Author: jorgen.muylaert

IMPACT ON CLIMATE

Through the #ImpactOnClimate-series, Incofin shares examples on how financial inclusion can advance climate-smart solutions and drive inclusive progress. A series of impactful projects of all shapes and sizes in emerging countries that address climate change, and help people adapt to and be more resilient to climate hazards. We at Incofin hope these stories of entrepreneurs, of financial institutions, of cooperatives, of impact organisations around the world can inspire how impact investors can contribute to a sustainable transition to a climate resilient economy.

Climate change is now. We must ensure that the most susceptible to the impacts of climate change – who are often already among the most vulnerable – are not left behind. Climate change is as much an environmental challenge as it is one of livelihood and social justice. Low-income communities (not the least women in those communities) are on the frontline of the dire effects of climate change. With the proper financial and technical solutions they are able to adapt, build resilience and mitigate climate change. Financial inclusion is well positioned to play a key role in empowering low-income vulnerable populations to adapt to climate change.

In this first episode, we take you to India and introduce you to Mufin Green Finance, pioneer in climate financing solutions in India.

The company’s mission is not only to bring about an environmental transformation, but also to create a positive social impact in India (financial inclusion and climate sustainability).

Mufin Green is a leading provider of loans for income generation through electric vehicles (EV), charging infrastructure and swappable batteries. By propelling the electrification of the transport sector in India, Mufin Green has managed to reduce over 100,000 tonnes of CO2 emissions since its inception in 2016. This has not only impacted the carbon footprint reduction, but has also resulted in financial inclusion, more income generation, and women empowerment.  

One of the e-rickshaw drivers supported by Mufin Green is Mustaqi Imad. She used to stay at home to take care of the household, but since her husband passed away, she had to look for a new source of income to take care of her four children. She knocked on Mufin’s door and today she is the proud owner and driver of an electric rickshaw. This activity generates a stable income for her and her family.

“I first drove a diesel rickshaw, but it became increasingly costly due to rising fuel prices. Moreover, it also made a lot  of noise and the driver’s seat would become uncomfortably hot, especially in summer with outside temperatures as high as 40 to 45 degrees. This e-rickshaw stays cool, doesn’t make much noise, and is a lot cheaper to use.”

In fact, by 2050, 215 million urban, low-income people will be exposed to average summer temperatures above 35°C. On the front line, India experienced record heat waves last summer, reaching over 49°C in some parts of the country.

Because of Mufin Green’s crucial role in boosting the importance of electric mobility in India while including more vulnerable populations, Incofin made an investment in the company through its India Progress Fund in 2022.

11/06/2023

A lot of ink has been devoted in the press about the rapid growth of the microfinance sector in Cambodia. Unfortunately, too rarely the focus has been on shining a light on the positive financial and welfare impacts for households by giving more Cambodians access to reliable financial services.

The country comes from a long road of recovery. Cambodia had to reintroduce a banking system to support economic activities after the fall of the Khmer Rouge regime. The financial system was in its infancy, with limited access to formal financial services. Microfinance institutions played a crucial role in promoting financial inclusion in Cambodia. The expansion of the microfinance sector has provided access to formal credit for a large segment of borrowers who previously depended on informal sources.

Based on research and our own experiences at Incofin we answer for you the eight most pressing questions.

1. How confident are we that Incofin is financing responsible microfinance institutions in Cambodia?

Incofin has encouraged responsible lending in Cambodia since 2012 through financing market research and through its investment strategy. Three safeguards give us assurance that we only work with responsible financial institutions:

1. RESPONSIBLE LENDING GUIDELINES

Incofin only works with financial institutions that comply with the Responsible Lending Guidelines to prevent over-indebtedness and excessively risky refinancing. Thanks to the dashboard produced monthly by the Credit Bureau of Cambodia, all financial institutions can track and monitor their high-risk refinancing. The tool also allows the regulator to sanction institutions guilty of aggressive refinancing practices.

2. CLIENT PROTECTION PRINCIPLES PATHWAY CERTIFICATION (CPP CERTIFICATION)

All Incofin’s partner institutions in Cambodia have received the highest gold level CPP certification. To obtain this, institutions must conduct an independent 3rd-party audit on their customer protection principles. Currently, seven microfinance institutions in Cambodia are gold certification recipients. The principles are there to protect the rights and interests of the end customer and encompass transparent and responsible pricing, a fair and respectful treatment of clients and collection practice, and mechanisms to prevent over-indebtedness amongst others. 

3. SOLID ON-SITE DUE DILIGENCE

All our partners in Cambodia are required to go through Incofin’s social and financial due diligence process, which is conducted on-site every year by our investment team in Phnom Penh. Responsible lending practices are crucial to avoid over-indebtedness. Our partner financial institutions identify all sources of income and expenses, including existing loan repayments, of their customers and family members living in the same house before granting credit.

Inofin was amongst the very first investors that decided to work only with investees in compliance with those standards, even though it led to a reduced market share. All four financial institutions that Incofin works with in Cambodia have passed Incofin’s social and financial due diligence process, adhere to the Responsible Lending Guidelines and agree to conduct independent 3rd -party audits on customer protection principles (e.g. CPP certification).

2. Is there too much lending in Cambodia?

Looking at all formal and informal credit supply, we tend to answer with yes to this question. While it is true that Cambodia private debt to GDP ratio is alarmingly high, we need to remember that the majority of such private debt is concentrated in the corporate sector and resides with commercial banks, frequently financing real estate. The risk for overheating the market is however not microfinance – microfinance institutions represent only 17% of all outstanding credit in Cambodia.  

Many Cambodians, especially in rural areas, still rely on informal credit and private lenders. Some of them combine a loan from a formal institution with credit from an informal source. People who borrow informally are often more susceptible to mistreatment by their lenders in case of repayment difficulties. Informal loans entail higher interest rates and less protection for the borrower. This is the very reason why we shall fight against the irresponsible credit suppliers.   

The risk of overheating should also rather be sought in the real estate sector and the price trends in the sector over the past years. Land purchasers with deep pockets fuel speculation that can culminate in a real estate bubble bursting.

That is why at Incofin, we analyse closely the share of housing loans of our microfinance partners in Cambodia. We do not lend to institutions that grant loans for speculative real estate and we check whether the housing loans are truly intended to finance a household’s house purchase or home improvement project and whether there is enough repayment capacity. 

3. Does microfinance really benefit low-income populations in Cambodia?

Cambodia has become one of the world’s leaders in poverty reduction: poverty rate dropped from 53% in 2004 to 10% in 2018. Among the many improvements that took place in the country and contributed to this success, financial inclusion played a role. Two leading research studies confirm the positive impact of microfinance in Cambodia.

  • 60 Decibels interviewed over 18,000 microfinance clients worldwide, including in Cambodia. 80% of the Cambodian borrowers reported that their quality of life improved thanks to microfinance.
  • The Dr. Bliss-study from 2022 concluding that most of the microfinance loans in Cambodia have a positive impact on the livelihood of the borrower, improving the sources of income.

At Incofin, we collect social performance data on a quarterly basis from all our institutions.

4. Are microloans in Cambodia always used for productive or business purpose?

We estimate that 60% of microloans are being used undoubtedly for productive purposes, such as setting up or expanding a small business. 30% of the microloans go to non-productive activities (including consumer goods, health, education, and housing improvements). A further 10% is used for refinancing or debt management.

One must not lose sight of the fact that non-productive purposes are also essential for low-income households. Using a microloan to manage an emergency or health issue is not in itself a negative phenomenon.

Rather than focusing solely on the stated purpose of the loan, we call for constant and rigorous examination of the credit underwriting quality conducted by the microfinance institution involved.

5. Should we be concerned about the microloans that are used for debt management or refinancing?

Not necessarily. It is important to make a distinction between lower-risk and higher-risk refinancing. There is a lower risk in case a borrower whose loan is about to reach maturity, asks to close early and to refinance it through a larger loan to match enlarged business needs because he or she won a new contract.

In that respect, Cambodia can be considered as a market leader in terms of transparency of its credit system data. Lending institutions are obliged to conduct a credit bureau check before considering disbursing a loan. Secondly, the Lending Guidelines Dashboard allows financial institutions to track and monitor their high-risk refinancing practices. 

How does Incofin prevent higher-risk linked to loan refinancing? First, we only work with microfinance institutions with high-risk refinancing <5% according to the Lending Guidelines. Secondly, during our due diligence, our investment team visits the branches of financial institutions and engages with their loan officers to analyse and assess their refinancing practices.

6. From time to time, stories surface about dubious collection practices, such as borrowers being forced to sell their land to repay their debt. How serious is this problem?

Incofin strongly condemns any practice whereby people would be forced to sell their land or irresponsibly pushed further into debt to pay off previous debts.

 While we unfortunately observe some deceptive collection practices, it is important to note that recent rigorously led impact surveys such as the one of Dr Bliss, concluded that such cases are a minority or even anecdotal (less than 1% of cases). The report states that the reason vulnerable families fall into a situation of repayment issues is not the loan amount in itself, but an external shock (loss of job, reduction of income-generating work) that happens after repayment capacity was determined.  

At Incofin, we make sure that our microfinance institution partners have formal collection procedures in place, and that all steps are clearly outlined in the collection procedures. During our due diligences, we verify that the organisations have operational and governance mechanisms in place to ensure the highest level of ethical behaviour when it comes to dealing with delinquent clients, collecting repayments and controlling collecting practices.

Foreclosure of collateral is only allowed when all other alternatives have been exhausted: this ranges from granting a waiver of repayment for a few instalments to completely rescheduling the loan. In line with the guidelines of the Client Protection Principles, forced collection practices will not be tolerated.

7. Is there an excessive focus on micro-credit in Cambodia as opposed to savings?

There is a need for more savings products that help grow the resilience of especially more vulnerable populations. Less than 7% of Cambodia’s population saves with a financial institution. The recovery of the economic and banking system after the fall of the Khmer Rouge takes time. And it takes even more time to regain people’s confidence to take money out of their homes and place it into the banking system. Microfinance institutions can help restore that trust and advocate with people the importance of rebuilding the resilience and safety nets lost during the Covid crisis.  

Savings is just one product. Microfinance institutions should take the lead in supporting the further development of financial products, such as savings, but also remittances, microinsurance, agricultural insurance, and services for SMEs.  

8. What is the future path for microfinance in Cambodia?

Cambodia does not need less microfinance, but more responsible microfinance. All parties involved have a role here to play. Together, we must protect the original aim and positive impact intentions of financial inclusion.  

The shareholders of microfinance institutions should revise their expectations on growth and profits and have a deep discussion on a fair split of the profits between shareholders, employee and end clients (through interest rate reductions).  

Meanwhile, lenders, both local and international, both impact and mainstream, must stop lending to microfinance institutions which are not Client Protection Pathway-certified or which are not adhering to the Responsible Lending Guidelines. This is the only way to send a strong signal to the sector that there is zero tolerance for irresponsible lending practices.

Regulators should continue efforts to ensure compliance with applicable client protection regulations, including direct complaint lines and on-site audits. Regulators should also pursue the fight against the informal credit sector. 

Borrowers need to be protected and empowered to optimise their financial decision-making. We welcome the efforts of the NBC and the Ministry of Education to include financial literacy in the national curriculum.

Cambodia’s rapid digital transformation, especially through mobile banking, will only further promote formal financial inclusion and reduce reliance on the informal sector. Internet banking and mobile apps in particular empower people in the lower income segment of the population by giving them access to user-friendly financial services at lower costs.

For example, mobile banking solutions have helped digitise account opening and accessing, allowing rural Cambodians to access services without having to travel to a branch. We welcome the development, but call on all stakeholders to be vigilant in creating a secure financial ecosystem.

By acting collectively at all these levels, the “bad” players in the industry will be easily identified and pushed out of the market. We will be able to discern between those institutions that “walk the talk” in terms of responsible finance and those that betray the original impact intent of microfinance. 

 

 

09/06/2023

In March, the Financial Times covered the news of the launch of  the Water Access Acceleration Fund, Incofin’s initiative to provide safe drinking water for 30 million people by 2030. Now the newspaper featured the fund launch as an inspiring example for their video on private sector investments to make drinking water available for more people. We are very grateful for the press attention that this fund receives (rightly so).

The fund is underpinned by the commitment of investors like Danone, Aqua for All, DFC, Norfund, BNP Paribas, IFU and USAID.

 

 

03/06/2023

Incofin is proud to announce that Fairtrade Belgium came to the head office to award the Fairtrade @work-label. It is a recognition for how we at Incofin work for a more sustainable agriculture with a fair income for smallholder farmers. Not only through our investments, but also in the daily life in the Incofin offices. Wheter it is the coffee drunk there, the nuts eaten or events organised: Incofin always goes for those products that truly benefit the farmer or producer of origin.

Our colleagues Sétha, Niels and Jorgen explain in less than 2 minutes all about it:

 

 

05/05/2023

Incofin raises fresh capital from new shareholders Degroof Petercam Asset Management (DPAM) and Korys. The transaction allows Incofin to accelerate its growth and to expand its impact in emerging countries. The new investors join the two founding shareholders of Incofin:  Incoteam, the vehicle holding the staff members’ majority stake and Incofin CVSO, a social investment company with more than 30 years of existence, out of which Incofin Investment Management spun off in 2009.

According to a survey (GIIN, 2022) the size of the global impact investment universe amounts to EUR 1 trillion. These investment play a vital role in achieving the Sustainable Development Goals (SDGs). However, a funding gap to reach the SDGs by 2030 still exists. According to OECD, reallocating 1.1% of the total assets held by banks, institutional investors or asset managers – almost EUR 4 trillion – would be sufficient to fill the gap in SDG financing. This is why impact investments are key for the future of our planet and why impact fund managers such as Incofin IM play a vital role.

Pioneering into new territories, both in terms of asset classes and geographies, has always been core to Incofin’s entrepreneurial approach. The capital increase will boost the company’s capacity to launch new initiatives, including funds integrating a smart climate and gender lens.  In addition, Incofin is at the forefront of developing best practices in impact measurement and reporting.

“The company’s’ unique strengths are attributable to the management’s drive and independence. However, in 2020, we realized we needed to boost our growth trajectory by attracting fresh capital and team up with partners, as we saw immense untapped investment opportunities. We wanted partners contributing to excellence in governance and capitalizing on our company culture. DPAM and Korys were the winning combination. With them on board we proudly remain a company rooted in Belgium but with unlimited global outreach.” – Loïc De Cannière, Founder and Chair of Incofin Investment Management

For DPAM, its first ever investment in an impact investing firm feels like a natural next step in line with the company’s longstanding commitment to sustainability.

“We have been thinking about broadening our offer for a long time, especially in the direction of impact investments in private debt and equity. We also perceive a growing demand from customers in this direction that we would like to meet. Today, we are a reference partner on responsible investments in emerging markets. This cooperation is fully in line with our commitment to sustainable development and strengthens the social component of it.” – Peter De Coensel, DPAM CEO

For Korys and Incofin this is not the first partnership.

“And we are happy to deepen this partnership with Incofin,” says Frederik Bauwens, Investment Director at Korys. “After a first investment in agRIF in 2016, Korys became a cornerstone investor in the India Progress Fund in 2021. We are a long-term investor focusing on sustainability, we particularly enjoy working with partners who share our core values and aim to make a positive impact. Together with the existing shareholders and DPAM, we make sure Incofin remains an independent investor anchored in Belgium, yet with a global impact. Furthermore, we love the idea that this partnership will expand our network and help us to connect with new players active in areas close to our heart.”

Incofin CVSO, a long-time shareholder since it split off its management activities into Incofin Investment Management, welcomes the two new shareholders.

Ever since Incofin CVSO was founded in 1992 – now more than 30 years ago – its mission has been to support entrepreneurs in emerging economies by offering them appropriate financing.  Incofin CVSO is proud that this trajectory has made it possible to now attract new like-minded shareholders in Incofin IM  This will enable Incofin to continue its strong growth path in the coming years, with even more positive impact for entrepreneurs in emerging economies.” Michiel Geers, Chair of Incofin CVSO

All parties involved underline how this new partnership brings a tremendous opportunity to leverage more sustainable impact and financial inclusion for low-income people in emerging countries. A major new initiative is already at an advanced stage and will be officially launched within a few months.

Argo acted as transaction counsel, advising both Incofin IM as issuer and Incoteam and Incofin CVSO as existing shareholders of the company, in relation to the capital increase.

 

 

 

20/04/2023

Incofin announces in the lead-up to the UN 2023 Water conference, the launch of the Water Access Acceleration Fund (W2AF). W2AF is a private equity fund focusing on safe drinking water, with EUR 36 million of commitments. The blended fund aims to provide 20 billion liters of water to 30 million people, mainly in Africa and Asia. W2AF invests in innovative water businesses that provide affordable, safe drinking water to underserved populations.

The committed capital comes from a diverse pool of private and public investors, including Danone along with BNP Paribas, the U.S. International Development Finance Corporation (DFC), Norfund, the Danish development finance institution IFU, and international foundation Aqua for All. The U.S. Agency for International Development (USAID) provided catalytic funding to enable a first-loss tranche.

W2AF is the first private equity initiative in a sector that is traditionally financed by  governments, donors and foundations. The fund aims to demonstrate the financial viability of the safe drinking water market worldwide.  It has a blended finance structure – an approach to use part of the public and private donor funds to attract capital from private investors. W2AF hit EUR 36 million in commitments at this first closing and aims to achieve total capital commitments of EUR 70 million in subsequent closings.

 

W2AF goes the last miles

Today, more than two billion people do not have access to safe drinking water. Inadequate or unreliable access to safe water is a harsh reality for many, especially in large parts of Africa and Asia. Piped water is in most countries a common way to get water to consumers, but where piped networks are unavailable or unreliable, people rely on wells or community water supply systems. Mostly women and girls have to walk, sometimes for miles, to reach the nearest water source. A growing world population, together with rising consumption and climate change threatens to increase water access inequality even more.

More and more, local entrepreneurs are coming up with promising market-based, yet affordable solutions. W2AF plans to invest in various decentralized solutions, such as water kiosks, which deliver safely treated drinking water in gallons to the home or to the local store. In addition, the fund will invest in water pipe infrastructure and water technologies. The investments will contribute to delivering safe drinking water to low-income communities around the world.

State Street Bank International GmbH in Paris will provide depository services.

“Drinkable water is a luxury we too often take for granted. Yet, 2.2 billion people today do not have access to safely managed drinking water. Meanwhile, there are talented water company owners who know how to solve this problem but can’t find an investor who aligns with their vision to help them scale up. That’s why Incofin created the W2AF, to address the growth capital needs of these entrepreneurs, and to prove that the drinking water sector is investment-ready, even when targeting low-income people.” Dina Pons, Managing Partner Incofin and W2AF Fund Relationship Manager.

“In a context where 1 in 3 people in the world do not have access to safe drinking water, we consider that it is crucial to join forces with public and private actors and scale up financial and social impact. Water is a key pillar of our mission to bring health through food and drink. Building on the experience of our impact fund Danone communities, we are today going a step further in supporting innovative social businesses dedicated to water access issue, and we hope other actors will soon join us.” Henri Bruxelles, Chief Sustainability and Strategic Business Development Officer of Danone

“Blended finance is critical to achieve universal access to water. Safe drinking water enterprises complement public efforts serving low-income communities in emerging markets. These enterprises struggle to access capital to scale and become sustainable. By making impactful water investments, W2AF will pave the way for other private and public investors”, said Josien Sluijs, Managing Director of Aqua for All.

“Norfund is delighted to play a part in setting up this first-of-its-kind fund and contribute to developing new ways of mobilizing the needed capital to provide access to safe and affordable drinking water. Norfund has ambitions to invest further in this sector that is essential for people’s health, but also for job creation, and we see this fund as an important step in building a larger portfolio”, says Delphine Gilbert, Investment Manager at Norfund.

“We are very happy to join W2AF that aims at improving affordable and safe water access for underserved low-income population in South Asia and Africa with a Just Transition approach, a very innovative initiative in the impact investing space. Indeed, W2AF’s theory of change focuses on the safe water value chain which addresses both social and environmental issues with substantial positive impacts: avoiding preventable diseases, fostering gender equality, plastic bottles reduction, CO2 emissions avoidance, …. ”, Laurence Pessez, Head of Group CSR at BNP Paribas.

“W2AF investments in innovative water businesses will advance water security by providing affordable, safe drinking water to millions of people in Africa and Asia. The fund will work to address the fundamental problem of access to clean water, which is increasingly scarce due to climate impacts such as excessive heat and drought. We are proud to be a part of this investment that meets DFC’s mandate of financing solutions to the most critical challenges facing the developing world today”, said Jake Levine, Chief Climate Officer at DFC.

“Lack of access to clean drinking water has profound consequences for billions of people in emerging economies, and we are far away from meeting the SDG 6 target on creating access to safe water for all. W2AF is an innovative tool to mobilise the needed private capital, which can speed up investments in private sector water companies and demonstrate that the water sector is financially viable. We are looking forward to being part of this initiative and make a positive impact by providing clean and affordable water to 30 million people”, said Arent Christian Kjær, Investment Director at IFU.

“At State Street we believe that addressing ESG issues can help generate better long-term outcomes. As an asset servicer, asset manager and responsible corporation, we aim to create value for our stakeholders. We are very pleased to accompany Incofin with the launch of this pioneer fund and to provide depository services”, Christophe Baurand, Country Head at State Street Bank International GmbH in France.

 

 

 

16/03/2023