news - Market Creation in Practice: Accelerating DFI Investments in Nepal’s Financial Service Industry

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Market Creation in Practice: Accelerating DFI Investments in Nepal’s Financial Service Industry

May 10, 2024

There's a large financing gap towards achieving the Sustainable Development Goals (SDGs), and simultaneously not enough business opportunities for Development Finance Institutions (DFIs) and other impact investors to invest in. To tackle this, we've made market creation a key focus in our 2030 Pioneer, Develop, Scale strategy.

It aims to generate more investment opportunities for development banks and other large-impact investors seeking to contribute to private sector development in the markets and sectors that it currently cannot reach.

With market creation, we are leveraging our investment skills, expertise and partnerships to tackle investment barriers. Our goal is to increase the success rate for early-stage companies and broaden the pipeline of inclusive, impactful, and sustainable transactions.

One market creation activity we've initiatied is Invest for Impact Nepal, established by BII, SDC, and ourselves, which focuses on ecosystem constraints supporting local financial institutions and private equity funds.

We recently attended the 2nd DFI investment mission to Nepal, focused on financial institutions, which was hugely successful in drawing together financial institutions and DFIs to partner around SME Financing and addressing the financing gaps in the segment. This would not have been possible without the participation of the eight DFIs and Asset Managers, along with the Class A Banks that led to debt investment in the following year of around USD 100 million and a pipeline of another USD 150 million into the sector. 

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On the backdrop of these positive outcomes, Invest for Impact Nepal (IIN) organized the second DFI Mission in 23-25 April 2024 to bring together DFIs working in Nepal to assess the developments made since the last DFI Mission and explored new opportunities offered by the market. This time the mission focused on opportunities across the spectrum of financial institutions including Class B banks, microfinance institutions and the Digital Financial Service Industry.  Following up on the last mission, there was an opportunity to engage with the Ministry of Finance and Nepal Rastra Bank to discuss on improving the investment environment for DFIs.

The objective of the mission was to: 

  • update DFIs on the latest policy developments, their collective investments, and its impact and also discuss how to promote more impactful and transformative investments in the financial services industry.  
  • showcase pipeline of investable FIs including Class B, Micro Finance Institution (MFI)s and Fintech for potential transformative investment opportunities.   
  • create a wider market awareness on Sustainable Financing, including gender, inclusion, climate and impact outlook. 
  • facilitate collaboration between DFIs & DPs to assist regulators in creating a more conducive environment for foreign and DFI investments in Nepal. 
  • provide feedback and guidance to IIN for its future strategy. 

Key Achievements of IIN till date:

  • IIN has served as a pivotal platform, closely collaborating with 20 DFIs and Impact Investors.
  • Successful facilitation of collaboration among key stakeholders in the investment ecosystem, including DFIs, Impact Investors, Development Partners, Government, and the Private Sector.
  • Market intelligence initiatives by IIN have resulted in significant outcomes:
    • DFI investments in the financial service industry (Commercial Banks) surged from USD 98 Million in 2021 to USD 615 Million.
    • The number of DFIs and Impact Investors investing in Nepal's financial service industry increased from 2 to 8, with the number of Commercial Banks receiving investments rising from 2 to 6.
  • IIN facilitated Memorandum of Understanding (MoU) between the GoN - Ministry of Finance (MoF) and six DFIs collectively. This marks the first MoU signed by GoN with DFIs collectively, underscoring its commitment to partnering and fostering an investment-friendly environment in Nepal.
  • IIN’s engagement with Nepal Rastra Bank (Central Bank of Nepal) led to formal recognition of DFIs in their Foreign Investment and Loan Management Bylaws and addressed key issues collectively raised by DFIs with regards to debt investment through amendment of the Bylaws in February 2024.
  • IIN's engagement with Securities Exchange Board of Nepal (SEBON) led to a reduction in the Lock-in-Period from 3 to 1 year for all DFIs investments and signed a MoU with the Nepal Private Equity Association (NPEA) addressing regulations impeding the alternative investment industry, recognizing NPEA as an umbrella institution.
  • As part of its market shaping initiatives, IIN established a significant partnership with Class A Commercial Banks and the Nepal Bankers’ Association (NBA). This collaboration has instigated a transformative shift within the banking sector, evident through widespread adoption of Environmental and Social (E&S) practices and the establishment of international standard Environment & Social Management Systems (ESMS) within these banks.
  • IIN's partnerships with the NBA have facilitated the creation of a robust, long-term infrastructure for training and developing both current and future talent within the market. Notably, 80 banking professionals are undergoing training on the International Certified ESG and Sustainable Finance Course, in partnership with Universitat Pomeu Fabra-Barcelona School of Management, to address immediate skill gaps.

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Key Highlights of the Mission

  • 30 delegates from 10 DFIs and 4 Impact Investors participated in the mission. (Please refer to notes below for the list of institutions).
  • Participation from local investment ecosystem stakeholders throughout the event:
    • Over 20 representatives from Government Agencies including Ministry of Finance, Nepal Rastra Bank and Securities Exchange Board of Nepal,
    • More 20 representatives of diplomatic missions and development partners,
    • Over 100 representatives from Financial Services Industry – Commercial Banks, Development Banks, Micro Finance Institutions, Digital Financial Service Institutions, Private Equity and Venture Capital Funds,
    • Representation from more than 10 private sector associations including NBA, NPEA, DBAN, CBFIN, NMBA etc.,
    • Over 30 journalists from various media,

Key Takeaways:

  • The mission was successful in engaging the Government of Nepal for continued commitment to improve the regulatory environment for DFI partnership and investment.
  • The dialogue between the DPs and DFIs during the mission helped deepen the commitment to collaborate for more impactful outcomes from DFI investments.
  • The missions also provided the opportunity to engage with the wider financial sector including Micro-Finance Institutions and key actors of the Digital Financial Services Industry.
  • Having witnessed the progress and the growth of investments made by the DFIs in the financial service industry so far, the DFI Delegates highlighted the significance to work with investment ecosystem stakeholders to further the momentum gained around Sustainable Finance, ESG, Client Protection, Gender and Climate Financing for more impactful results.

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Notes:

  • The First Development Finance Institutions (DFI) Mission in Nepal was held in April 2023.
  • The DFI Investments in Nepal from 2008-2023 has amounted to $1.1 billion with the financial sector comprising for 59% of the total. Remarkably, between 2021 and 2023, the financial sector attracted $629.9 million investments from DFIs.
  • Attendees of the second DFI Mission included Asian Development Bank (ADB), British International Investment plc (BII), Société Belge d’Investissement pour les Pays en Developpement (BIO), Nederlandse Financierings Maatschappij voor Ontwikkelingslanden nv (FMO), Swiss Investment Fund for Emerging Markets (SIFEM), Deutsche Investitions- und Entwicklungsgesellschaft (DEG), Finnish Fund for Industrial Cooperation (FINNFUND), International Finance Corporation (IFC), U.S. International Development Finance Corporation (DFC),  Japan International Cooperation Agency (JICA), MicroVest, DAI Capital, responsibility and Symbiotics.

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