Financial system development
Fundamental for sound economies
The overarching goal of KfW Development Bank is to promote sustainable, pro-poor financial systems. In addition to contributing to greater economic growth, functioning financial systems in developing and emerging countries play a major role in achieving development goals in a myriad of ways. A well-functioning financial system is one of the key cornerstones of an economy. Financial institutions mobilise resources for investments, which are paramount for sustainable growth. They also ensure non-cash payments can be processed swiftly and safely. To promote the sustainable development of financial systems in its partner countries, KfW concentrates on three areas by employing both classic and innovative financing tools: in addition to the micro level which concerns strengthening individual financial institutions, KfW carries out projects on the meso and macro level to stabilise the macro-economic environment. In doing so, the focus is primarily on four areas: micro-financing of micro enterprises, agricultural and environmental financing and Responsible Finance.
Micro-finance projects produce many beneficial outcomes. They create income and employment through financial services for people on low incomes who would otherwise be denied access to savings products, loans or other financial products. Micro-finance projects open up new opportunities for women in particular, and in doing so, increase their social status. Additionally, projects in the area of micro-finance strengthen the financial sector itself. By supporting micro-finance institutions a greater number of people can be reached and a broader range of products featuring tailored financial services such as micro-loans, insurance or savings products can be offered. The financial sector thus fulfils a vital function in converting savings into loans (its "resource mobilisation and intermediation function").
KfW Development Bank, which has promoted the micro-finance sector around the world for many years, wants to help create more sustainable micro-finance markets. In doing so, KfW particularly focuses on supporting institutions which offer varied, financial services tailored to meet the needs of customers, and which act in a fair and transparent manner (Responsible Finance), above and beyond purely extending credit.
The following conditions must be met in order for micro-finance institutions to actually fulfil their intended function: the basis for refinancing must be expanded, savings accounts must be set up, the local capital markets must be built up, loans must be issued in a way that is responsible and transparent, finance must be offered in local currencies and the equity base must be enlarged. These are precisely the areas that KfW Development Bank focuses on in its micro-finance projects. KfW is one of the biggest providers of micro-finance in the world with a portfolio of EUR 1.7 billion, more than half of which is from its own funds.
Even today, more than 840 million people suffer from acute hunger worldwide. Over a billion people are chronically malnourished. According to the United Nation's Food and Agriculture Organization, FAO, around 70 % more food needs to be produced by 2050, to feed the world's growing population. Sustainable economic development and promoting agribusiness can contribute to providing world nutrition in a manner that uses resources sparingly and is viable in the long term. Agricultural financing links both these areas and indirectly contributes to increasing agricultural production.
This is why KfW Development Bank places special emphasis on improving the range of financial services on offer, for instance loans and savings products for small and medium-sized enterprises in the agricultural sector. The goal is to promote micro finance institutions, banks or credit unions, so that they can develop and provide suitable financial services for agricultural companies and those living in rural areas.
A special focus is on financing that arises along value chains, because in this way risks can be distributed and monitored more efficiently. In order to achieve this, financial institutions need to be very aware of the financing requirements and risks of the agricultural sector. It is also important to shape the agricultural credit business in a responsible manner. To this end, technical capacities need to be strengthened and financial institutions to be provided with loans and equity capital.
Responsible Finance is the guiding principle of KfW's commitment in the area of financial system development. As one of the world's largest investors in the area of micro-finance, we bear a special responsibility for ensuring that financial institutions deal with their customers fairly and respectfully.
In order to promote the principles of Responsible Finance and ensure they are complied with over the long term, we enter into dialogue with supervisory authorities in our partner countries, regularly hold discussions with the donor community and support initiatives such as the SMART Campaign of the Consultative Group to Assist the Poor. The goal of this initiative is to establish precisely such principles in microbanks as a matter of course.
These principles are anchored in every phase of the project cycle at KfW. A thorough analysis of the underlying conditions in the financial sector is carried out at the start of each project. This measure aims at recognising tendencies towards indebtedness and unhealthy competition at an early stage, in order to counteract them with suitable project approaches. We work with financial institutions that pursue a "double bottom line" strategy – i.e. they pursue the dual goal of financial sustainability and social impacts.
Additionally, we specifically support our partners in implementing the principles of Responsible Finance. This also includes assisting them in extending their product range in order to motivate customers to save, for instance with appropriate saving products. Complying with the principles of Responsible Finance is contractually agreed on with all partners and also monitored. Above and beyond protecting customers, we motivate the banks that we finance to set goals and strategies which are socially compatible (Social Performance Management).
Climate change is one of the greatest challenges of our time. It is therefore of increasing importance for industry, as well as emerging and developing countries to make fundamental adjustments and pursue an inclusive, resource-efficient and low carbon path to development. The financial sector plays a significant role on the path to sustainable development in the area of "Green Finance".
"Green Finance" is an important approach of development policy which strives for ecological economic growth in partner countries. It supports the transition to a sustainable economy. The way to achieve this goal is through better general conditions for investments, and by providing additional financing with a clear focus on renewable energy, energy efficiency and environmentally friendly technologies.
Currently, KfW is promoting this green transformation, primarily via the financial markets in developing countries. For example, it provides credit lines via national development banks, which then offer low-interest loans to encourage consumers to purchase environmentally friendly products. These could be domestic appliances such as refrigerators in Mexico, or energy efficient new apartments in India. The aim of this is to encourage greater sustainability via the financial market. At the same time, KfW is participating in the direct reform of financial systems in its partner countries, for instance, by strengthening local financial institutions and promoting innovative financial services. Yet ultimately, KfW's goal is always to employ its financial instruments so that they boost and accelerate the transformation of the respective economy.
FC Fund finance is defined by KfW Development Bank as the promotion of developing countries and emerging economies by participating in investment companies or Funding thereof. The Funds that are promoted by the Federal Ministry for Economic Cooperation and Development and KfW Development Bank within the scope of the Financial Cooperation (FC) finance measures that are developmentally soand and profitable in developing countries. They also report regularly about the impact of these measures. The Funds in question are impact investment Funds, i.e. the Funds simultaneously pursue development, climate and environmental goals in developing countries and emerging economies on the one hand and financial goals on the other. These Funds are legally independent entities. The resources of various investors are used according to agreed criteria. Specialist Fund managers are appointed for this purpose.
Each Fund is unique and has specific characteristics (legal form, structured/non-structured liabilities and shareholders' equity, financing tools, investors, target markets, maturities, investment Fund's headquarters, etc.). Some Funds have the option to finance training and advisory measures. Many of the Funds are structured, most according to Luxembourg law: public equity tranches act as a kind of risk shield, by offering a risk buffer to protect more risk-averse investors. The public resources in many of the Funds mobilise private investors, offering them the opportunity to buy Fund notes or Fund shares issued for development and climate policy purposes. Even now, numerous private investors, family offices, pension Funds, philanthropists, international and German charitable trusts are investing in FC-promoted impact investment Funds.The financing requirements of the individual Funds vary over time. The respective Fund managers are responsible for the sale of unlisted notes. In addition, financial intermediaries place some of these Funds' notes with their clients.
Investment Funds that are promoted by a KfW participation are listed below in alphabetical order: