Reduced inequalities - reaching the underserved
Inequality hinders social and economic development. Although worldwide inequalities has decreased, there is a growing divide between low- and high-income countries and some 70% of the world’s population continue to live in countries where inequalities are increasing.[1] It is these groups that are hit hardest by the effects of climate change and the global pandemic. Our contribution towards SDG 10 is, therefore, more important than ever.
Our focus
Global economic growth in recent decades has narrowed the average income inequality between countries, largely due to transition from middle income countries to high income countries. But the income gap between the poorest and the richest countries has widened by 55% between 1990 and 2018. Supporting economic growth alone is, as such, is not sufficient. We have to focus on areas where the need is greatest, most notably in least developed countries (LDCs) and the bottom 40% of the population in these and other developing countries.
How we make a difference
Our financing is aimed to create greater social and economic inclusion and create opportunities for currently un(der)served groups such as the un(der)banked, the unconnected and poorly connected, smallholder farmers, youth, women, rural populations, migrants and refugees through financial inclusion, women's economic empowerment and access to energy.
Financial inclusion for MSMEs
FMO invests in intermediaries that focus on providing finance to micro enterprises, SMEs owned by underserved groups such as women, youth, migrants and refugees, and rural or agricultural SMEs. Supporting these entrepreneurs is key in creating job opportunities and better livelihoods of the bottom 40% of the population.
Technology and innovation are creating even greater opportunities to reach these groups. FinTech companies address barriers to financial inclusion by reducing costs, increasing accessibility, creating a better fit and improving the user experience – delivering financial services to un(der)served populations in a more efficient way than traditional financial institutions (FIs) do.
FinTech companies in emerging markets can struggle to scale up, however, often because of a lack of commercial appetite and adequate capital. To address these issues FMO's customer Lendable launched the Lendable MSME FinTech Credit Fund to unlock access to financial services for more than 150,000 MSMEs across Africa and Asia. Alongside other reputable co-investors such as DFC, DFAT, Calvert, Ceniarth, BIO, and FSD Africa, the fund’s first close ended at approximately US$45 million, with a second close of just under US$70 million. FMO provided a 5-year mezzanine loan of US$5 million to further enable financial inclusion for MSMEs, with a strong emphasis on women entrepreneurs.
In addition, under the NASIRA program, FMO provides a risk-sharing facility for local FIs lending to underserved groups to reduce the perceived and real risks of lending and to meet their long-term entrepreneurial needs. Young women and entrepreneurs affected by COVID-19, for instance, are often perceived as too risky by FIs. Reporting and modelling is an essential part of the NASIRA guarantee program, as it provides the data needed to show FIs the real risks of lending to underserved parts of the populations, allowing them to continue serving these groups, also after the guarantee program has ended. In 2021, FMO partnered with Northern Arc Capital to provide these data-services, including research on macro trends, assessment of financial landscape, and transaction monitoring.
Inclusion of smallholder farmers
FMO supports improving rural income also by investing in companies sourcing from smallholders and companies financing smallholders. In 2021, FMO and Rabobank have agreed to invest €10 million each in the IDH Farmfit Fund. The €100 million IDH Farmfit Fund makes investments in smallholder farmers affordable by lowering risks and costs for both farmers and investors. The credits allow farmers to invest in their farm, increase productivity and exit the cycle of poverty.
FMO has many customers that buy tropical commodities such as coffee and cocoa from smallholder farmers. We work closely with these customers and use capacity development grants to make supply chains more inclusive. In 2021, for instance, FMO supported Mercon, a coffee merchant, to carry out a supply chain risk analysis, focused on human rights, for three of its sourcing countries. FMO also set up a partnership with TechnoServe, an agricultural consultant, to implement dedicated small holder inclusion programs across Asia and Africa. Niche, a cocoa processor in Ghana, participated in such a program with the aim to better integrate small holder farmers in their cocoa sourcing operations.
Women's economic empowerment
FMO is committed to advancing opportunities for women in the projects it supports, as a driver for commercial performance and as a means to promote women’s economic empowerment. To achieve this goal, FMO is a member of the 2X Challenge, which aims to advance opportunities for women through enterprise support, leadership, and career progression, quality employment, and products/services that enhance women’s economic participation. “2X” refers to the multiplier effect of investing in women. The 2X Challenge allows for setting financial ambitions among DFIs and collaboration with various stakeholders towards female empowerment. The target for the 2X Challenge has recently been expanded to mobilizing US$15 billion of capital towards women by 2022. The initiative has also taken steps towards standardizing identification and reporting on gender lens investments. Participating in the 2X Challenge has allowed FMO to address opportunities for women’s empowerment through its investments and collaborations.
Access to energy
More than half of people living in least developed countries lack access to electricity. Rural electrification in these countries is particularly low.[2] Furthermore, inequalities in social standing, economic capability and gender-defined roles mean women often lack access to modern and sustainable forms of energy in a disproportionate way. Providing access to modern, affordable and reliable sources of energy can improve the well-being of women and children and provide women with new economic opportunities. Despite progress made, there may still be as many as 660 million people without access worldwide in 2030. In addition, the COVID-19 pandemic will impede progress on future electrification.
FMO supports the generation and distribution of renewable energy. In 2021, FMO announced the financing for the construction and operation of four solar plants in Burkina Faso. Burkina Faso is one of the poorest countries in the world, where only 1 in 5 people have access to electricity. Currently, 85 percent of the country’s grid is powered by diesel generators, with the fuel imported by road or through electricity imports from neighboring countries. Such reliance on fossil fuels and electricity imports results in high electricity costs. These investments will substantially increase the electrification in a sustainable way and lessen the reliance on fossil fuels, while at the same time reducing inequalities.
Broken supply chains, increased costs of solar components, and continued COVID lockdowns have crippled the energy access industry. In 2021, through the Access to Energy Fund, FMO invested in the Energy Access Relief Fund (EARF) – a partnership between 16 governments, foundations and investors. The EARF, managed by Social Investment Managers and Advisors (SIMA), will provide relief capital in the form of short-term loans to an estimated 90 energy access companies in sub-Saharan Africa and Asia still struggling with disruptions wrought by COVID-19.
Off grid-solutions like mini-grids are seen as essential to increasing access to electricity as well, and, as such, are becoming part of FMO’s core strategic focus. Last year we signed our first transaction in the mini-grid sector, regarding the development and financing of a portfolio of mini-grids in Africa. Together with NEoT Offgrid Africa (NOA) and Winch Energy Limited 49 villages in Sierra Leone and Uganda will be equipped with off-grid and remotely controllable solar solutions, supplying power to nearly 60,000 people. The partnership with Winch and NOA proves that mini-grids can be financed at scale and efficiently by creating a cross-country portfolio of assets.