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					                                                      Dexia Micro-Credit Fund
                                                                            Annual Review 2011

    Net Asset Value:
     USD 394           Dear Investor,

      million          We are pleased to provide you with an overview of the Dexia Micro-Credit Fund (“DMCF”)
      as of end-2011   for 2011, the 13th year of operations for DMCF. When DMCF began in September 1998,
                       it was the first commercial microfinance investment fund of its kind. In the years that have
         Number of     passed since, the microfinance industry has matured significantly, with now over USD5bn
 microentrepreneurs    in assets under management in the sector, and has successfully weathered the 2008/2009

           reached:    global financial crisis. In this report, we update you on developments within the market this
                       past year in terms of the financial and social performance of both DMCF and the MFIs in
 14.1 million          the fund portfolio.


            Average
                       The Year in Review
  performance since
          inception:   2011 was a difficult year in financial markets generally, with uncertainty over the strength
                       of the global economic recovery, particularly in Europe and the U.S., and the European

   4.15% p.a.          debt crisis leading to increased market volatility. In microfinance, positive trends seen since
                       late 2010 gained momentum in most countries, and MFIs reported stability or improvements
   (USD share class)   in portfolio quality, profitability and healthy portfolio growth. The negative impacts of the
                       2008/2009 global financial crisis proved to be relatively short-lived in most developing
                       countries, and 2011 was by and large a very successful year for most MFIs, as they ex-
                       panded their products and services and reached more clients, both as borrowers and
                       depositors. A notable exception to this was in India, however, where the crisis in Andhra
                       Pradesh (AP) deepened, ultimately leading to a comprehensive debt restructuring for the
                       main MFIs operating in the state. Importantly, however, the crisis was contained largely
                       within AP and had limited impact on the portfolio quality in other states.


                                                                                               USD Share Class       USD LIBOR 6 months


Performance history      160




                         145




                         130




                         115




                         100
                                   2001     2002    2003     2004    2005     2006     2007      2008       2009           2010           2011

                                            2001    2002    2003    2004     2005    2006     2007      2008       2009           2010           2011
                       USD share class      6.50%   4.10%   3.26%   3.95%   4.70%    6.56%    6.21%     5.31%      2.33%          1.43%      0.32%
                       USD LIBOR 6 months   3.68%   1.86%   1.25%   1.81%   3.76%    5.27%    5.20%     3.06%      1.09%          0.52%      0.49%
                       EUR share class                              4.40%   3.60%    4.38%    4.77%     5.67%      2.46%          1.34%      0.68%
                       EUR LIBOR 6 months                           1.93%   1.95%    3.04%    4.29%     4.73%      1.39%          1.03%      1.58%
                       CHF share class              1.64%   2.15%   2.74%   2.05%    2.68%    2.85%     4.14%      1.81%          1.01%     -0.42%
                       CHF LIBOR 6 months           1.18%   0.35%   0.53%   0.71%    1.20%    2.61%     2.68%      0.49%          0.26%      0.19%
                                                    BlueOrchard | Dexia Micro-Credit Fund | Annual Review 2011 |   2



               At the same time, across all regions and in the industry as a whole, there has been con-
               siderable work in the social performance arena: monitoring and reporting on social perfor-
               mance indicators, and codifying principles for all stakeholders to ensure the continued
               development of a healthy, sustainable microfinance market.


               In the Dexia Micro-Credit Fund, returns in the USD and EUR share classes were 0.32%
               and 0.68% respectively, while the CHF share class had a slightly negative return of -0.42%.
               Investment levels were high for the full year, with the microfinance portfolio averaging ap-
               proximately 85% of NAV (the maximum allowed is 90% as per the fund requirement to keep
               10% of NAV in cash or cash equivalents) on the back of strong demand from MFIs. This
               was an important change from 2009 and 2010 when the fund had higher liquidity levels
               due to lower credit demand from MFIs. Loan spreads were also stable and the geograph-
               ical diversification of the fund increased, helped in part by enhanced hedging capabilities:
               At year end 2011, DMCF was providing loans denominated in 20 different currencies to 96
               MFIs located in 44 countries. The crisis in Andhra Pradesh resulted in provisioning that
               brought the year’s returns below our targeted level of 6 month Libor + 100-200 bps. Returns
               since inception remain impressive, however, at 72% since 1998 for the USD share class,
               33% since 2003 for the EUR share class and 23% since 2001 for the CHF share class.




                                        Peru
                                   Armenia
    Country                      Networks
                                 Colombia
Distribution                     Kyrgystan
                                   Georgia
 (% of NAV)                           Kenya
                                 Indonesia
                       Bosnia Herzegovina
                                   Ecuador
                                       India
                                 Tajikistan
                                  Paraguay
                                Azerbaijan
                                Cambodia
                                     Serbia
                               Kazakhstan
                                    Kosovo
                                    Belarus
                                 Mongolia
                                  Romania
                               El Salvador
                              South Africa
                                     Russia
                                    Mexico
                                  Tanzania
                                  Mauritus
                                    Uganda
                                Cameroon
                                     Ghana
                                    Albania
                               Philippines
                                  Moldova
                                  Sri Lanka
                                    Nigeria
                                    Zambia
                                Nicaragua
                                     Jordan
                Congo Democratic Republic
                                   Panama
                               Guatemala
                                   Senegal
                                Costa Rica

                                               0%     2%     4%      6%      8%     10%
                                                                BlueOrchard | Dexia Micro-Credit Fund | Annual Review 2011 |                                 3

                                                                                                                              2009           2010          2011

       Growth rate   100%

   of DMCF MFIs:     80%
  Portfolio Growth   60%
Medians by Region
                     40%

                     20%

                      0%

                     -20%

                     -40%




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                     The impact of provisioning: India
                     Net provisioning impacted returns by -198 bps for the full year with -185 bps coming from
                     provisions against losses in India. This is the highest provisioning level that the fund has
                     experienced since its 1998 inception, and resulted from exceptionally adverse political
                     developments in the Indian microfinance market brought on by the Andhra Pradesh crisis.
                     The crisis began in the fall of 2010, when the government of the state of Andhra Pradesh,
                     home to one of the largest microfinance markets in the country, suddenly and unilaterally
                     imposed strict operating limitations on microfinance institutions operating in the state under
                     a state ordinance. The effect of the new regulations was essentially to halt operations in
                     MFIs, and repayment delinquencies quickly rose to 70-85% of the outstanding loan port-
                     folios in the state. In the year following the ordinance, some smaller institutions have gone
                     bankrupt while larger MFIs have undergone comprehensive restructurings with the main
                     lenders and shareholders, and many of the clients of these institutions have had to borrow
                     from unregulated, unsupervised local money lenders to replace the loans that they had
                     borrowed from MFIs. Importantly, however, the worst impacts of the crisis have not spread
                     to other states in the country. The government and Reserve Bank of India have also reiter-
                     ated their support for microfinance as a “priority sector” in the priority sector lending program
                     and it is expected that new, nation-wide legislation will shortly be passed that will render
                     the Andhra Pradesh ordinance null and void. Such legislation has already made its way
                     through the first stage of the ratification process and is expected to be made law in mid-2012.


                     DMCF has been facilitating lending to MFIs in India since 2001 and at the time of the AP
                     Ordinance had 4.7% of its portfolio exposed to MFIs that had operations in the state of
                     Andhra Pradesh. Since the crisis began we have been in close contact with the local MFIs,
                     local regulators, other lenders and market participants. The provisions taken in the DMCF
                     against these positions reflect the conditions of the comprehensive Corporate Debt
                     Restructurings agreed with individual MFIs, whereby a certain percentage of senior loans
                     (in the 30 to 45% range) were converted to preferred shares, which have been valued at
                                                                    BlueOrchard | Dexia Micro-Credit Fund | Annual Review 2011 |                          4



                         zero in the fund. While it is too early to tell how the situation will ultimately resolve, we are
                         hopeful that lessons learned from the current crisis will help all stakeholders to ensure the
                         development of a healthy, sustainable microfinance market in India with enhanced client
                         protection and within the context of fair and transparent regulation.



                         MFI operational performance 1
                         As mentioned above, trends in the market outside of India were positive for the year. The
                         graphs in this document show these trends by region, in order of those with the largest
                         exposure in the DMCF fund. Differences by region are apparent, but clear trends towards
                         renewed growth, profitability and higher portfolio quality are evident in the major markets.
                         Medians for the DMCF portfolio as a whole show MFI portfolio growth for 2011 at 36% –
                         higher than 2009’s 12% and 2010’s 25%. While lower than levels seen prior to 2008, which
                         were often in the 70-100% range, we feel these growth levels are appropriate in what is
                         now a more mature industry.




                                                                                                                             2009         2010          2011

     Portfolio quality       70%

      of DMCF MFIs:          60%

PAR30 + Restructured         50%
   loans + write-offs
                             40%

                             30%

                             20%

                             10%

                              0%
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                         Portfolio quality has also improved or remained stable in most regions. Median write-off
                         levels for MFIs in the DMCF portfolio were a very low 1.0% versus 1.5% in 2010 and 1.7%
                         in 2009. Median portfolio at risk past 30 days plus restructured loans for end 2011 was in
                         line with 2010’s level below 3% (PAR30 of 2.3% + restructured loans of 0.3%) and an im-
                         provement over 2009’s 5%. South Asia is a clear outlier here due to the issues outlined
                         above in India, while Central America and Eastern Europe also show continued higher
                         delinquency rates relative to other regions, as the markets in these regions have not fully
                         recovered from the effects of the global financial crisis as well as internal market difficulties,
                         especially in Nicaragua and Bosnia. It is worth noting that DMCF’s exposure in South Asia
                         and Central America were each less than 4% of NAV as of year-end 2011, while Eastern


                         1
                             All data in this section is based on unaudited management reports from MFIs in the DMCF portfolio.
                             End-2011 data is from December 2011.
                                                                 BlueOrchard | Dexia Micro-Credit Fund | Annual Review 2011 |                           5


                       Europe was 11%. Profitability levels are stable in most regions and median levels are
                       positive in all regions outside of South Asia: Importantly, DMCF MFIs located in Bosnia and
                       Nicaragua have returned to profitability after difficulties in both these markets in 2009 and
                       2010, having made the necessary adjustments to their operations, provisioning against bad
                       loans, reducing costs and increasing efficiency. The median ROA across all regions was
                       3.1%, an improvement over 2010’s 2.3% when provisioning against portfolio losses reduced
                       net income for many institutions.




                                                                                                                          2009           2010         2011

    Profitability of     12%

      DMCF MFIs:          8%

 Return on Assets,        4%
Medians by Region
                          0%

                          -4%

                          -8%

                         -12%

                         -16%

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                       Local Currency Lending
                       A notable development in the DMCF in 2011 was the expansion of the fund’s local cur-
                       rency lending. (Note that all assets of the fund are hedged back to USD, and so these loans
                       do not expose the fund to foreign exchange risk). It has been a strategic focus of the fund
                       in recent years to further expand its hedging capabilities: Lending in local currency allows
                       MFIs to lend to their clients in local currency, the currency in which they overwhelmingly
                       earn their livelihoods, and without taking on foreign currency risk themselves. Lending in
                       local currency also indicates a clear commitment to the Principles for Investors in Inclusive
                       Finance, which BlueOrchard endorsed as a founding signatory in January 2011. Principle 3,
                       which refers to fair treatment, includes the statement that signatories will treat investees
                       fairly with appropriate financing that meets demand. Increased hedging capacity has there-
                       fore helped the fund to maintain responsible lending practices as well as gain access to a
                       greater number of countries.


                       DMCF now has hedging arrangements established with five highly rated counterparties and
                       has to date lent in over 20 local currencies. As of 31 December 2011, the fund had loans
                       outstanding in 18 different local currencies, together representing 35% of the microfinance
                       portfolio.
                                                             BlueOrchard | Dexia Micro-Credit Fund | Annual Review 2011 |               6

                                                                                                                           18 hedged local
                                                                                                                      currencies including:
 Exposure by currency                                                             EUR
                                                                                  10.82%
(as % of MFI portfolio)                                                                                                   PEN
                                                                                                                          COP
                                                                                                                                    10.5%
                                                                                                                                     5.8%
                                                                                                                          IDR        4.4%
                                                                                                                          AMD        2.5%
                                                                                                                          KZT        2.1%
                                                                                                                          AZN        1.6%
                                                                                                                          ZAR        1.1%
                                      USD                                                    Local Currency               RUB        0.9%
                                      54.55%                                                 34.63%                       MXN        0.8%
                                                                                                                          TZS        0.8%
                                                                                                                          UGX        0.8%




                          Social Performance
                          Significant progress has been made in the social performance area in the past year, within
                          the microfinance sector and at BlueOrchard: At the MFI level, many more institutions have
                          endorsed the Client Protection Principles, and the Microfinance Transparency statement
                          on transparent pricing. Many have also undertaken “social ratings” by specialized microfi-
                          nance rating agencies, have submitted standardized social performance data to the
                          MixMarket – the global information exchange website on microfinance- and have embarked
                          on social impact studies. At the country level, credit bureaus have been established in both
                          India and Cambodia, allowing MFIs to obtain better information on their clients, and to make
                          more informed assessments on their clients’ capacity to repay, which is crucial to avoid the
                          damaging risk of overindebtedness. BlueOrchard has been involved in several initiatives on
                          this front, including signing on to the Principles for Investors in Inclusive Finance 2, and as
                          a member in the Social Performance Task Force’s Investor Subcommittee, leading a working
                          group on overindebtedness. Our internal SPIRIT social performance due diligence scoring
                          system has been updated to incorporate feedback from analysts and industry best prac-
                          tices. It is implemented systematically for all new investment decisions taken for the Dexia
                          Micro-Credit Fund alongside financial and operational assessments of MFIs.




                          2
                              For more information on the Principles for Investors in Inclusive Finance, please see
                              http://www.unpriorg/files/2011_01_piif_principles.pdf
                                    BlueOrchard | Dexia Micro-Credit Fund | Annual Review 2011 |                    7




Outlook for 2012
We expect to see a continuation of the trends seen since late 2010 in microfinance, which
include improved portfolio quality, healthy, moderated growth and greater attention to social
performance issues, client protection and transparency. We plan to continue to increase
the proportion of (hedged) local currency lending in the DMCF portfolio, increase our
exposure in underrepresented markets, particularly in Africa and MENA, and further enlarge
the outreach of the fund and enhance its already wide portfolio diversification. A new local
office of BlueOrchard Finance, S.A. to be located in South Africa, will help in this regard,
as well as on the ground exposure through local offices opened in 2011 in India and China
(BlueOrchard has other local offices in Peru, Cambodia and Kyrgyzstan).


We expect the main sources of financial performance in 2012 to be high investment levels
in the fund, similar to the average 85% – 90% experienced in 2011, improved spreads and
– to a minor extent - recoveries from some distressed exposures, particularly in Nicaragua.
Given the current portfolio structure and outlook, strong demand from institutions and
available investment opportunities, we expect to meet the fund’s target return of Libor
100 – 200 bps. We look forward to another year of investing with you in this dynamic and
rewarding market which remains a core pillar in the impact investing sphere, and strongly
believe that the work towards building global financial inclusion remains largely unfinished.
We wish you a successful 2012 and remain open to any questions that you may have.




Disclaimer
This document is published purely for the purposes of information. It constitutes neither investment advice nor
confirmation of any transaction unless expressly stated otherwise. The information contained in this document was
obtained from a number of different sources. BlueOrchard Finance S.A. exercises the greatest care when choosing
its sources of information and passing on this information. Nevertheless, errors or omissions in those sources or
processes cannot be excluded a priori. The contents of this document may be reproduced only with the prior written
agreement of BlueOrchard Finance S.A.

Past performances listed in this document are no guarantee of future results, nor are performances guaranteed not to
fluctuate over time. In cases where performance is expressed in a currency other than that of the investor’s country of
residence, the returns mentioned may increase or decrease as a result of currency fluctuations. The investor is invited
to consult the fund prospectus which notably describes the risks of the fund. The prospectus, the simplified prospec-
tus, the latest annual report and other information relating to the fund are available at: www.blueorchard.com and
www.dexia-am.com.




For additional information, please contact: Heide Jimenez Dávila, Head of Sales and Investor Relations
heide.jimenezdavila@blueorchard.com, T +41 22 596 47 89
BlueOrchard Finance S.A.
32 rue de Malatrex
1201 Geneva, Switzerland
Tel.: +41 22 596 4777
Fax: +41 22 596 4799
info@blueorchard.com

www.blueorchard.com



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