Microfinance

Core competence of KfW Entwicklungsbank

Money and lemon are lying on a table

KfW Entwicklungsbank is one of the world's leading microfinance financiers. Source: KfW Photo Archive / photothek.net

Over the past years, microfinance has experienced rapid growth. More and more microfinance institutions (MFIs) are operating on a financially sustainable basis and are independent from subsidies. Attracted by the successes of MFIs, private and institutional financiers are increasingly entering this market as well. Although this is encouraging, it is also associated with high expectations.

The global financial crisis also affected MFIs, as well as their clients. As a result of the economic effects of the crisis on the clients, credit risks have increased. But many MFIs have weathered the strom remarkably well despite the tough environment.

In this context, KfW Entwicklungsbank regards its microfinance activities as a contribution to counteracting the effects of the crisis on MFIs through good performance. With the global Microfinance Enhancement Facility, which was launched in early 2009, KfW Entwicklungsbank, the Federal Government, the International Finance Corporation (IFC) and other development finance agencies are making funds available to refinance MFIs that have experienced refinancing shortages on the part of private investors and reduced inflows of savings deposits as a result of the global financial crisis. This initiative has succeeded in sending out a strong signal in the wake of the financial crisis.

Fair and Responsible

In addition to the provision of funds, however, disseminating Responsible Finance principles is one of the primary responses to the financial crisis. These principles commit the financial institutions supported to fair and transparent practices with their customers. KfW Entwicklungsbank therefore welcomes international initiatives such as the Client Protection Principles initiated by the Consultative Group to Assist the Poor (CGAP).

Broadening the institutions' funding basis, access to savings mobilisation, developing local capital markets, a rigorous, responsible and transparent lending policy, increased access to local currency financing and broadening the equity base constitute further decisive factors for enhancing the sustainability of MFIs. These are the challenges which KfW's microfinance activities address.

core competence of the KfW Entwicklungsbank

Core competence of the KfW Entwicklungsbank

The KfW Microfinance Portfolio

With a portfolio of 2.3 billion euros (as of end of 2010), around three-fourths of which is made up of its own funds, KfW is one of the world's leading microfinance financiers, especially for equity holdings and activities in Latin America and Eastern Europe/Central Asia. But even in Sub-Saharan Africa KfW now ranks among the top financiers of microfinance institutions. In this way KfW is making an important contribution to provide a growing number of people with access to financial services so as to improve their living conditions.

microfinance portfolio

Microfinance portfolio

KfW Entwicklungsbank uses a wide range of financing instruments that are tailored to the specific needs of the financial institutions it supports. Most of them are refinancing lines, although equity participations have grown in importance as well.

The financing instruments of KfW

The financing instruments of KfW

A Favourable Environment, Strong Institutions

Increasing financial commitments, however, is not the only concern. Successful microfinance approaches need a favourable environment and, most of all, strong institutions that tap their growth potential effectively. This means that many MFIs still need considerable support in order to remain financially sustainable and focused on promoting development. One important aspect here is to get licensed to take deposits, which many MFIs still don't have. KfW Entwicklungsbank actively helps non-governmental organisations (NGOs) that operate in microfinance to develop into 'full-fledged' financial institutions.

In order to enable the dynamic MFIs to unfold their full development potential, reforms in the legal, institutional and regulatory framework need to be supported. Using a diversity of contacts, KfW urges positive changes to be implemented.

A Recognised Partner

KfW's activities in microfinance are recognised and valued internationally as well. Following the 2007 CGAP Smart Aid For Microfinance Index (CGAP stands for Consultative Group to Assist the Poor), KfW was again assessed in 2011. In this review KfW was again recognised as a leader among the participating institutions. 'Already one of the top performers in the pilot round of Smart Aid 2007, KfW has again made significant improvements to its internal systems', the CGAP report concludes.

The consistent implementation of international promotional standards, the high qualification of the project managers and the great variety of funding instruments were given particularly good ratings.

The excellent rating awarded by the Consultative Group to Assist the Poor (CGAP) is both an honour and an incentive not to waver in our efforts to further improve access to financial services - in terms of both quantity and quality.

Its experience and expertise also make KfW Entwicklungsbank a partner of choice for bi- and  multilateral institutions in the co-financing of microfinance projects. Accordingly, it has launched the African microfinance initiative MIFSSA, which provides for the establishment of several microbanks. Moreover, the Africa-oriented Regional Micro Small and Medium Enterprises Investment Fund (REGMIFA) was created at the G8 summit in Heiligendamm. A regional microfinance initiative has also been launched in Asia (MIFA) together with the World Bank subsidiary International Finance Corporation (IFC).

We are working to ensure the implementation of good microfinance practices and standards in global microfinance funds together with other development finance agencies, including the IFC, the Agence Française de Développement (AfD), the European Investment Bank (EIB), the European Bank for Reconstruction and Development (EBRD) and the Dutch FMO.

KfW Entwicklungsbank pursues new local currency financing approaches in an effort to accommodate the needs of many MFIs to refinance more of their lending business in local currency. It has made a substantial contribution to the local currency fund TCX, for example.

Microinsurance that provides improved social security for core groups of the population is becoming increasingly important. MFIs play an important role as marketing channels for insurance products because they know their customers and their needs very well. KfW Entwicklungsbank has financed a number of studies in selected countries and is developing suitable financing schemes.

Verifiable Impact

Microfinance projects have many positive developmental impacts. First, they create income and employment for hundreds of thousands of people, so they help to fight poverty in a significant way and complement the efforts made in other sectors. The income generated through microfinance gives women in particular more opportunities for themselves and their families, affording them greater recognition in society. Microfinance strengthens the financial sector in many different ways. It reaches more people, expands the range of products offered by the sector and can therefore more effectively and efficiently fulfil its function of mobilising resources and intermediation (converting savings deposits into loans).

Further Information

Last updated: July 2011