MEET THE BOSS: Nanno Kleiterp of the Netherlands Development Finance Company (FMO)

The Netherlands Development Finance Company (FMO) is the international development bank of the Netherlands. FMO uses loans, mezzanine financing and equity investments to invest in financial institutions and other companies in developing countries. With an investment portfolio of USD 6.5 billion, FMO is one of the world’s largest bilateral private sector development banks. FMO’s mission is to create flourishing enterprises that can serve as engines of sustainable growth in their countries.

For over 20 years, FMO has made major commitments to microfinance. During these years, a vast network has been developed and valuable experience and knowledge gained. As of year-end 2009, FMO has a committed microfinance portfolio of USD 490 million, which is divided among Africa, Asia, Latin America & the Caribbean and Eastern Europe.

MicroCapital: What role do you see development banks playing in social change?

Nanno Kleiterp: The view of FMO is that we have to take risks that commercial parties are not able or willing to take. When possible, we try to catalyze commercial investment in order to maximize impact. In addition, we support our clients in getting to best standards in terms of the environment and transparent governance.

MC: What makes FMO a leader in microfinance?

NK: One of the reasons that I think we are very innovative is that we have a broad network of partnerships in the countries where we operate. In most cases, we are active right from the early stages, which makes us an interesting partner for other parties in this business. We were involved in the early stage of ProCredit, which is now a big success and one of the bigger players. We have worked on innovative products like the BRAC securitization, the BlueOrchard Loans for Development collateralized debt obligations and development of hedging services with MFX Solutions.

We also have a unique ownership structure; there are not many development banks that have private investors on board. There are no governmental or other direct representatives of our shareholders on our board of directors. That makes us flexible because our put-through time is quite low. That is not uncommon for a for-profit company, but for a development bank, we are a special case. On the other hand, because of our relationship with the Dutch government, the Ministry for Foreign Affairs has provided us with funds for financing projects in high-risk countries or high-risk sectors. One of these is the local-currency MASSIF (Micro- and Small Enterprise Fund).

In Cambodia we have made loans to and invested equity in quite a number of institutions. We’ve been involved with ACLEDA right from the beginning. We’ve seen it evolve from a grassroots NGO into a successful commercial bank covering all of Cambodia and have recently sold our stake to a commercial party, which we regard as an important milestone. ACLEDA is now starting a new bank in Laos, in which we have invested share capital and substantial technical assistance. We have invested in Amret and been involved with PRASAC and Sathapana. Cambodia is a small country – a fairly small microfinance market – and I think FMO made a difference there, not only in developing one institution with financing and knowledge transfer but in giving a push to the sector as a whole.

MC: How were you first introduced to microfinance?

NK: I started at FMO 22 years ago in microfinance, although it wasn’t called that yet. What we did – I think FMO was one of the first – was create a local-currency fund, then called the Small-scale Enterprise Fund, now MASSIF. That fund has grown since 1987 and has shown a positive return. At the time, nobody believed that it was possible for a local-currency fund to make a profit providing loans and equity to financial institutions that dedicate themselves to micro- and small enterprises.

MC: What led you to believe that local currency was possible and appropriate?

NK: We were convinced that local-currency-earning entrepreneurs should be financed with medium- to long-term, local-currency loans in order to avoid their exposure to foreign currency risk. In the beginning – frankly – we did not know that it would be possible. Over the years, we improved our techniques, proving that local-currency lending was commercially viable.

MC: How does microfinance fit into the broader landscape of enterprise development?

NK: FMO focuses on access to finance, access to energy and access to housing. It is our view that not only credit is important, but also access to savings, to insurance, to a broad palette of different products. We think microfinance is important, but we are also very active in the missing middle – in small- and medium-enterprise financing.

MC: What trends do you see now and on the horizon?

NK: In the last year, microfinance has become a mainstream asset class. I am quite convinced that, after the crisis, the track record will really be established because then you will see how the sector has held during the crisis. You see that the portfolio of microfinance institutions is deteriorating a little bit, but not dramatically. In 2011 or 2012, commercial interest will come back much stronger even than before.

We will also see increasing competition, which dramatically decreases the cost of delivery. We were at the start in Bolivia with BancoSol when interest rates were over 50 percent. Today interest rates are around 20 percent because of competition that pushes institutions to become more efficient instead of letting their clients pay for their inefficiencies.

There is also a lot of debate about whether microfinance institutions should strictly stick to serving microentrepreneurs. We see it as positive when microfinance institutions move upscale based on their experience with and the growth of their clients. This is one of several ways that an inclusive financial sector can foster economic growth and social change where they are needed most.

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