in or lends to several of its subsidiaries. As required by IFC, ProCredit Holding AG & Co. KGaA has developed an organization-wide social and environmental management system and implemented it at each subsidiary. MIGA will require in its contract of guarantee that ProCredit maintain this SEMS.

Development Impact

MIGA’s proposed support will allow ProCredit Holding AG & Co. KGaA to direct equity to subsidiaries with the greatest need. The additional services these banks will be able to offer will help stimulate growth, generate employment, and reduce poverty.

MIGA’s support for this project is aligned with the World Bank Group’s microfinance strategy which includes improving the supply of microfinance in large, but underserved markets; enhancing deposit capacity by assisting microfinance institutions in savings mobilization; capacity building; creating and shaping markets; and fostering innovation.

The project is also aligned with MIGA’s support for the Joint IFI Action Plan established in the wake of the global financial crisis.