Finnfund

AfriCap Microfinance Fund is a pioneer in its field in Africa, and has also managed to attract private funding for microfinance banks.

Established in 2001, AfriCap was the first equity fund in the continent dedicated to microfinancing. It makes equity and quasi-equity investments in microfinance banks which, in turn, provide microcredit and deposit services to low-income customers.

European development finance institutions and NGOs specializing in microfinance were among AfriCap’s first financial backers, but the fund’s aim from the outset was to also attract private investors.

“One of our objectives was to give a sign to investors,” says managing director Wagane Diouf of AfriCap Microfinance Investment Company. “Private investors have been discouraged by the lack of transparency and risk diversification and by undocumented commercial returns.”

Through its own example, AfriCap is trying to show that microfinance can be a profitable investment opportunity. The imputed net yield on investments in the fund so far has averaged about 30 percent annually.

Fund seeks new investment targets

In its recent second round of investment, in which Finnfund participated for the first time, AfriCap raised about 30 million US dollars, boosting its total capital to 50 million. At the same time it transformed itself into a permanent company under the name AfriCap Microfinance Investment Company.

Finnfund holds 6.1 percent of the new company’s share capital. The major shareholders are the European Investment Bank (EIB) with 14.6 percent and two private funds, Nordic Microcap with 12.2 percent and Blue Orchard Private Equity Fund with 10.2 percent. Other shareholders include the Netherlands development finance company FMO, Sweden’s Swedfund and Norway’s Norfund.

So far, AfriCap has invested in 14 institutions in thirteen countries. Its portfolio is geographically diverse, stretching from Egypt to South Africa and from Senegal to Madagascar.

It is currently exploring new investment opportunities in these and other countries and intends to expand its portfolio with 20 investments during the next five years.

Advisory services to microfinance institutions

AfriCap is managed by AfriCap Investments, a South African advisory company. Seven African investment professionals work in its offices in Johannesburg.

It made history a few years ago when it participated in the launching of Kenya’s Equity Bank Limited, the first IPO of a microfinance institution in Africa.

In addition to providing financing, AfriCap offers advisory services to the microfinance banks that it invests in, helping them develop their business and governance.

“Our second objective is to be the kind of financial backer that actively participates in managing what it invests in, and in improving governance. This is our way of developing the African microfinance market and spreading good business practices.”

AfriCap also aims to take advantage of new technology in order to reach customers at the very lowest income levels.

Successes with comparable funds

AfriCap is the fifth microfinance institution in which Finnfund has participated financially. It has had good experiences with its previous investments in Africa, southern Asia and Latin America.

“Microfinance has significant development effects,” says Finnfund investment manager Peter Platan. “Microcredit targets low-income households and helps small entrepreneurs. The microfinance banks also have a lot of women among their customers.”

Platan says participating in AfriCap is providing Finnfund with valuable information about the development of African microfinance markets and will create new opportunities for cooperation.

Muhammad Yunus of Grameen Bank in Bangladesh, who was one of the pioneers of microcredit, won the Nobel Peace Prize in 2006. Platan says that the award to Yunus did a lot to increase interest in microfinance among investors.

“Not just traditional development finance institutions but also private investors have woken up to its opportunities.”

Credibility requires a professional approach

Wagane Diouf has observed the same trend.

“There are good prospects for a continuing flow of private capital. One of the things that is encouraging interest is the development of more sophisticated financial vehicles. These make it easier to enter the field.”

He is concerned, however, about the number of unskilled players in microfinance. There is a danger that they could make a bad name for the industry.

“We have to be ready to deal with crises that will jeopardize the public perception of microfinance.”

Diouf believes that professionalism can be improved if the diverse field slims down and microfinance is consolidated in the hands of major players.

“This would make operations more effective and help to reduce the cost of services to the clients.”

The greatest risks in microfinance lie in the general political and economic development of African countries, he says.

Political risks can be reduced by diversifying investments geographically. For protection against exchange rate changes, investments can be placed where the return on capital invested outpace the losses that would be sustained in devaluations.”

For more information please contact Mr Peter Platan, Investment Manager, tel. +358 9 3484 3327, email firstname.lastname@finnfund.fi