Innovation and business development
While we see high levels of liquidity in some of our markets, we also see a lack of bankable projects in which to invest. In markets where risks are still perceived as too high, there is a greater need for de-risking and risk-sharing facilities. This requires FMO to be innovative and think of ways in which to stimulate project development and investment.
The OECD predicts a widening financing gap in developing countries to achieve the Sustainable Development Goals (SDGs), because of the pandemic. DFIs such as FMO can and do play a role in tackling this issue by mobilizing private and public capital towards these markets. This goes hand-in-hand with efforts to stimulate market creation and project development.
Key to FMO’s approach is forging partnerships that drive change; through complementing skills and expertise we play off one another's strengths to create more impact.
How we make a difference
FMO sees great potential in investing in pioneering and early-stage projects and supports this in several ways. Here we highlight the following examples: NASIRA, FMO's Venture Program, DFCD and our accreditation management services. Other examples such as MFF and CI2 are mentioned in the feature on climate action.
Risk-sharing through the NASIRA facility
There is increasing demand for risk-sharing within the financial institutions market. To cater to this need, we established the NASIRA program, a bilateral loss-sharing scheme between FMO and local financial institutions. The program is backed by the European Commission through the European Fund for Sustainable Development (EFSD) as well as by the Ministry of Foreign Affairs of the Netherlands. NASIRA offers a portfolio guarantee to unlock lending to target groups that are perceived as high risk in an otherwise untapped market of migrant, women and young entrepreneurs in countries neighboring the EU and in Sub-Saharan Africa. Through this risk-sharing facility, we enable access to affordable loans to small business owners through local banks, microfinance institutions and other non-banking financial institutions, which would otherwise not have been available.
In 2021, for example, we provided a US$20 million portfolio guarantee to the Capital Bank of Jordan. This facility enables alternative MSME lenders Liwwa and Sanadcom to access sustainable funding through a local tier 1 bank to offer finance to COVID-19-affected as well as young entrepreneurs. Liwaa is a FinTech start-up operating a crowdfunding platform. Sanadcom is a specialized and SME-focused spinoff of Jordan’s Microfund for Women. The facility further mobilizes larger volumes of local funds that would otherwise not be accessible to these alternative lenders.
Early stage investing through FMO’s Venture Program
FMO’s Venture Program aims to empower innovative business models applying disruptive technology to enable or improve affordable access to goods and services to the un(der)served in emerging markets. The program seeks to support young entrepreneurs by investing in early-stage start-ups and scale-ups in FinTech, AgriTech and energy access as well as in venture capital funds focused on Africa, Asia and the European Neighborhood. The program is supported by the EFSD guarantee program of the European Commission as well as by the Ministry of Foreign Affairs of the Netherlands, allowing for the fund to take on a higher risk appetite.
On average, investments made through the Ventures Program are much smaller and we enter at a much earlier stage compared to other FMO investments. For example, one of the program’s leading AgriTech investments in 2021 was in a Series B round for Aerobotics, a South African startup developing intelligent tools to feed the world. Aerobotics enables tree and fruit farmers not only to monitor their crops but also to increase their overall yield and reduce their footprint, through a combination of satellite and drone imagery coupled with machine learning algorithms.
In addition, the Ventures Program offers technical assistance facilities (TAF) to stimulate a vibrant start-up environment in the regions where the program will invest. These facilities aim to build an entrepreneurial ecosystem by helping to improve services of incubators, accelerators, and other entrepreneurial support organizations (ESOs) and by enabling more early-stage financing for ventures in prioritized middle-tier markets. In 2021, FMO partnered with VC4A to enable more ESOs to create a more efficient network of support for early-stage ventures. By bringing together more investors, mentors, and corporates as part of the pipeline development process, this project is helping to increase investment flows into start-ups and strengthen nascent venture capital ecosystems.
Deal origination: Dutch Fund for Climate Development
Many innovative projects address climate resilience, but not all of these are bankable, which means that the risk for investors is still too high. To attract (commercial) finance, projects must develop a profitable revenue model or demonstrate a good track record over time. The Dutch Fund for Climate Development (DFCD) is a fund with an origination facility with several partners led by FMO. The origination is done by consortium partners SNV and WWF, which have so far supported 28 climate projects. We help these projects to create a solid revenue model and business plan and guide them in scaling up through DFCD’s technical assistance and grants. As soon as a project moves to the next phase, FMO or the other consortium partner Climate Fund Managers will step in.
In 2021, the DFCD organized the Scalable Climate Solutions Challenge targeting potentially bankable projects in Uganda, Kenya and Bangladesh. The program identified three promising entrepreneurs out of 118 applicants, 103 of which were local entrepreneurs. Together with WWF, Climate Fund Managers, and SNV, FMO assessed their business plans, environmental, and social impacts leading up to a final pitch organized live during COP26 from Glasgow. Entrepreneur Peter Nyeko of Mandulis Energy won the competition with a plan to transform agricultural residues into cooking fuel and electricity. Mandulis Energy’s solution won over the jury of experts thanks to a clear business case and proven results for rural communities in Uganda. The company won a €100,000 consultation and capacity development grant to help make their solution bankable. The program showed there is clearly a case for entrepreneurial solutions to adapt to climate change. As a follow-up to this challenge, the DFCD will organize local matchmaking events in 2022 in four different (least developed) countries: Loas, Cambodia, Tanzania and Zambia.
Accreditation management services
Large international public organizations like the European Commission (EC) and the Green Climate Fund (GCF) only fund organizations that have passed a critical fiduciary and strategic threshold test, so called ‘accredited entities’. Since 2016, FMO is one of the few organizations to provide accreditation management services in development finance.
The organizational and risk-bearing capacities of FMO and other accredited entities alone are not sufficient to deploy the large resources made available by the EC and GCF. Therefore, FMO facilitates strategic partners, which have not yet or cannot obtain accreditation themselves, to secure financing to build up portfolios that serve their as well as our development and climate ambitions. Based on our in-depth knowledge of emerging markets, FMO is trusted to assess if an idea is solving a market failure and can be executed in a sustainable way and if a pipeline of projects can be created to serve this purpose. We are furthermore entrusted to find the right partners to execute some of these programs, which has resulted in the endorsement and subcontracting of several partners like the EDFI Management Company (ElectriFI and AgriFI), Eversource (Green Growth Equity Fund ) and Climate Fund Managers (Climate Investor One) on behalf of the EC and the GCF.
We hold a unique position by offering a channel through which pioneering financing opportunities with global development potential help create new markets. This multiplies our impact by pooling more resources to unlock development finance and private investments.
- 1 OECD (2020) Global Outlook on Financing for Sustainable Development 2021: A New Way to Invest for People and Planet. https://www.oecd-ilibrary.org/sites/6ea613f4-en/index.html?itemId=/content/component/6ea613f4-en