MAJOR RISKS ASSOCIATED TO AN INVESTMENT IN SOCIAL BANKS (SBs) OF EMERGING MARKETS

Emerging Markets Risks.

Investment in emerging markets involves risks related to, among other aspects, the vulnerability of local economies, the instability or uncertainty of political systems and the impact of international adverse factors. Such risks include political risks as expropriation of assets, impossibility to pay dividends and capital gains, restrictions on transfers of foreign currency, devaluation of local currencies and inflation, legal framework, unfair changes in fiscal policies, government intervention in economic activities, wars, revolutions and terrorism, among others.

Government Intervention and Political Risk.

Government actions in certain developing countries that could increase the risk of micro-borrowers and of foreign investment as control of foreing investments, adverse changes in regulatory structures and anti-usury laws, foreign exchange controls that could include suspension of the ability to convert funds from local currency and restrictions on the repatriation of funds.

Uncertain Regulation of SBs.

Some countries in Asia, Africa, Eastern Europe and Latin America have adopted specialized legislation creating financial institutions specialized in microfinance and organizing dedicated supervision. Such regulation often encourages the disclosure of standard financial information and establishes prudential norms that, in turn, promote the development of the microfinance industry. Nonetheless, countries in which Social Banks (SBS) are located may have risky or incomplete regulatory environments. Law enforcement may also be lax, or inconsistent and the enforceability of legal decisions may be inadequate.

Currency Exchange Risk.

The funding of SBs can be in U.S. Dollars, Euros or in local currency. Therefore, a currency risk exposure is possible. The investments in local currency should be hedged in order to avoid losses due to any adverse fluctuation of exchange rates. The investees should maintain an adequate currency matching in their Financial Statements.

SB Business Risks.

Challenges facing SBs include matching of currencies and maturities, liquidity, assets and portfolio quality, profitability and margins generation, capital adequacy, capital structure, operating efficiency, and repayment capacity. Other, more qualitative challenges for SBs are information quality and transparency, strategic plan, market position, shareholders' solvency, institutional vision, management capacity, organizational effectiveness, human resources, as well as audit and internal control processes.

Risk of Liquidating Investments upon Default or Bankruptcy.

The market value of investments may fluctuate with, among other factors: changes in market interest rates, general economic conditions, political events, developments or trends in any particular industry, the situation of financial markets and the financial performance of SBs. In the event of a SB default or in the case of a SB bankruptcy, there can be no assurance that the proceeds from liquidating investments will be sufficient to fully repay the amounts due to Investors.

Tax Considerations.

The tax aspects of investing in an investment vehicle, or directly in a SB, are complex. Investors should consider hiring professional advisers who are familiar with the investor's tax situation and with the tax laws and regulations applicable to foreign investments in emerging markets.