DFI Files: FMO – the Dutch Development Bank – investments in emerging markets and developing economies

By Daniil Filipenco

DFI Files: FMO – the Dutch Development Bank – investments in emerging markets and developing economies

For half a century, FMO, the Dutch Development Bank, has supported private and public entities around the globe to achieve both economic growth and development but also sought to gain profit from its operations. As a development finance institution (DFI), FMO, just like other similar entities, aims to obtain profit from providing funding to various development projects but at the end of 2022 (its 52nd year of operation), the bank’s profit was just €1 million compared to €491 million the year before.

What are the reasons for such a downturn in the bank’s profitability? Which projects were in the bank’s portfolio and which Sustainable Development Goals did it aim to contribute to? Let’s find out.

FMO – an abbreviation of Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden N.V. – is a development bank based in the Netherlands which was established in 1970 and became part of EDFI in 1992. The organization is a public-private partnership under Dutch Central Bank (DNB) supervision and its goal is to develop a more sustainable future through private-sector investments.

FMO organizational structure and sectors of interest

The company’s largest shareholder is the Dutch government which owns 51%. Dutch banks own 42%, while the remaining 7% is owned by employers’ associations and trade unions, as well as corporate and individual investors.

The latest data shows that there are 689 internal employees and 154 external experts working for this DFI. Around 43% of female employees are in senior or middle management.

FMO has investment projects in over 85 countries in Africa, Asia, Europe and Central Asia, and Latin America and the Caribbean. The company provides a range of financial products to private sector firms as well as financial institutions in developing nations.

The organization’s head office is in The Hague, the Netherlands, and it also has local offices in Johannesburg, Nairobi, and San José, and a representative office in Costa Rica.

The Dutch bank boasts in-depth expertise in financing and ESG management with a focus on emerging markets and developing economies. It has extensive alliances and networks of clients including educational institutions, NGOs, governments, and financial stakeholders including private investors and banks.

FMO focuses on three sectors: Agribusiness, Food & Water, Energy, and Financial Institutions but it will also invest in other areas indirectly through investments made in financial institutions as well as private equity funds.

FMO focuses on three sectors

Source: Annual Report 2022

The business operations of FMO

The three lines of business in FMO’s operational strategy can be readily distinguished.

1️⃣ FMO delivers long-term financing and, when feasible, funding in local currencies which lessens the exchange rate risk for its clients and the end recipients. This may include:

  • Providing direct medium- and long-term loans with both fixed and fluctuating interest rates as well as, if necessary, a grace period for repayment.
  • Putting money into the stock market either directly (via private equity firms) or indirectly, or through joint investments with partners.

2️⃣ FMO arranges public funding in higher-risk endeavors on behalf of governments and multilateral institutions. In order to efficiently secure greater financing levels, the bank organizes syndicated loans by connecting various DFIs.

3️⃣ FMO provides advisory services and technical support which includes assistance with the planning and execution of ESG risk mitigation strategies, workshops, and capacity development.

FMO financial performance as of the end of 2022

The financial performance of FMO as a whole was impacted by the unstable macroeconomic circumstances around the world. Events such as the war in Ukraine, the political and economic upheavals in Sri Lanka as well as the political turmoil in Myanmar had an impact on the financial results of this DFI. As a result, the bank witnessed a great reduction in equity valuations and a rise in loan impairments which ultimately led to a net profit of €1 million.

Source: Annual Report 2022

According to the bank’s 2022 report, its share of non-performing loans (NPL) increased by 2.4 % compared to 2021, reaching 11.9% of the bank’s portfolio, with Ukraine, Sri Lanka and Myanmar accounting for nearly a third of this total, around €200 million.

FMO committed portfolio

As a result of new investments together with the appreciation of the US dollar, the bank’s committed portfolio for 2022 has shown a 7% increase compared to the previous year and surpassed the established target of €8.8 billion. FMO’s total committed portfolio reached €13.2 billion which can be divided into:

  • €8.9 billion invested via the bank’s own books
  • €1.4 billion via public funds
  • €2.9 billion via mobilized funds

Source: Annual Report 2022

The organization’s report shows that in 2022 the bank invested €2.4 billion. €1.8 billion of this represented the bank’s own funds of which 43% was invested in Africa and Asia, 26% was invested in Latin America and the Caribbean and 25% in Central Asia and Europe.

FMO new investments (in mln Euros)

Source: Annual Report 2022

Few of FMO’s 2022 Energy Sector Investment Project

Solar project in Egypt

FMO has invested $36 million in the largest solar power initiative in Egypt by providing assistance to Abydos Solar Company, a subsidiary of AMEA Power, to set up and manage a 500 MW solar PV plant in the Aswan Governorate that is able to produce green, cheap energy.

Mini power grids in India

FMO has invested in Husk Power Systems, a multifaceted rural energy services company that installs mini power grids in India’s rural areas. These grids are intended to replace diesel generators and use a hybrid power system that runs on biomass at nighttime and solar cells during the day.

Since 2018, FMO has invested over $5 million in Husk operations and development with the company planning to significantly scale up and increase the number of hybrid mini-grids in Tanzania and India in the next few years.

With the help of the FMO Ventures Program’s investment, it is expected that the number of mini-grids will increase from 75 in 2020 to over 400 in the next three to four years.

FMO’s and the SGDs

With one of its goals being to reduce inequalities, the Dutch bank’s investments to help to achieve this has reached €810 million. The company’s report states that €237 million was directed to enterprises and initiatives in the least developed nations to target the creation of new opportunities and thus reduce inequality. In terms of the financial instruments and types of final beneficiaries, FMO invested €617 million using inclusive ventures, with a particular emphasis on microfinance and micro-financial services (both instruments that aim to support small-holder farms and businesses which again reduces inequality), SMEs managed or owned by women, and SMEs operated or owned by young people.

FMO has also invested €1 billion in a number of eco-friendly initiatives such as renewable energy and agriculture projects like those described above).

Source: FMO

The table below illustrates the organization’s investments in inclusive and sustainable development in 2022:

Source: Annual Report 2022

In 2022, FMO’s funding contributed to the creation or maintenance of around 750,000 jobs, including 43,000 direct jobs in the projects financed by the organization and 707,000 indirect jobs via tertiary impact. This represents a considerable increase compared to the previous year when the number of jobs created was 644,000. Approximately 87% of the jobs that were supported were related to investments made using FMO’s own balance sheet, and 13% were attributed to investments made using public funds.

The bank assists a large number of entrepreneurs throughout the world who founded and grew their businesses to contribute to positive changes through collaboration with partners such as European Development Finance Institutions (EDFIs), civil society organizations, and investors.

The bank’s strategy towards 2030 shows its long-term commitment to companies by “supporting them from an initial high-risk phase to the point where commercial investors can (partially) take over from FMO”.