Guest Blog Post written by Dom Manganelli during TBLI CONFERENCE™ NORDIC 2015. Views and opinions are that of the writer and are not the official views of TBLI CONFERENCE™.
What is the future of banking? The finance industry has a role to play not just in the maintenance of retirement funds, but also in the allocation of capital to build what is necessary in society.
At TBLI Nordic we had the fantastic opportunity to sit down with Yvonne Bakkum of FMO, the Dutch development bank who hosts an annual conference titled “the future of banking”, to discuss how the development bank contributes to the competitiveness of modern financial institutions. FMO invests in the private sector in emerging markets, with a portfolio of over EUR 8 Billion across 85 countries.
Investment managers around the world are attempting to diversify by expanding their portfolio in emerging markets, but with the resources available, this activity is primarily limited to Asia. In the current environment of low interest rates, investors are looking for higher yields, while simultaneously, there is an increased interest in impact investment and clients are seeking investments that meet sustainability goals.
The focus on frontier markets is what sets FMO apart, but how to maintain this focus once economies become more developed. Over 45 years of activity, FMO has experienced markets moving from low income to being developed economies. The long term mandate to support low-income countries means that tough decisions need to be made to maintain FMO’s role as a development bank.
As Yvonne explains: "in 2009, FMO stopped doing new business in Brazil, Mexico, Russia, and Kazhakstan because they were at investment grade. They took a lot of attention from our teams, and had relatively easy deal flow. All that capacity was then redirected”. Since then, Africa has become the biggest part of the FMO portfolio.
Finding the right companies who can help support the FMO mandate of creating sustainable impact is a big part of due diligence. From first stages of deal selection, environmental and social officers join deal teams. According to Yvonne, “the result is that we only engage with companies who take these things serious enough and who don’t do it just to comply with what we want, they have to see the value.”
Today, FMO helps to bring about the future of banking by overcoming barriers for investment, by building structures that can be replicated and scaled up. The G20 Innovation Lab recently awarded the FMO pilot initiative in climate finance, called The Climate Development and Finance Facility.
As Yvonne explains, this renewable energy facility addresses "several structural problems in project finance, resolving huge complexity of various financiers."
The new facility combines: 1. Early stage project development funded by donors or governments, 2. A construction facility funded by equity and debt from a development finance institution and frontrunner institutional investors, and 3. A refinance facility which will take out the infrastructure assets once they are operational, delivering a typical debt product, with low risk and steady returns for mainstream institutional investors.
So what is the future of banking? Yvonne believes the future will be "much more balanced, with an awareness of the public utility function of a bank.” FMO finds the best balance of investment opportunities to diversify risk and increase yields by focusing on this sustainable approach to development in frontier markets, delivering propositions for institutional investors that meet their requirements in a dynamic world.