CASE STUDIES IN DONOR GOOD PRACTICES No. 17 December 2004 How the Netherlands Government Fostered Successful Public-Private Partnerships for Financing MFIs by Ruth Goodwin-Groen This case study examines how a change in Dutch microfinance funding policy led to successful public-private partner- ships that brought private financial expertise to microfinance funding and increased the amount, range and flexibility of financial instruments offered to microfinance institutions (MFIs). Overview parties share information and, increasingly, provide In 1997, the Netherlands Directorate-General for Inter- syndicated (i.e., joint) loans. national Cooperation and its four co-financing agencies Comparative advantage drives these partnerships. The (CFAs) instituted a major policy change in Dutch govern- CFAs have a deep knowledge of local NGOs in ment funding for microfinance. Cognizant that the amount developing countries and a focus on poverty alleviation. of microfinance funding was not producing expected Private Dutch FIs have missions rooted in social justice results, they agreed that all financial assistance to MFIs and expertise in international lending, governance, and a should be managed by financial experts. With most wide range of financial instruments. The Dutch donors, as revealed by the recent Microfinance Peer government uses its own comparative advantages-- Reviews of 17 development assistance agencies, the bulk money and knowledge of microfinance good practice--to of public donor microfinance funding is managed by encourage partnerships between these two types of development specialists, without microfinance or institutions. financial sector expertise. The Dutch decision was ground-breaking and an important step toward improving Box 1. Dutch Micro Finance Platform Improves the effectiveness of their microfinance operations. Member Effectiveness Following the decision, the CFAs and several private, The objective of the Dutch Micro Finance Platform is to enhance the effectiveness of Dutch institutions that support microfinance by socially-oriented Dutch financial institutions (FIs), increasing their collaboration. Launched in early 2003, the platform developed successful partnerships. These partnerships use has a rotating coordinator. Coen van Beuningen of Hivos, who held a combination of government and private sector funds to this position in 2003, led the organization to establish a portfolio database on all microfinance funding in the Netherlands. When the offer flexible, quasi-commercial funding instruments, database revealed that many MFIs worldwide were receiving such as loans, loan guarantees, and equity investments, to funding from more than one platform member (most with MFIs dedicated to serving poor people. In parallel, the government financing), Mr. van Beuningen convened a member workshop on collaboration. Stijn Albregts of Novib became the CFAs use government subsidies to provide essential platform coordinator in January 2004 and is currently focusing the technical assistance for MFI institution building. The organization on a comparative advantage study and greater collaboration between various Dutch actors--both private collaboration with the MIX Market. and public--was then formalized in the Dutch Microfinance Platform. The platform comprises 15 Dutch Setting the Stage institutions involved in microfinance, and is an important catalyst for private-public partnerships. The Dutch government has a unique approach to overseas development assistance (ODA) that emphasizes support to By the end of 2003, the four CFAs and their FI partners civil society in both the South and in the Netherlands. In had collectively lent or invested over 51.2 million in 145 2003, for example, the Netherlands allocated projects worldwide. (An additional 11.7 million in gov- approximately 22 percent of its bilateral development ernment funds was allocated by the CFAs to MFI assistance to non-governmental organizations in technical assistance and start-up grants). In many cases, developing countries. About half of this funding was these partnerships offer MFIs sequenced financing to channelled through four large, multi-sectoral, non- match the stages of their institutional growth. When more governmental development agencies (the CFAs). Each than one CFA-FI partnership funds the same MFI, the CFA represents a pillar of Dutch socio-cultural-religious Page 2 A DIRECT Case Study life. These agencies are Hivos (Humanist Institute for Co- "The partnerships bring together specialized developmental operation with Developing Countries), ICCO (Inter- and banking knowledge to address the social and financial church Organization for Development Co-operation), objectives of MFIs in a balanced manner. They offer a broad Novib (Netherlands Organization for International Devel- spectrum of financial instruments and technical assistance opment Cooperation), and Cordaid. funds, as needed. Challenges of these partnerships include: efficiency, strengthening and expanding retail MFI capacity The Dutch government is one of the biggest bilateral (especially 'young' MFIs), and stimulating sustainable local contributors to microfinance. For many years, the multi- financial markets." sector CFAs used Dutch government monies to provide Johan de Waard, policy advisor, the Netherlands Ministry of grant funding to MFIs as part of poverty alleviation and Foreign Affairs, Directorate-General for International Cooperation rural development projects. After gaining a better under- standing of microfinance good practice, the Directorate- Hivos-Triodos Fund (HTF). Hivos works with NGOs in General for International Cooperation (part of the the developing world to achieve poverty alleviation and ministry of foreign affairs) and the CFAs jointly evaluated sustainable development. Three years before the Dutch their economic development programs, including ministry introduced its new policy, Hivos recognized its microfinance, in 1996. The evaluation found that the own need for greater financial skills. Coen van CFAs lacked sufficient financial skills to support MFIs Beuningen, senior economic policy officer, and Jaap with the proper mix of instruments. Also, the evaluation Dijkstra, managing director, looked for a small bank that results showed that credit components in larger shared Hivos' mission and wanted to collaborate. Triodos development projects were most often ineffective. The Bank, a world leader in social and environmental lending CFAs then embarked on a strategy to professionalize their (962 million in total assets in 2003), was also looking for support for microfinance and other economic activities. a development finance partner. Building on the initiative of the CFAs, the ministry in In 1994, the two institutions established the Hivos- 1997 announced a new policy for financial support to Triodos Fund (HTF), a microfinance lending facility that microfinance (this included loans and guarantees, but extends commercial loans to MFIs in local currency, excluded technical support). In keeping with its strong offers loan guarantees, and makes equity investments in private sector orientation and close links to the Dutch promising regulated MFIs (such as Findesa in Nicaragua, financial sector, the ministry told the CFAs to either find a finance company). The goal of the fund is to provide professional financial partners or develop in-house financing to MFIs that no longer need subsidized donor financial expertise. In addition, all loans and guarantees to funding, but are not yet prepared to access commercial MFIs were to be made on market-oriented terms (as capital. opposed to low-interest loans with soft repayment discipline). Three of the four CFAs decided to partner Financing for HTF lending comes from Triodos Bank's with financial institutions dedicated to social investments. "North-South" savings accounts; these monies are guar- To date, only Cordaid has decided to develop its own in- anteed by Hivos (90 percent) and private individuals (10 house expertise. Examples of the partnerships formed percent). HTF equity investments are financed by interest- between the CGAs and private financial institutions are free, subordinated loans from Hivos, which receives any described in the following section. dividends and all capital gains realized upon the sale of stock. As of 2003, Hivos also began to provide a 100 Structuring Public-Private Partnerships percent guarantee on the foreign-exchange risk of all The partnerships created between the CFAs and private loans made by the fund. Box 2 below gives an example of financial institutions allowed both sets of partners to HTF lending. HTF's cost of funds, management fees, and concentrate on their area of expertise. The socially- overhead are covered by income earned. oriented FIs conduct due diligence, manage microfinance Triodos International Fund Management manages the funding operations, and monitor investments. The CFAs fund and a senior staff member of Triodos Bank joins the focus on institutional building and technical assistance. board of directors of MFIs in which HTF makes equity The partnerships typically target MFIs that are in the investments. Thus Triodos also contributes its experience crucial growth phase when they are just ready to begin as a small independent bank that combines both social accessing funding on near-commercial terms. These and economic objectives. This experience is highly valued public-private partnerships are succeeding because the by the MFIs. For Triodos, the HTF fund is a strategic CFAs and FIs carefully matched their respective activity; it is not a hugely profitable business. Its costs are institutional goals and then designed the partnerships to covered by the management fee charged to HTF. achieve specific financial and developmental outcomes. A DIRECT Case Study Page 3 Box 2. HTF lending to Socremo in Mozambique total asset value of the ASN-Novib Fund was 9.1 million, of which 5.5 million was outstanding loans and The Hivos-Triodos Fund (HTF) extended a 225,000 loan in local currency to Socremo, an urban-based MFI in Mozambique, in the remainder, equity, and guarantees. 2002. Loan terms were three years at market interest rates with a bullet principal payment. The following year, at the initiative of ICCO-Oikocredit Partnership. ICCO is an inter-church Triodos International Fund Management, HTF and Novib offered a organization that gives grants to partner networks in the syndicated loan to Socremo (syndicated means a loan advanced jointly by two or more financial institutions). developing world. Oikocredit is an international co- HTF lent the equivalent of 100,000 and Novib, 200,000, both in operative society that uses its members' investments Mozambiquan Meticais. Loan terms were three years at market (mostly church-based organizations) to lend to inter- interest rates with a bullet principal payment. On behalf of HTF and national partners, of which approximately 50 percent are Novib, Triodos International Fund Management conducts due MFIs. One third of its 67 million portfolio is held in diligence and manages the syndicated loan, visiting Socremo twice a year to review developments. local currencies. The two organizations share a common Socremo benefits by receiving one, larger loan and having to deal mission of poverty reduction and global justice. with only one organization instead of two. Novib benefits because Triodos International administers the loan. Hivos guarantees 90 According to Eric Heinen, Oikocredit director of credit percent of the HTF loans and, from separate funds, provides operations, ICCO and Oikocredit have complementary technical assistance to Socremo. To date, Dutch government monies used for the HTF guarantees have generated 325,000 in networks and staff competencies. From 1997 to 2001, the private sector funds for loans to Socremo. two parties carefully analyzed how to best structure their financial relationship to benefit their developing country partners. By year-end 2003, HTF had a total portfolio of over 12 million spanning 33 MFIs in Africa, Latin America, In May 2001, ICCO and Oikocredit reached an agree- Eastern Europe, and South Asia. Of the total portfolio, ment whereby ICCO guarantees 50 percent of Oikocredit 3.9 million was in equity participation and 8.04 million loans to MFIs considered relatively risky institutions (e.g., in loans. MFIs in the start-up or expansion phase, or with a rural or women's empowerment focus). ICCO uses funding from "Thanks to our cooperation with Hivos, it is possible to the ministry to furnish the guarantees. Oikocredit pays finance institutions that are still in a start-up phase and, ICCO a 2 percent guarantee fee to cover costs and risk. obviously, [represent] more risk than more established MFIs. The two institutions work on a case-by-case basis, with It also makes it possible to provide finance in local currency, Oikocredit assigned responsibility for financial issues and so that HTF [bears] the risk of major currency swings instead of passing these risks on to the (more vulnerable) MFI ... ICCO, responsibility for optimum outreach and capacity however, there is still much to learn about how best to finance building. transitioning MFIs." Marilou van Golstein Brouwers, managing director, Triodos "We do not wish the ICCO Loan & Guarantee fund to become International Fund Management B.V. a big fund. To the contrary, we wish the focus of the fund to be `leveraging' private capital (Oikocredit and others, like banks), and, of course, on the developmental relevance." Novib-ASN Fund. ASN Bank is the oldest social bank in the Netherlands and was rated the number one socially Cor Wattel, policy adviser, Credit Desk, ICCO responsible bank by the Netherlands Consumer's Organi- zation in 2003. Novib is one of the oldest development By year-end 2003, Oikocredit had approved a total of NGOs in the country and raises a good part of its 8.4 million in loans guaranteed by ICCO, which were operating funds directly from Dutch citizens. extended to 16 partners in 8 countries. Total ICCO guarantees for the 16 loans were 2.7 million, meaning In 1996, ASN and Novib created the ASN-Novib Fund to the loans represent a multiplier of greater than three. To provide loans to MFIs in developing countries. ASN Bank date, no ICCO guarantees have been called. wanted to develop a product that put its Dutch banking clients in contact with developing-country entrepreneurs Improving the Effectiveness of the Public-Private and Novib believed microfinance offered a good Partnerships opportunity to attract private capital from individuals. In 2003, new initiatives began that built on the Both contributed 0.7 million to the fund, which was partnerships' solid foundations: opened to private investors in 2000. The portfolio consists primarily of hard-currency loans on commercial terms to Syndicated lending. The CFA-FI partners started 16 MFIs in Eastern Europe and Latin America. A targeted syndicated lending (see Box 2 for a specific example) in dividend of 2 percent per annum is paid to fund investors 2003, and by the end of the year, seven syndicated loans (1.8 percent was paid in 2003). As of December 2003, the had been extended to MFIs in Africa and Latin America. Page 4 A DIRECT Case Study All seven were initiated by Triodos International Fund Box 3. Public Private Partnership Lessons for Donors Management because the MFIs it was lending to needed The Dutch government relied on good-practice microfinance bigger loans than Triodos could provide. The solution was principles and an analysis of its own comparative advantage to to bring in other financiers. choose the most efficient strategy to support microfinance. It recognized that the development of successful microfinance Focus on niches. The CFAs and other platform members organizations follows a sequence in which subsidized capital for on- have started to identify their respective niches in lending is followed by near commercial funding, when donor grants are best devoted to institution building. Some lessons from the microfinance, encouraged by the 2003 Microfinance Dutch experience include: Donor Peer Review coordinated by CGAP. ICCO, for · Donors that do not have a wide range of financial instruments for example, has tentatively identified its niche to be the microfinance or the technical expertise to effectively build MFIs support of small and rural microfinance institutions in should fund institutions that do. both post-conflict economies and countries where the · Governments should refrain from intervening directly in the private sector and, instead, allow private institutions to implement microfinance industry is emerging. financial projects. · Grant making in microfinance should be separated from loans Increased coordination at all levels. To improve the and equity investments. Donor grants in particular should be effectiveness of these partnerships, the Dutch ministry is: limited to non-commercial purposes (e.g., initial capital for on- lending, institutional development) so that subsidies do not disturb expanding the its coordinating role (based on its 2004 the development of the market for financial services. vision for microfinance); upgrading how it tracks the · All actors active in microfinance - donors, implementing microfinance portfolio financed by Dutch funds; organizations, technical specialists, commercial financial monitoring how these monies leverage private funds; and institutions - benefit from regular dialogue, which allow them to enhance collaboration, efficiency, and effectiveness. improving CFA accountability for achieving impact. For the Dutch Microfinance Platform, improving CFA-FI References effectiveness currently involves: enhancing information sharing and coordination among members prior to CGAP, "Netherlands Development Cooperation System Letter funding approval, thus avoiding duplication of effort; to Management,".Washington, DC, 2003. www.cgap.org/docs/PeerReview_Netherlands.pdf. further identifying the comparative advantage of members, thus achieving greater impact; designing "Dutch Microfinance Platform Database on Microfinance financial instruments for MFIs reaching poorer and more Funding," unpublished report, 2003. rural clients and; providing TA for MFIs that want to B.V Facet, "Donor Collaboration in the Dutch Support for provide savings and insurance services. Microfinance," draft workshop report, January 30-31, 2003. Brigit Helms and Ruth Goodwin-Groen, How Donors Can Help Conclusion Build Pro-Poor Financial Systems, CGAP Donor Brief No. 17 (Washington, DC: CGAP, 2004). www.cgap.org/docs/ By facilitating the development of public-private DonorBrief_17.pdf. partnerships which are based on comparative advantage, "ICCO's Niche in Microfinance: Exploring the Case of the Dutch government has greatly improved the Ethiopia," Zeist, ICCO, November 2003. effectiveness of its microfinance financing. The result is a Unpublished letter of Minister J.P. Pronk (Ministry for Devel- focus on sustainable MFIs that alleviate poverty. The opment Cooperation of the Netherlands) to H.A.J. Kriujssen CFAs have concentrated their resources on the insti- (Chairman, GOM Working Group on Loans and Guarantees), tutional development of MFIs, leaving financial decision July 16, 2003. making to their lending partners. Socially-oriented FIs have lent on a greater scale to MFIs because the risk of Contacts and Websites such lending is lowered by the CFA guarantees. The FIs ASN Bank: www.asnbank.nl (in Dutch) have also succeeded in sharing their management and Cordaid: www.cordaid.nl (in Dutch) governance expertise with young, pro-poor financial Hivos: www.hivos.nl, e-mail: coen@hivos.nl institutions. MFIs can access a greater range of financial instruments in local currencies and now benefit from ICCO: www.icco.nl/delivery/icco/en/, e-mail: credit@icco.nl larger syndicated loans that require reporting to only one Ministry of Development Cooperation of the Netherlands: entity. In addition, they continue to receive CFA technical www.minbuza.nl, e-mail: johan-de.waard@minbuza.nl assistance for institutional development (i.e., for projects Novib: www.novib.nl/en that cannot be readily funded by commercial sources). Oikocredit: www.oikocredit.org Triodos Bank: www.triodos.com, marilou.vangolstein@ triodos.nl Ruth Goodwin-Groen is a senior microfinance consultant who works regularly with the CGAP Donor Team.