A Billion to Gain? Dutch contributions to and trends in the microfinance sector

Transcription

1 A Billion to Gain? Dutch contributions to and trends in the microfinance sector

2 Colophon Initiator S.R. Budjhawan ING Microfinance Authors G. Hieminga ING Economics Department U. Midiburo NpM, Platform for Inclusive Finance I.J. Unger AllWays Impact Editorial Board J. Sluijs NpM, Platform for Inclusive Finance C. Bochatay Triple Jump R. Ruben Radboud University of Nijmegen List of Interviewees C. Wattel Terrafina Microfinance B.R. Brinkenberg FMO G. Salcedo Oikocredit E. Mol Triple Jump F. Streppel Triodos Bank L. Wessemius Cordaid Disclaimer The views expressed in this report reflect the personal views of the analyst(s) on the subject of this report. No part of the compensation(s) of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific views in this report. This report was prepared on behalf of ING Bank N.V. ( ING ). This report is not, nor should it be construed as, an investment advice or an offer or solicitation for the purchase or sale of any financial instrument or product. While reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, ING makes no representation that it is accurate or complete in all respects. The information contained herein is subject to change without notice. Neither ING nor any of its officers or employees accept any liability for any direct or consequential loss or damage arising from any use of this report or its contents. Copyright and database rights protection exists with respect to (the contents of) this report. Therefore, nothing contained in this report may be reproduced, distributed or published by any person for any purpose without the prior written consent of ING. All rights are reserved. Investors should make their own investment decisions without relying on this report. Only investors with sufficient knowledge and experience in financial matters to evaluate the merits and risks should consider an investment in any issuer or market discussed herein and other persons should not take any action on the basis of this report. ING Bank N.V. is a legal entity under Dutch Law and is a registered credit institution supervised by the Dutch Central Bank ( De Nederlandsche Bank N.V. ) and the Netherlands Authority for the Financial Markets ( Stichting Autoriteit Financiële Markten ). ING Bank N.V., London branch is regulated for the conduct of investment business in the UK by the Financial Services Authority. ING Bank N.V., London branch is registered in the UK (number BR000341) at 60 London Wall, London EC2M 5TQ. ING Financial Markets LLC, which is a member of the NYSE, NASD and SIPC and part of ING, has accepted responsibility for the distribution of this report in the United States under applicable requirements. The final text was completed on 10th of November A Billion to Gain? September

3 Table of contents Preface 4 Executive summary 5 Introduction 8 1. The Dutch Offer continues to grow despite decreased support for development aid Dutch funders stimulate job creation for the poor by an increased focus on SME finance Many funders are embracing equity finance Dutch funders are most active where they can keep their promises Dutch funders increase impact by shifting focus from microfinance to inclusive finance Concluding remarks 22 Appendix 1: Overview of NpM members 23 Appendix 2: List of abbreviations 23 A Billion to Gain? September

4 Preface Dutch funders have a long history with the microfinance sector and have provided large contributions to its overall development. But for many years solid data on the size and development of the Dutch microfinance sector has been missing. The 2012 A Billion to Gain? report (ABTG) fulfilled a need in estimating the size of total funding to the microfinance sector by Dutch funders using their CGAP surveys. Based on 2010 figures the members of NpM, Platform for Inclusive Finance committed 2.1 billion to the sector which equalled around 11% of total foreign funding. As time went by the question of how the commitments by Dutch funders have developed became relevant, especially in light of the turmoil caused by the global financial crisis. That s why we now present an update. The purpose of the report is to give an accurate and up to date overview of the Dutch Offer. By sharing our conclusions with you, our intention is to provide input for the debate on how to improve contributions to the microfinance sector. To ING and NpM the importance of inclusive finance is incontrovertible. After all, access to financial services is an important aspect in the economic development of countries throughout the world. This report is a joint cooperation between ING and NpM, but could not have been written without the help and input from the members of NpM. We would like to express our gratitude to each organization that shared data with us, took part in the interviews or contributed in any other way during the process of writing this publication. We hope that the insights in this report are valuable to you. We would greatly appreciate your feedback and are open to further discussion. Roy Budjhawan Head ING Microfinance Josien Sluijs Director NpM, Platform for Inclusive Finance A Billion to Gain? September

5 Executive Summary This report is a follow-up to the comprehensive overview of Dutch funders to the microfinance sector presented in the 2012 edition of the A Billion to Gain? report. It was concluded that Dutch funders in 2010 committed 2.1 billion to the sector which equalled around 11% of total foreign funding 1. This update now includes actual figures for 2011, 2012 and 2013 and it provides forecasts up till In doing so it is the first study that provides insights in the development of Dutch commitments to the microfinance sector 2. Main findings are as follows. Dutch Offer continues to grow Total funding from the Dutch Offer in microfinance has increased gradually from 2.1 billion in 2010 to 2.5 in 2013 (figure 1). As a result the Dutch accounted for 10% of foreign funding to the microfinance sector in Funding grew by 6% in 2011, 8% in 2012 after which it fell back to 6% in It is expected to grow by 9% in 2014 and 10% in 2015 reaching 3 billion in These are quite remarkable achievements given financial market turmoil, fiscal austerity and declining support for development aid. despite falling support for development aid Public support for development aid continues to decline rapidly in the Netherlands. Support among Dutch voters has come down steadily from 47% in 2006 to a meagre 17% in 2014 (CBS). ING s poll among 56,000 clients shows that, on balance, 37% of clients have taken a more negative stance on development aid in the last year (figure 2). Most respondents (24%) state that development aid should focus more on healthcare and education (19%). These are more traditional forms of development aid. More contemporary forms of aid like local entrepreneurship (19%) and microfinance (15%) should also get a more prominent role. This clearly shows that self-supporting initiatives like microfinance have an important role to play in stimulating development in low income countries, especially within a context of budget cuts on development aid (figure 3). Figure 1 Dutch funding to microfinance sector continues to grow 3,5 14% 3,0 2,5 2,0 2,1 2,2 2,4 2,5 2,7 3,0 12% 10% 8% 1,5 6% 1,0 4% 0,5 2% 0, F 2015F 0% Commitments by NpM members ( billion) _ %-change Source: ING Economics Department based on CGAP surveys from individual NpM members. 1 In this report the terms microfinance and inclusive finance are used interchangeably unless stated differently. 2 Funding is measured by total commitments which represent both current as well as future funding to the microfinance sector. These commitments are commonly used rather than actual investment amounts due to the availability of data in the sector. A Billion to Gain? September

6 Figure 2 In comparison to last year, my view on development aid has become Much more positive More positive 2% 2% Unchanged 42% More negative 17% Much more negative 24% Do not know / no opinion 13% 0% 10% 20% 30% 40% 50% Source: ING question of the day among 55,882 Dutch respondents. Figure 3 Development aid should focus more on Healthcare 24% Education Local entrepreneurship 19% 19% Microfinance 15% Human rights Trade 5% 6% Do not know / no opinion 12% 0% 10% 20% 30% Source: ING question of the day among 51,048 Dutch respondents. Note that only 5% of respondents state that development aid should focus more on trade. This is remarkable since trade has become one of the main pillars of the renewed government police in the Netherlands. This policy aims to merge aid with trade both out of solidarity and enlightened self-interest 3. This leaves the government with a communication challenge to better explain its policies to the public. Dutch funders embrace SME and equity finance In % of all the projects of NpM members involved financing to Small to Medium Sized Enterprises (SMEs), an increase by 7%-points from Dutch funders continue to mostly provide debt financing (71% of total commitments which equals 1,773 million in 2013). Yet, this has decreased by 3%-point since Equity funding has seen a sharp increase of 5%-point to 24% of total commitments in 2013 ( 600 million). As such, Dutch investors provide considerably more equity funding to the sector in comparison to their peers in the rest of the world who committed 14% of their resources to equity funding. Donors showed a much larger increase in equity funding in comparison to commercially oriented investors. 3 Ministry of Foreign Affairs; A world to gain a new agenda for Aid, Trade and Investment, A Billion to Gain? September

7 A Billion to Gain? September Dutch funders are most active in mature markets Dutch funders are active in 87 countries. The majority of funding goes to India although it decreased from 12% of total commitments in 2010 to 10% in 2013 ( 255 million). India, Peru, Cambodia, Bolivia and Indonesia are the top-5 countries that receive most of the funding. The Latin America and Caribbean region accounts for 31% of the Dutch commitments in 2013 ( 750 million). The region consists of mature markets that provide many investment opportunities that have an attractive risk and return profile. The Middle East and North Africa region has been constantly affected from conflicts in the past years. This creates barriers for funders who want to invest in that region. On 18 December 2010 the The Arab Spring started a revolutionary wave of demonstrations and protests, riots, and civil wars in the Arab world. While the wave of initial revolutions and protests had expired by mid-2012 the region still has many ongoing conflicts that prevent funding from flowing in. This is reflected in the data as the number of projects funded in the region dropped from 15 in 2010 to 9 in As a result total commitments to the region dropped by 25 million (from 34 million in 2010 to 9 million in 2013). One of the main conclusions in the ABTG 2012 report was the fact that NpM members wanted to increase their funding activities on the African continent. Funding to the region increased by 78 million from 12% of total commitments in 2010 to 13% in NpM members invested in mobile banking services to serve clients in more remote areas as these regions lack the financial infrastructure that is available in urban areas. However, they als mention that the political instability, weak regulatory and in stitutional framework, the weakness of sector support services, as well as the MFI characteristics prevent them to collectively invest a much larger share of their portfolios in Africa. This is worrisome in terms of global poverty reduction as Africa is a continent that is lagging behind as the proportion of the population living on less than $1,25 a day has remained fairly constant in the past 35 years at around 50% whereas other regions showed impressive improvements. For example, globally the figure dropped from 53% in 1980 to a forecasted 18% for Dutch funders are not alone in wanting a greater presence in Africa. The bottom line is that many Dutch funders are still committed to increase their investments in Africa, but the high risk on this continent and lack of investment opportunities that meet their mandates currently still prevents them to do so on a much larger scale.

8 Introduction Joint cooperation This report is an update to the fourth in the series A Billion to Gain? and gives insight on how the Dutch Offer has changed over the past years and their future approaches. It is a joint cooperation between ING and NpM, Platform for Inclusive Finance (NpM). Currently NpM has 13 members who account for the majority of Dutch microfinance activities. Two objectives This report has two main objectives. 1. Provide an accurate and up to date overview of the microfinance activities by Dutch funders, as represented by the 13 NpM members. 2. Provide insight in trends and developments of their combined portfolios which we have labelled the Dutch Offer. To be able to deliver on the aim of this report we held interviews and constructed an extensive database thanks to the 13 NpM members sharing their CGAP surveys for the period. A note on terminology: microfinance versus financial inclusion Currently the sector operates in a twilight zone. Nowadays, NpM members together with other practitioners in the sector increasingly talk about inclusive finance instead of microfinance. However the term inclusive finance and its implications have not been taken up yet globally by the general public and all its policymakers. Since this report focuses on the contributions of the NpM members to the sector we use the terms microfinance and inclusive finance interchangeably. The title of the report speaks of microfinance to appeal to the broader audience as well. The NpM network comprises of 13 members... Using the lemma the Dutch Microfinance Offer the Dutch donors and investors united in the NpM in 2003 (box 1). The NpM promotes inclusive finance as a contribution to poverty alleviation in developing countries. Box 1 List of 13 the NpM members ASN Bank Cordaid DOEN Foundation FMO Hivos ICCO ING Bank Oikocredit Oxfam Novib Rabobank Foundation Terrafina Microfinance Triodos Bank Triple Jump A Billion to Gain? September

9 and covers Dutch microfinance activities almost completely NpM members are not the only Dutch institutions that are active in the field of inclusive finance. For example, pension funds may invest in the sector through other channels beyond the NpM members. In addition, other investment companies (e.g. Goodwell Investments, APG and PGGM) are active in the field of inclusive finance as well. Numbers on many of these activities are not available but in comparison to NpM members they are likely to be relatively smaller. It is safe to say that NpM members represent the bulk of Dutch microfinance activities. Therefore we refer to the total commitments of the NpM members as the Dutch Offer to the microfinance sector. NpM members encourage economic development with the Dutch Diamond Approach The members of NpM first came together to promote a transparent and accountable microfinance sector with both financial and social return. They now share the broader aim to expand access to finance through market-oriented investment. By coming together with a shared aim, NpM members have found advantages in working together even when they have different goals, tasks and responsibilities. This has been accomplished with a model now called the Dutch Diamond Approach (figure 4). Figure 4 The Dutch Diamond Approach: A public-private partnership model Government Private Sector Research Institutions Civil Society Organizations Source: Ministry of Foreign Affairs. With this approach, the NpM members look to encourage economic development through clever combinations of aid, trade and investment. With the Dutch Diamond Approach, they combine collective thinking and action where the private sector brings efficiency and a market-oriented approach, the civil society organizations bring knowledge of local circumstances, the research institutions bring additional expertise and the Dutch government brings parties together and act as a facilitator. The following initiatives are examples of how the Dutch Diamond Approach works in practice. Hivos is guaranteeing the foreign currency risk of the Hivos-Triodos-Fund; Triple Jump is fund manager for ASN and Oxfam Novib; Rabobank and Cordaid cooperate in the Rural Fund; Oikocredit en ICCO have a close working relationship for example ICCO provides among other things guarantees to Oikocredit; and ING clients can participate in the Oikocredit Nederland Fonds without having to pay transaction fees and ING invests directly in Oikocredit. Apart from these formalized working relationships, NpM members also cooperates in more informal ways. For example in joint research projects or by the development of tools to measure progress and impact on certain topics. A Billion to Gain? September

10 1. The Dutch Offer continues to grow despite decreased support for development aid Figure 5 Growth rate of global cross-border Microfinance funding, % 60 50% 50% 50 40% 40 30% 20% 10% 0% % % % % % % 17% 18% 2013F 2014F 2015F Growth in foreign funding (left hand scale, %) _ Level of foreign funding (right hand scale, billion) Note: Cross border funding is measured by total commitments which represent both current as well as future funding to the microfinance sector. These commitments are commonly used rather than actual investment amounts due to the availability of data in the sector. Source: ING Economics Department based on CGAP surveys from individual NpM members. Microfinance institutions (MFIs) worldwide currently hold approximately 110 billion in assets. Foreign funders have contributed to these MFIs by providing approximately 26 billion of funding in 2013 and this is estimated to grow by around 15% in 2014 and 2015 (see figure 5). Despite financial market turmoil and fiscal austerity, foreign funding to the sector has increased globally from 13 billion in 2008 to an estimated 30 billion in Growth rates decreased from 23% in 2008 to just 4% in 2011 after which it picked up again to double digit numbers. But growth rates never went negative as investors stayed committed to the sector. Investors are increasing sustainable investments again, despite previous capital Figure 6 Funding by NpM members continues to grow 3,5 14% 3,0 2,5 2,0 2,1 2,2 2,4 2,5 2,7 3,0 12% 10% 8% 1,5 6% 1,0 4% 0,5 2% 0, F 2015F 0% Commitments by Dutch funders ( billion) _ %-change Source: ING Economics Department based on CGAP surveys from individual NpM members. Note that Rabobank Foundation did not provide their CGAP surveys so we don t know their commitments precisely. As a result an estimate of their total commitments is included to calculate the Dutch Offer. A Billion to Gain? September

11 Figure 7 Declining support for development aid in the Netherlands (share of voters in favour of development aid). 50% 40% 47% 30% 20% 28% 22% 17% 10% 0% F Source: CBS and ING Economics Department. Figure 8 In comparison to last year, my view on development aid has become Much more positive More positive 2% 2% Unchanged 42% More negative 17% Much more negative 24% Do not know / no opinion 13% 0% 10% 20% 30% 40% 50% Source: ING question of the day among 55,882 Dutch respondents losses and banks want to deliver corporate responsibility, although their balance sheets remain under pressure. Dutch Offer continues to grow Total commitments from the Dutch Offer to the microfinance sector have increased gradually from 2.1 billion in 2010 to 2.5 in 2013 (figure 6). As a result the Dutch account for 10% of foreign funding. NpM members are looking for ways to continue to grow and support the sector. The Dutch government is facilitating growth for example with the setup of the Dutch Good Growth Fund. Therefore commitments by the NpM members are expected to grow by 9% in 2014 and 10% in 2015 reaching 3 billion in despite falling support for development aid The increase in commitments to the microfinance sector by NpM members is impressive considering the fact that public support for development aid continues to decline rapidly in the Netherlands. Support among Dutch voters has come down steadily from 47% in 2006 to a meagre 17% in 2014 (figure 7). ING s poll among clients shows that, on balance, 37% of clients have taken a more negative stance on development aid in the last year (figure 8). Fiscal austerity and falling support for development aid among people in the Netherlands has resulted in cuts by the Rutte-II administration of approximately 1 billion a year in the period. As a result the Dutch no longer meet the UN target to spend 0.7% of GDP on development aid. A Billion to Gain? September

12 Figure 9 Development aid should focus more on Healthcare 24% Education Local entrepreneurship 19% 19% Microfinance 15% Human rights Trade 5% 6% Do not know / no opinion 12% 0% 10% 20% 30% Source: ING Economics Department based on CGAP surveys from individual NpM members. However the Dutch see an important role for entrepreneurship and microfinance in development aid When questioned about where development aid should focus, over 1/3 of Dutch respondents stated either local entrepreneurship or microfinance (figure 9). This clearly shows that self-supporting initiatives like microfinance have an important role to play in stimulating development in low income countries. It also clearly indicates that the public still values traditional elements of development aid like healthcare and education very much. This is not the case for trade policies which now is a major element of development aid in the Netherlands. It indicates that the government needs to communicate its policies better to the public in order to bridge the mismatch in perception about what is most relevant for development aid. A Billion to Gain? September

13 2. Dutch funders stimulate job creation for the poor by an increased focus on SME finance In 2013, 43% of all the projects of NpM members involved financing to Small to Medium Sized Enterprises (SMEs), an increase by 7%-points from 2010 (figure 10). This highlights how funders are now looking also to fund SME projects and are not only focused on micro-entrepreneurs. Figure 10 Contribution to SME finance (share of portfolio by total commitments) Microfinance only 56% 54% Microfinance and SME 36% 43% Other 8% 3% 0% 10% 20% 30% 40% 50% 60% Source: ING question of the day among 51,048 Dutch respondents. SMEs provide jobs for the poor SMEs play an important role in providing jobs to the poor as they employ more than one third of the world s labor force in the formal economy, yet this varies according to country income group (figure 11). Research shows that SMEs not only are employing the largest number of people in aggregate but they also generate the most new jobs. 4 As a result NpM members show an increased interest in SME finance. Figure 11 SME are important job creators, especially in high income countries (employment by SMEs as % of total employment) 50% 40% 30% 20% 10% 0% High Upper-middle Lower-middle Low Definition of income groups by the World Bank as of 1 July High: GNI per capita of $12,746 or more. Low: $1,045 or less. Lower-middle-income and upper-middle-income economies are separated at a GNI per capita of $4,125. Source: MSME Country Indicators, World Development Indicators database. 4 Ayyagari, Meghana, Aslı Demirgüç-Kunt, and Vojislav Maksimovic (2011). Small vs. Young Firms Across the World: Contribution to Employment, Job Creation, and Growth, Policy Research Working Paper World Bank, Washington, DC. A Billion to Gain? September

14 but lack proper access to finance Access to finance is often cited as one of the primary obstacles that affect SMEs. SMEs in developing countries face an estimated financing gap of $2.1 to $2.6 trillion, which is equivalent to 30 to 36 percent of current outstanding SME loans. There are 200 to 245 million formal and informal enterprises that do not have a loan or overdraft, but are in need of one (unserved sector) or do have a loan but still find access to finance as a constraint-(underserved sector) 5. The SME market therefore provides huge opportunities for the microfinance sector and its funders. Capacity building is needed for the SME activities of MFIs to grow For SME financing to grow, MFIs need to have the capacity to manage these new types of loans. NpM members understand that for SME financing, MFIs need capacity building training and some provide grants for this purpose. Yet, there is a need for more. According to some NpM members, a current problem in the sector is a mismatch in supply and demand for capacity building. Grants provided by governments are decreasing in many cases while the demand for support to the inclusive finance sector presses on. The building of the inclusive finance sector cannot be done without funding for technical assistance (TA funding). Direct SME financing requires close connections and local knowledge Many NpM members find direct financing to SMEs to be too risky unless there is knowledge of the region, staff on the ground and weekly connections with these entrepreneurs. Some NpM members also state that being on the board of directors is something they look for when funding SMEs activities of MFIs. For some NpM members, investing directly is an option but then they limit it to SMEs that operate in areas that the NpM member knows well. For others, indirect funding of SMEs is the preferred, and sometimes only choice. When they choose to invest indirectly they can invest equity into a fund that helps many entrepreneurs; without the hassle of individual oversight. Many NpM members have such plans and it is likely that we will see new Dutch funds supporting SMEs in the near future. 5 World Bank / IFC Advisory Services. Access to Finance. Closing the Credit Gap for Formal and Informal Micro, Small, and Medium Enterprises A Billion to Gain? September

15 3. Many funders are embracing equity finance The Dutch preference for debt has decreased slightly The two most used instruments by Dutch funders are debt and equity. The preference has in the past been debt but this is changing. In 2010 the debt instrument represented 74% of the Dutch contribution to microfinance but it has decreased by 3%-point to 71% in 2013 (table 1). Table 1 Commitment change by instruments (% of total commitments) Dutch Offer Rest of the World Change Change (%-point) (% point) Debt 74% 71% -3% 62% 64% 2% Equity 19% 24% 5% 13% 14% 1% Grant 3% 2% -1% 9% 10% 1% Guarantee 4% 3% -1% 10% 7% -3% The CGAP survey among 18 funders from different countries is used as a proxy for the portfolio s of foreign investors outside the Netherlands labelled Rest of the World. Source: ING Economics Department based on CGAP surveys from individual NpM members. but equity funding is on the rise Equity funding on the other hand has seen a sharp increase of 5%-point to 24% of total commitments in 2013 ( 600 million). As such, Dutch investors provide considerably more equity funding to the sector in comparison to their peers in the rest of the world who committed 14% of their resources to equity funding. Donors have shown greater progress in increasing equity investments in comparison to investors In the last three years a huge shift has occurred in the way the donors fund the sector. Equity funding has increased by 21%-points from 27% in 2010 to 48% in The investors on the other hand only increased their equity funding by only 4%-points. Not only have donors increased their equity funding, the proportion of their guarantee and grant funding has changed. In 2010 the two instruments represented 25% and 26% respectively; these percentages have decreased to 11% and 17% (figure 12). A Billion to Gain? September

16 Figure 12 Donors are responsible for the rise of Equity funding (% of total commitments) 100% 2% 2% 80% 25% 17% 11% 18% 22% 60% 26% 40% 20% 27% 48% 80% 76% 0% 21% 2010 Donors 25% Investors 2013 Debt Equity Guarantee Grant Source: ING Economics Department based on CGAP surveys from individual NpM members. A Billion to Gain? September

17 4. Dutch funders are most active where they can keep their promises Latin America & the Caribbean still attract most of the funding Latin America and the Caribbean region accounts for 31% of the Dutch commitments in 2013 ( 750 million) (figure 13). Since this region is more developed than other regions it receives the lion s share of Dutch funding to the microfinance sector. The region provides many investment opportunities that have an attractive risk and return profile. The maturity and professionalism of the MFIs in this region have made investing in these regions easier for all types of funders in the past years. However, opportunities in the mature regions are likely to diminish in the future as the MFIs are able to find local funding that is often cheaper and connected with local or regional networks. Funding to Middle East and North Africa (MENA) has decreased The Middle East and North Africa region has been constantly affected from conflicts in the past years. This creates barriers for funders who want to invest in that region. On 18 December 2010 the The Arab Spring started a revolutionary wave of demonstrations and protests, riots, and civil wars in the Arab world. While the wave of initial revolutions and protests had expired by mid-2012 the region still has many ongoing conflicts that prevent funding from flowing in. This is reflected in the data as the number of projects funded in the region dropped from 15 in 2010 to 9 in As a result total commitments to the region dropped by 25 million (from 34 million in 2010 to 9 million in 2013). Figure 13 Commitments by region (% of total commitments) 18% 18% Europe and Central Asia (ECA) 2% 0% Middle East and North Africa (MENA) 14% 14% 32% 31% 13% 12% 15% 13% South Asia (SA) East Asia and the Pacific (EAP) Latin America and the Caribbean (LAC) Sub-Sahara Africa (SSA) 8% 9% 0% 1% Multi-Region Other Source: ING Economics Department based on CGAP surveys from individual NpM members. A Billion to Gain? September

18 Funding to Sub-Saharan countries remains constant One of the main conclusions in the ABTG 2012 report was the fact that NpM members wanted to increase their funding activities on the African continent. Funding to the region increased by 78 million from 12% of total commitments in 2010 to 13% in NpM members invested in mobile banking services to serve clients in more remote areas as these regions lack the financial infrastructure that is available in urban areas. However, they als mention that the political instability, weak regulatory and in stitutional framework, the weakness of sector support services, as well as the MFI characteristics prevent them to collectively invest a much larger share of their portfolios in Africa. This is worrisome in terms of global poverty reduction as Africa is a continent that is lagging behind as the proportion of the population living on less than $1,25 a day has remained fairly constant in the past 35 years at around 50% whereas other regions showed impressive improvements. For example, globally the figure dropped from 53% in 1980 to a forecasted 18% for Dutch funders are not alone in wanting a greater presence in Africa. In many parts of Africa, there is currently an abundance of funding available for projects that meet due diligence requirements. What is often a challenge is that many of the deals fall through due to the management team not having the skills needed or other types of required resources missing. As a result it is very hard for Dutch funders to find projects that meet their requirement. They must ensure the quality of their portfolio remains good in order to keep to their promises, whether it s a promise of financial or social return. Bottom line is, many NpM members want to increase their investments in Africa, but the high risk on this continent and lack of investment opportunities that meet their mandates currently still prevents them to do so. Figure 14 Proportion of population living on less than $1,25 a day (PPP, 2005 constant prices) 80% 60% 40% 20% 0% F East Asia and the Pacific South Asia Sub-Saharan Africa _ Latin America and the Caribbean World Source: World Bank. Most funding still flows to India As of 2013 the Dutch funders are active in 87 countries all over the world. India still receives most of the funding, although the share decreased from 11.7% in 2010 to 10.2% in 2013 ( 255 million). As a result the share of South Asia in the Dutch Offer decreased from 15% in 2010 to 13% in Of the top 5 countries funded by the Dutch, two countries are in Latin America and the Caribbean (Peru and Bolivia) and two are in East Asia (Cambodia and Indonesia, figure 15). A Billion to Gain? September

19 Figure 15 Top 25 countries funded by the Dutch (% of total commitments) India Cambodia Peru Ecuador Bolivia Azerbaijan Paraguay Honduras El Salvador Kyrgyzstan Kenya Uganda Turkey Philippines Tajikistan Nicaragua Georgia Mongolia Costa Rica Tanzania Bosnia and Herzegovina Indonesia Mexico Argentina Bangladesh 0.4% 1.3% 1.3% 1.0% 1.5% 1.4% 1.4% 1.2% 1.2% 1.1% 1.3% 1.1% 1.9% 0.8% 1.6% 0.4% 1.3% 1.9% 1.9% 1.8% 1.1% 1.9% 1.2% 1.8% 1.4% 2.0% 2.4% 1.9% 2.4% 2.3% 2.2% 2.0% 2.6% 1.9% 2.3% 2.2% 2.8% 2.6% 2.8% 3.2% 2.9% 4.2% 3.5% 3.9% 5.2% 5.6% 6.7% 8.6% 10.2% 11.7% 0% 2% 4% 6% 8% 10% 12% Source: ING Economics Department based on CGAP surveys from individual NpM members. A Billion to Gain? September

20 5. Dutch funders increase impact by shifting focus from microfinance to inclusive finance The sector started off with microcredit only... Microfinance began as an idea that loans could help the poor improve their livelihood. Most of the poor throughout the world are self-employed and the first loans were targeting these micro-entrepreneurs. The sector pretty much offered only microcredit to micro-entrepreneurs (figure 16). Figure 16 From microcredit to financial inclusion: an evolution as the sector searches for greater outreach and impact Products and services offered by the sector Loans and training to microentrepreneurs Loans for consumption, housing, energy and education Payments and Cash Management Mobile and Branchless Banking Savings Micro leasing Micro insurance Traning, networking, mentoring SME financing Microcredit Microfinance Financial inclusion Source: ING Economics Department. but now financial inclusion provides many products and services to the poor It soon became clear that loans can be a valuable finance tool to finance other than business expenses such as education, housing, energy and even consumption. Since this time, the sector has broadened its offering to the poor and now gives loans to different types of clients for various purposes (student loans, consumption smoothing, mortgages, energy lending, et cetera). The sector evolved from microcredit to financial inclusion. However, with such an extensive range of products offered to clients (not only microentrepreneurs) and to such a large scale, possible side effects soon manifested itself of which over-indebtedness is a notorious one. As a result the sector has broadened its services further, providing non-financial services such as business training, health care, and other social services. These services recognize that clients can only fully utilize the financial services they are provided if they are healthy and educated on how to use the borrowed funds efficiently. 6 Additional financial services include: Micro savings Payments and cash management Mobile and branchless banking Micro insurance and micro leasing 6 Lensink, R. Mersland, R. Nhung, V. (2011). Should Microfinance Institutions Specialize in Financial Services (Working Paper)? Retrieved December 15, 2011, from A Billion to Gain? September

21 Listed below are many of the non-financial services offered by MFIs: Education and awareness (e.g. financial education and literacy) Asset building (e.g. retirement savings) Business training Networking Mentoring Other social services The sector increases its focus on SMEs Many funders now focus to financially include not only micro-entrepreneurs but also SMEs as the so called missing middle is often excluded from formal financial services as well. This stimulates job creation for the poor (see chapter 2). This is important since not every poor client is a true entrepreneur. Some might be better off with a regular job in comparison to the uncertainties and problems of entrepreneurship. Since SMEs are major job creators for the poor, the sector is now looking to increase SME financing. In this way, the sector is aiming for full financial inclusion for both individuals and businesses. A Billion to Gain? September

22 6. Concluding remarks This report gives insight into the funding choices by the 13 NpM members in the Netherlands. Since they represent the vast majority of Dutch funding to the microfinance sector trends in their behavior is representative for the Dutch Offer. It is our hope that this report will be a catalyst in the ongoing discussion of how funders, with different mandates, can work together to improve financial inclusion throughout the world. Five main trends were identified during the interviews that could be validated by dataanalyses from the CGAP surveys of the NpM members: 1. Funding to the sector continues to grow. 2. There is an increased focus on SME finance. 3. Many funders, especially donors, embrace equity finance. 4. There are large regional differences across the world. 5. The sector changes from microfinance to financial inclusion. In the interviews the following trends were mentioned often and are worth noting. However, as researchers we could not validate these trends with data as they are not captured in the CGAP-surveys. Many Dutch funders want to increase their activities in rural areas since the majority of poor and financially excluded people live in rural areas. The same applies to their activities in agriculture, mobile banking and renewable energy. Dutch funders increasingly look for MFIs that offer the whole spectrum of financial products and services. Some funders want to focus more on MFIs that balance social, financial and environmental impact (the triple bottom line). With this report we have been able to provide an accurate and up to date overview of the activities by Dutch funders, as represented by the 13 NpM members. The report also provides solid evidence on trends and developments in their combined portfolios which we have labelled the Dutch Offer. We hope that the insights in this report are valuable to you. We would greatly appreciate your feedback and are open to further discussion. A Billion to Gain? September

23 Appendix Appendix 1: Overview of NpM members Supported by: Appendix 2: List of abbreviations ABTG CGAP GNI GDP EAP ECA EU LAC MENA MFIs SMEs MIX NpM SA SSA UN A Billion to Gain? reports of ING microfinance Consultative Group to Assist the Poor Gross national income Gross domestic product East Asia and the Pacific Europe and Central Asia European Union Latin America and the Caribbean Middle East and North Africa Microfinance institutions Small and medium enterprises Microfinance Information Exchange Platform for Inclusive Finance South Asia Sub-Saharan Africa United Nations A Billion to Gain? September

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