More than two years after its launch the Nasira risk-sharing facility of FMO, the Dutch development bank, expanded its remit to take in entrepreneurs affected by the Covid-19 pandemic.
In short
- Banks in emerging markets have been increasingly conservative about lending since Covid-19
- The programme’s focus on women reflects female entrepreneurs’ challenges in establishing suitable collateral due to inheritance restrictions
- FMO’s aim is to ensure lending to entrepreneurs is based on a good business plan rather than collateral
Designed as a bilateral loss-sharing scheme between FMO and its financial institution clients to unlock lending to specific groups perceived as high-risk, Nasira has helped to transform the prospects of small business people – migrants, women and young entrepreneurs running micro or small and medium-sized enterprises (MSMEs).
Nasira’s unique selling point is encouraging local financial institutions to provide loans to groups they normally perceive as too risky.
The method is simple. The risk-sharing facility reduces the perceived and real risks of lending to vulnerable and underserved parts of the population.
This way, the guarantees allow local banks to lend to underserved entrepreneurs. The programme targets mainly Tier 1 and Tier 2 financial institutions, and Tier 1 microfinance institutions in sub-Saharan Africa and Eastern European countries.
Guarantees to overcome local lenders’ risk aversion
“The design of the product focuses on issues that prevent these groups from accessing finance,” said Angelica Ortiz de Haas, Manager Financial Institutions ECA-MENA region (Europe, Central Asia, Middle East and Africa).
“We intend to cover the risk for the financial institutions. As a result, they can lend to women or youth, and the outcome is that their expected loss is at least similar to the rest of their portfolio. This makes them more interested in reaching out.”
The organisation is close to signing another Nasira transaction in the Eastern Caucasus, where traditionally lending has been very collateralised.
“In some markets, you have to have enormous documentation, and that’s been a big constraint for MSMEs in general and female entrepreneurs in particular,” said Maurits Fliehe Boeschoten, a senior advisor to FMO.
“What we are trying to do with our guarantee is to say, let us take that risk. Because we believe you can lend money based on a good business plan, instead of on collateral.”
The hope is that by providing a guarantee to banks for these groups, they will eventually realise what the risk really is. “Our belief is that the risk is lower than market perception,” said Ortiz de Haas.
“Hence, we’re willing to provide a guarantee with the aim of making the Nasira programme obsolete after a while.”
Covid effect
The need for guarantees reflects the increasingly conservative stance of many emerging economy lenders since Covid-19. They are proving less willing to take the risk, and less willing to grant loans to ‘difficult’ segments of the market, like young, migrant or women entrepreneurs – FMO’s target market.
Nasira is funded by the European Union (from their Team Europe programme supporting Covid-19 affected entrepreneurs), MASSIF (a state-owned fund managed by FMO) and by FMO itself. Together, the EU and MASSIF have funded €110mn.
“We definitely see that small and medium-sized enterprises have suffered under Covid,” Fliehe Boeschoten said.
“But we also see that banks, in general, are surviving the crisis better than we expected, compared to the financial crisis in 2008.” However, certain sectors such as tourism and hospitality have been completely wiped out by the pandemic.
Business continuity key
That helps explain FMO’s focus on business continuity in the wake of the COVID-19 pandemic, with additional resources channelled through Nasira.
In April 2020, Nasira received a €25mn top-up from the European Fund for Sustainable Development. The EU had already contributed an extra €75mn to support migrant, female and young entrepreneurs and SMEs affected by COVID-19.
That same month, the programme signed a guarantee facility with Jordan’s Bank al Etihad to provide $30mn to support COVID-19 affected micro-enterprises and SMEs. The guarantee will complement a tailor-made capacity development project aimed at supporting the bank’s offering to entrepreneurs. It’s funded by the EU.
Focus on women
The focus on women is critical, as they often face inheritance or property ownership-related restrictions. “They may not be able to inherit or have property to their name, hence no collateral,” said Ortiz de Haas.
“It’s very difficult in such circumstances for a bank to go over that threshold and lend to them. But FMO can say, look, we can partially resolve the collateral requirement through a guarantee.”
Measuring impact
FMO’s core belief is that a strong private sector leads to economic and social development. How then does FMO measure Nasira’s success in meeting that aim?
One way is through its data platform. “We have one of the largest repositories of information on MSMEs globally at any one time. And that information allows us to learn more about trends in the market and payment behaviour,” explained Fliehe Boeschoten.
The data platform allows FMO to look at the same information the banks look at. “It allows us to monitor on a much more frequent basis, check with the banks and have a conversation about the development of the portfolio,” said Ortiz de Haas.
FMO has also developed a specific MSME model on defaults, where it calculates risk in the transaction. “We follow the NPL [non-performing loan] ratio, and we follow the trends of the expected losses on models that allow us to estimate what the loss is going to be.”
