FMO innovates microfinance
"Developing countries need a healthy capital market in local currency", CEO Arthur Arnold of FMO emphasized today at the 'New Partnerships for Innovation in Microfinance' conference in Frankfurt. "It would be irresponsible to saddle micro-entrepreneurs and small enterprises in these countries with exchange-rate risks. Eighty per cent of the finance provided by FMO to this group is in local currency."
The conference in Frankfurt will bring together 250 experts from 28 countries today and tomorrow to discuss the future of microfinance. The Netherlands Development Finance Company (FMO) has been one of the driving forces behind the conference.
Research conducted by the Consultative Group to Assist the Poor (CGAP) indicates that three billion households throughout the world need access to financial services but that only one in six have such access. Arnold: "Africa and Asia are the continents where the need is greatest. FMO has a fund for micro-entrepreneurs and small enterprises of EUR 150 million, of which half is invested in Africa and a quarter in Asia. We have managed to place 80 percent of the fund in local currencies, whereas microfinance institutions largely provide finance in dollars or euros. The development of capital markets in local currencies is crucial: only in these circumstances will the financial sector in these countries be able to operate independently of international financial institutions in due course."
Securitization of microfinance
The securitization of microfinance is on the agenda for tomorrow. Securitization involves the sale by a financial institution of its claims to a third party, such as a pension fund. In the Western world this has been a familiar product for many years now, for example in relation to mortgages and credit cards. FMO is expecting to contract the first securitization of microfinance claims in Bangladesh in the next few months. Under the agreement, which will in principle run for six years, a total of USD 100 million in local currency claims will be purchased. At present the local microfinance organization already has 4 million loans on its books averaging one hundred dollars each. The proceeds from the securitization will make it possible to provide hundreds of thousands of new loans.
FMO has taken the initiative for this unique arrangement together with the Bengali organization RSA. Since local commercial banks are not as yet prepared to assume such risks, FMO together with the German development bank KfW is providing a hundred percent guarantee for the financing arrangement and will itself be buying over a quarter of the claims. Such transactions would not come about without the involvement of development banks. The aim is for commercial banks to assume these risks independently in due course.
International partners
The conference in Frankfurt is being organized by the German development bank KfW together with the Netherlands Development Finance Company (FMO), the Consultative Group to Assist the Poor (CGAP), Agence Française de Développement (AFD), the German Federal Ministry for Economic Cooperation and Development (BMZ) and the UK Department for International Development (DFID).
The Netherlands Development Finance Company (FMO) is the international development bank of the Netherlands. FMO invests risk capital in companies and financial institutions in developing countries. Thanks in part to its relationship with the Dutch government, FMO is able to take risks which commercial financiers are not -or not yet- prepared to take. FMO's mission: to create flourishing enterprises which can serve as engines of sustainable growth in their countries.
