Author: Nepal Invests Platform
Original publication date: 13 July 2021
What is a development finance institution?
Development finance institutions (DFIs) are government-backed specialised institutions established to promote job creation and sustainable economic growth and to contribute to the Sustainable Development Goals (SDGs), alongside development partners. DFIs invest in commercially viable private sector projects in developing and emerging market economies. They provide funds for low-capital projects or where borrowers are unable to access capital from commercial lenders. DFI investments are made through financial intermediaries such as banks or private equity and venture capital (PE/VC) vehicles.
DFIs play a crucial role in financing the private sector of less economically developed countries in the form of higher-risk loans, equity positions, and guarantees. They source their capital from national or international development funds or benefit from government guarantees. This ensures their creditworthiness, which enables them to raise large amounts of money on international capital markets and provide financing on very competitive terms. Over the years, DFIs have led to considerable growth in Southeast Asia, with a focus on investment markets largely revolving around financial services, energy, and manufacturing. Further information on DFIs can be found on CDC Group plc’s (CDC Group) page “CDC Explains”.
The status of DFI investment in Nepal
Nepal is a developing country (in fact, a Least Developed Country (LDC)), hence its need for funds to maintain the availability of long-term finance (and growth potential) for sectors such as infrastructure, industry, agriculture, tourism, ICT, small and medium enterprises development, and other entrepreneurial activities. With Nepal’s economy facing a slowdown due to COVID-19, DFI investments are crucial to help meet Nepal’s capital needs, accelerate industrialisation, promote the SME sector, and fill the current financial gap.
To date DFIs have played a significant role in supporting the economic growth of Nepal. Several DFIs and development partners – such as the Dutch Entrepreneurial Bank (FMO), the UK’s development finance institution CDC Group, Proparco, the Dutch Good Growth Fund (DGGF), the International Finance Corporation (IFC), Finnfund and Swedfund – are continuously investing in different sectors such as SME growth, energy and hydropower, hospitality, manufacturing, and technology through private equity/venture capital funds (for example, Dolma Impact Fund and Business Oxygen (Bo2)) and the banking sector (for example, NMB Bank Limited).
The estimated investment portfolio (commitment and financed) of DFIs between 2014 and May 2021 is set out in Figure 1 below. The data shows that circa US$902.46 million of DFI investments were made over this period, with the highest contributions made by the European Investment Bank (EIB) and IFC followed by the Asian Infrastructure Investment Bank (AIIB), FMO and CDC Group respectively.
Note: Data compiled by Nepal Invests Platform team using publicly available sources.
As shown in Figure 2, it is perhaps unsurprising to see the largest investment from DFIs over the period was in the energy sector (80% of investment), followed by the banking sector (10%) and the PE/VC sector (8%). Investment in the hospitality and ICT sectors was minimal at 1% respectively.
Note: Data compiled by Nepal Invests Platform team using publicly available sources.
One of the biggest DFI investments to date in Nepal’s energy sector is that led by IFC with the Asian Development Bank (ADB), AIIB, the Export-Import Bank of Korea (KEXIM), the Korea Development Bank (KDB), CDC Group, FMO, Proparco and the OPEC Fund for International Development (OPEC Fund) in the Upper Trishuli-1 Hydropower Project, with a total investment of US$453 million. There are many examples of DFI investment in other sectors: for example, the OPEC Fund recently announced an investment of US$15 million in NMB bank with the objective of boosting renewable energy and access to finance in Nepal, and in May 2078 (2021) FMO, CDC Group, Swedfund and IFC invested US$40 million in the first close of Dolma Impact Fund II demonstrating the appetite for growth of the PE/VC sector in Nepal. In the ICT sector, in 2019 CDC Group invested US$12 million in WorldLink – the largest private sector internet service provider in Nepal – to help WorldLink’s ambitious expansion of its fibre optic network throughout Nepal.
Is Nepal set up for foreign direct investment?
This upward trend of DFI investment in Nepal is positive, and shows that Nepal has encouraged foreign direct investment (FDI) inflows by looking to create an investment-friendly environment and prioritising foreign investment-related reforms. Recent regulatory changes are evidence of this: for example, with the amendment of withholding tax policy in the recent budget of FY 2078/79 (2021/22), the rate of withholding tax for paying interest on loans taken by Nepalese financial institutions from international finance institutions has been reduced to 10% from 15%. This year the central bank also enacted foreign investment and loan management bylaws 2078 (2021), which should help facilitate the process of attracting and receiving FDI: the changes mean that it will no longer be mandatory for foreign investors to obtain prior approval from the Nepal Rastra Bank to send or remit foreign currency to Nepal after obtaining foreign investment approval from the foreign investment sanctioning body.
But to ensure this momentum for increasing FDI – including from DFIs – into Nepal continues, it is important that the regulations governing FDI in Nepal are easily navigable and that the opportunities for investment are present. Over the next 12 months Nepal Invests Platform will be promoting this agenda: under five pillars, Nepal Invests Platform aims to:
1. FDI: Make regulations governing FDI in Nepal more navigable for DFIs.
2. SME FINANCE: Build an investable pipeline in SME Financing opportunities:
- Analysis of current and potential SME financing options and instruments (including alternative instruments) capable of benefitting from DFI and DP investments.
- Preliminary due diligence (advised by DFI and DP technical and investment teams) on at least two options.
- Coordination of a Technical Working Group of selected DFIs and DPs engaged in the financial sector in Nepal to share intelligence and strengthen pipeline building.
3. FUND MANAGERS: Increase the capability of investment professionals in Nepal:
- Design and pilot investment professional development programme in tandem with the Nepal Private Equity Association, based on assessment of local talent development needs and locally or regionally available solutions benchmarked to other frontier markets.
4. DEMAND FOR GROWTH CAPITAL: Increase the understanding and demand for growth capital amongst Nepal’s business leaders and officials:
- Development and dissemination of events, workshops, research, learning and communications products that convey the benefits of DFI investment, to stimulate increased demand for growth capital.
5. ESG: Drive ESG standards that are standardised by DFIs and better practiced by companies in Nepal:
- Expand awareness of and commitment to E&S principles by key leaders in the banking and hydropower sectors.
To keep up to date with these activities, please visit our website and LinkedIn page. Future editions of this blog will be published online, and a newsletter will be launched in the coming months.
The views and opinions expressed in this blog post are those of the Nepal Invests Platform team only and are not those of any other organisation or individual affiliated with Nepal Invests Platform, including CDC Group plc (CDC), Nederlandse Financierings-maatschappij voor Ontwikkelingslanden N.V. (FMO) or the Swiss Agency for Development and Cooperation (SDC). All information is accurate to the best of our knowledge, however Nepal Invests makes no representation or guarantee as to its accuracy or completeness nor holds any liability for any errors or omissions.
The Nepal Invests platform is not in any way related to or associated with any other entity or organisation holding itself out as “Nepal Invests”. Nepal Invests will never request any payment or money, and all email communication from the Nepal Invests team will be through the @investforimpactnepal.com email address.
