MICROCAPITAL STORY: European Development Finance Institutions Part 3: The Netherlands Development Finance Company (FMO) Invests Over USD 160 million in Microfinance in Last Two Years

The Netherlands Development Finance Company (FMO), founded by the Dutch government in 1970 to support the private sector in developing countries, invests in microfinance as a way to stimulate sustainable economic growth. Between January 2007 and March 2009, FMO has invested at least USD 160 million in microfinance services around the world.

FMO supports the housing, energy and finance sectors in developing markets, and currently has an investment portfolio of over EUR 3.4 billion (USD 4.6 billion). The bank contributes to the microfinance sector through two main vehicles – FMO’s own account (FMO A) and the government-managed MASSIF fund which extends risk capital and local currency to financial intermediaries in developing countries. By the end of 2007, the MASSIF portfolio had grown to EUR 362 million (USD 494 million), of which EUR 275 (USD 375 million) was invested in microfinance.

This article aims to give an overview of FMO’s investments in microfinance over the past two years. As FMO does not provide a complete list of its microfinance activities, this review utilizes secondary sources and may not be comprehensive.

Over the past two years, FMO has maintained a close partnership with K-rep Bank, a commercial bank in Kenya that targets the low-income population, in which FMO currently holds a 5 percent shareholder stake. In June 2007, FMO gave K-Rep a Sh 476 million (USD 6.1 million) loan to expand its microfinance portfolio. In November 2008, FMO contributed Sh 50 million (USD 641,000) in new capital, as K-Rep faced record losses attributed to post-election violence and massive investments in the bank’s information and communication technology. Read more about FMO’s investment in K-Rep Bank in this MicroCapital story.

In early 2007, FMO invested USD 2.4 million in the Bellwether Microfinance Fund, an Indian microfinance venture capital fund, bringing the total stake in the fund to 18.6 percent. In June of that year, FMO invested EUR 1.5 million (USD 2 million) in Aavishkaar Goodwell, an Indian company that provides equity capital and support to MFIs in the country. FMO also invested EUR 20 million (USD 27.3 million) in the AfricInvest Financial Sector Fund, to become the sole shareholder. Notably, the management of the AfricInvest fund is carried out by AfricInvest Capital Partners, a private equity investment manager initiated by FMO and Tuninvest.

In August 2007, FMO invested EUR 2.5 million (USD 3.4 million) in Incofin’s Rural Impulse Fund, which makes equity and debt investments in rural MFIs. More information on the Rural Impulse Fund can be found in this MicroCapital story. In September, FMO made an equity investment of EUR 2.6 million (USD 3.5 million) in a second round of capital raising for ACCION’s Global Investment Fund.

FMO extended a loan of EUR 25 million (USD 34.1 million), in local currency, to the Bangladesh Rural Advancement Committee (BRAC) in October 2007. This FMO currency initiative eventually led to the creation of The Currency Exchange Fund (TCX), which provides currency and interest rate hedging products in developing countries. The loan to BRAC followed a six-year USD 180 million securitization program launched in 2006. Read more in this MicroCapital story.

In November 2007, FMO proposed the creation of a USD 125 million fund to invest in family-owned small and medium enterprises (SMEs) in India, and contributed an initial USD 25 million to the newly-created Banyan Tree Growth Capital Fund. FMO also extended USD 4 million to Microfinance International Corporation, a US-based company that works to expand access to microfinance services, including remittance services.

In early 2008, FMO financed a USD 1.1 million loan to FINCA Guatemala. FMO also offered a two local currency loans, totaling the equivalent of USD 9 million, to the First MicrofinanceBank Afghanistan (FMFB).

In July 2008, FMO made a EUR 3 million (USD 4.1 million) equity investment in ACLEDA Bank Ltd, a Laos-based subsidiary of the Cambodian microfinance bank ACLEDA, to aide in its transition to a commercial bank. The following month, MAS Financial Services Ltd received an equity investment of INR 434.71 million (USD 8.8 million) from FMO.

FMO signed a deal with LOLC Microfinance Company Ltd, a Sri Lankan MFI set up by Lanka ORIX Leasing Company PLC, to invest USD 2 million in October 2008. Beyond this 20 percent stake in the MFI, FMO also offered a convertible loan of USD 1.5 million and a senior loan of USD 6.5 million. Read more about FMO’s USD 10 million investment in LOLC Microfinance in this MicroCapital story.

FMO also gave a USD 200,000 grant to MFX Solutions, an organization dedicated to helping MFIs understand, quantify and reduce currency risk. Of note, MFX was set up as a vehicle for investors in microfinance to fund participation in TCX.

In 2009, thus far, FMO offered a USD 750,000 grant to the Africap Microfinance Investment Company and FinTech Africa. FMO also provided the equivalent of USD 12 million to Xacbank in Mongolia for housing and energy financing. This follows a USD 10 million loan FMO provided to Xacbank in 2007.

Overall, this review finds that FMO invested at least USD 160 million in microfinance services since 2007. Given FMO’s focus on “the power of entrepreneurship in economic development,” it is likely that the bank will continue to contribute to the microfinance sector in the future.

Read about other leading European Development Finance Institutions in Part 1 and Part 2 of this MicroCapital series.

By Jaclyn Berfond, Research Assistant

List of FMO Microfinance Activities: