COVID-19 Emerging and Frontier Market MSME Support Fund

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.

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.

• 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.

• 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.