COVID-19 Emerging and Frontier Market MSME Support Fund

Africa, South Asia

The fund has been launched by BlueOrchard Finance Ltd, an impact investing manager and member of the Schroders Group, to support MSMEs by lending to microfinance financial institutions across Africa and South Asia facing strained liquidity due to the impact of COVID-19.

Our investment

CDC plays an anchor investor role in the fund, joining other public and private investors in the launch of the fund, including Schroders, DFC (U.S. International Development Finance Corporation), and JICA (Japan International Cooperation Agency), who jointly supported its launch with around $140 million. The fund has a target size of $350 million.

Impact
  • Sustain and increase economic opportunities by providing access to financial services for entrepreneurs (SDG 8.3, 8.10).
  • Enhance resilience to economic shocks; maintain and increase access to microfinance for lower-income and vulnerable populations (SDG 1.4, 1.5).
How?

Direct: The fund will extend US dollar and local currency debt to financial institutions with loan books allocated significantly to MSMEs and low-income individuals. This financing will enable the financial institutions to maintain and extend greater credit to their customers namely entrepreneurs of micro-businesses (70 per cent of pipeline), enabling them to better manage cashflow and maintain or grow their business. Only a relatively small proportion will be likely used for personal purposes (21 per cent of current pipeline), mortgage/housing (2 per cent of current pipeline), allowing borrowers to save or invest, smooth consumption and manage risk better.

Stakeholder Geography Characteristics
Customers

Pan-Africa and South Asia. The AfrAsia sub-fund has a 40 per cent cap on exposure to India and a minimum of the lower of 15 per cent of the global fund or $30 million will be invested in Africa. CDC has committed to senior shares in the AfrAsia sub-fund which can only invest in CDC geographies.

The majority of the lending will go to underbanked entrepreneurs and low-income borrowers in both the formal and informal economy. Based on current pipeline, 70-80 per cent of borrowers are expected to be women and 60-70 per cent located in rural areas (this facility will qualify for the 2x Challenge). The range has been provided to account for variations in pipeline.

Grid Score Contribution
- This investment is made under an approved Catalyst Strategy, and therefore does not require a grid score. Market context: Commercial lending to this segment is not available in sufficient quantity or on the same terms in the COVID-19 context.

To help us direct our investments, we use a tool called the Development Impact Grid. The Grid scores every investment we plan out of a score of four, based on two factors: the difficulty of investing in the country and whether investment in that sector will lead to jobs.

  • Financial: CDC will play an anchor investor role in the fund by committing up to $30 million of first close capital and enabling the fund to reach its minimum viable fund size.
  • Value-add: (i) Increasing credit to sub-Saharan Africa by ensuring greater funding to the region than the original proposal; (ii) supporting qualification for 2X Challenge; (iii) supporting improvements in Blue Orchard’s environmental, social and governance (ESG) capacities which include increasing capacity to monitor ESG compliance and upgrading systems to meet international best practice.
  • Mobilisation: No mobilisation of commercial capital at this stage as Blue Orchard is primarily targeting DFIs due to their increased risk appetite in the current environment. Blue Orchard will look to mobilise commercial capital by attracting sufficient first loss capital. Deal team has engaged with other DFI investors to support Blue Orchard on fundraising.
Risk
  • External: Client protection considerations are heightened in the COVID-19 context, particularly as end borrowers are low-income/vulnerable populations. Mitigation: Client protection is assessed every two years through the ESG scorecard and financial institutions must demonstrate good practices. As part of the Environmental and Social Action Plan, 20 per cent of the portfolio will be visited annually to assess SMART campaign endorsement and operationalization of the principles (or an appropriate substitute standard).
  • Evidence: Visibility on the impact on underlying borrowers depends on the financial institution’s capacity to provide data on underlying borrowers. Mitigation: Blue Orchard’s half-yearly monitoring reporting can give us some understanding of the depth of impact through type/size of loans and segments reached. Opportunities to further assess this dimension will be further explored through deep-dive assessments.
  • Alignment: Relates to the risk that financial institutions will use credit for other purposes. Mitigation: (i) Risks around use of proceeds are mitigated by provisions in the loan agreements; (ii) risks relating to capital not being used to grow the portfolio will be closely monitored through a monitoring template; (iii) risk of financial institution serving other, less risky segments is mitigated by Blue Orchard’s selection process which focuses on financial institutions with significantly MSME-focused portfolios.

Environmental and social aspects

We are working closely with the fund manager to enhance its internal environmental, social and governance processes, which in turn will support financial institutions to integrate a responsible investor approach across their operations.

Key facts

Status:
Active
Region

Since 2012, we’ve only invested in Africa and South Asia. Investments outside these regions are from our pre-2012 portfolio.

:
Africa, South Asia
Investment type

We provide capital in three broad ways: direct equity, debt, and intermediated equity (principally through investment funds).

:
Intermediated investment
Fund manager:
Blue Orchard Finance SA
Start date

For direct investments, this is the date CDC committed capital to the business or project.

For funds, this is the date that CDC committed capital to the fund.

For underlying fund investments, this is the date that the fund invested capital into the business.e

:
November 2020
Amount

For direct investments, this is the total amount that CDC has committed to the business or project (it may be a combination of equity and debt).

For funds, this is the total amount that CDC has committed to the fund.

:
$35m
Domicile

This is the investee company’s place of incorporation; or a fund’s jurisdiction.

:
Luxembourg

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