The presentation delivered by Omer Zafar are Thierry Mahieux during the NEN retreat highlighted several rural finance schemes implemented by the IFAD projects in the NENA and CEN regions.  Lenyara Fundukova, Omer Zafar, Tawfiq El-Zabri and Denisa Butnaru reports on some Rural Finance schemes such as those funded by the European Union that support sustainable economic development and environmental issues.

European Investment Bank

The European Investment Bank (EIB) is the European Union's financing institution which provides long-term finance support to investment projects.  Within the European Union, EIB supports projects in line with EU's policy objectives such  as the development of small and medium-sized enterprises (SMEs), environmental protection, cohesion and convergence policies, and trans-European network development. Beyond the EU area, EIB is active in over 150 countries (South-East Europe, the Mediterranean partner countries, Africa, Caribbean and Pacific countries, Asia and Latin America, and Russia etc) working to implement the financial pillar of the EU external cooperation and development policies in rural and urban areas.

EIB was established in 1994, in collaboration with the European Community and private and public financial institutions from member States. The European Investment Fund (EIF) is a public-private partnership which provides credit guarantees and credit enhancement for debt finance. Its mission is to act as a catalyst in facilitating the partnership of private capital in Trans-European Network projects and in facilitating access for SMEs to loan finance at a reasonable cost. It also participates as an investor in venture capital funds.

EIB and EIF have developed the following funds in rural areas of the Mediterranean zone, and Central and Eastern Europe:

Rural Impulse Microfinance Fund II

The Rural Impulse Microfinance Fund II follows the achievements of the Rural Impulse Fund  I, the world’s first microfinance facility to specialize in commercially viable rural microfinance institutions. Rural Impulse Fund I achieved its planned deal flow in half the expected time, reflecting the strong demand for rural microfinance and has now made investments with 24 institutions across 18 countries with a customer base of 1.5 million clients.

The Fund invested in a range of microfinance intermediaries, including NGOs, credit unions, microfinance banks and institutions targeting small businesses. Participating microfinance institutions in developing countries had to have at least a 30% presence in rural areas in Africa, Latin America, Central Asia, the Caribbean, Central and Eastern Europe, India and South East Asia.  The challenges highlighted by the Fund were linked to seasonality and high administration costs of small loans.  Rural Impulse Fund II mitigated these factors by a careful selection of experienced and successful institutions active in both rural and urban areas and directly encouraged activity outside economically active and densely populated urban districts.

Facility for Euro-Mediterranean Investment and Partnership (FEMIP)

FEMIP has been operational since October 2002, and has contributed to an enhanced dialogue and cooperation between the European Union and the Mediterranean partner countries. Over the period 2007-2013, FEMIP has at its disposal EUR 10.7 billion to support projects in nine Mediterranean partner countries.  FEMIP encourages the modernization and opening-up of the economies of the Mediterranean partner countries. Activities are focused on two priority areas: i.)the development of the private sector, andii.)the creation of an investment-friendly environment.
FEMIP proposes products to large- and small-scale projects:

• Long-term direct loans for large-scale projects (costing more than EUR 25 million)
• Credit lines to intermediary banks, which on-lend the funds to finance investment undertaken by small and medium-sized enterprises or local authorities
• Credit lines to microfinance institutions
• Private equity (direct equity or quasi-equity investments in unlisted companies, private equity funds and co-investments with local intermediaries)
• Technical assistance to strengthen the capacity of Mediterranean partner countries and promoters and to finance upstream studies and activities focusing on private sector development

Some FEMIP figures between October 2002 and December 2009:

• invested EUR 10bln in the nine Mediterranean partner countries;
• financed 143 projects aimed at modernizing and opening up the partner countries’ economies;
• mobilized EUR 25bn in additional resources provided by the project promoters, other bilateral or multilateral financial institutions and commercial banks - this means that FEMIP managed to leverage more than double its own contribution;
• stepped up its pioneering role in the private equity sector to support very small as well as medium-sized businesses through a portfolio of more than EUR 470m.
• mounted 105 technical assistance operations totaling EUR 98.5m, with the aim of improving the quality of lending operations and enhancing their development impact.
• funded 20 studies under the FEMIP Trust Fund in order to ensure a better understanding of financial and economic issues in the Mediterranean.

Sample projects - FEMIP funds in Morocco

Fonds Capital Carbone

In July 2007, the EIB provided EUR 6.5 million to a new investment fund, Fonds Capital Carbone, designed to support capital investment in clean technology projects in Morocco through the purchase of carbon credits. This project promotes use of the Clean Development Mechanism in Morocco and the region and fosters the development of the greenhouse gas reduction market. At the same time, it is set to underpin investment in key sectors such as renewable energy, landfill management and energy efficiency.

Massinissaa Fund, Morocco

The EIB acquired a EUR 12 million holding in the Massinissa Fund, an investment fund aimed at making equity and quasi equity capital investments in Moroccan enterprises. The EIB was the first financing institution to join forces with the major Moroccan banking groups in helping to boost the equity of the country’s SMEs. It is currently one of the Moroccan private sector’s most committed investors.

European Fund for South-East Europe (EFSE)

The European Investment Bank (EIB) is investing EUR 25 million in the European Fund for South-East Europe (EFSE), which will on-lend the EIB funds via intermediary financial institutions to micro and small enterprises and private households. The objective of the EFSE is to make the majority of its investments in the Western Balkan countries and the rest in Bulgaria, Romania and Moldova and possibly other countries of South-East Europe. The EIB investment will help to foster economic development in South Eastern Europe by providing additional development finance, in particular to small and micro-enterprises.

The EIB funds aim at improving the access of local small and micro enterprises as well as households to medium and long-term finance to address their investment needs.

• Location: Bosnia and Herzegovina, FYROM, Serbia, Bulgaria, Montenegro, Romania and Albania.
  
• Description : The fund provides financing to micro and small scale enterprises, rural and housing loans through qualified financial intermediaries.
  
• Objectives: The objective of the fund is to provide development finance in the South East European region, through the local financial sector, focusing on the needs of Micro and Small Enterprises.
  
• Proposed EIB finance: Up to EUR 25 million.
  
• Total cost: Around EUR 600 million.
  
• Status: Signed - 30/11/2007
• PROGRESS Microfinance Facility
• Status Approved - 14/07/2010.
  
• Beneficiary: EIF will manage funds provided by the EC and the EIB.
  
• Description: Targeting microfinance institutions, including banks, which will address a mix of social, economic and financial objectives.
  
• Objectives By supporting microfinance institutions, the initiative is intended to benefit self-employed persons, microenterprises (especially in the social economy) and micro entrepreneurs starting or expanding their businesses as a way of countering unemployment and social exclusion in the EU in the context of the financial crisis.
  
• EIB finance Up to EUR 100 million.

A leveraging financial instrument: Mezzanine Fund

Mezzanine financing is a type of debt adapted for companies with little or no collateral. A company takes a loan, if the company fails to payback the loan, investors can convert the debt into equity. This kind of debt is risky for investors due to the lack of guarantee, but is also very attractive as in compensation the interest rate charged on the loan is higher than usual. The advantage remains its convertibility in equity, with respect to a classic loan without guarantee.

Vantage Regional Mezz Fund

The Vantage Regional Mezz fund is still under appraisal.  It is an equity participation of an European Neighbourhood and Partnership Instrument (ENPI) risk capital resources, that will primarily focus on growth and acquisition financing opportunities within middle market companies mainly in Egypt and Morocco, and to a lesser extent Tunisia and Algeria.  Although the Fund will have no specific industry-sector focus, it will focus particularly in companies that have difficulty in getting loans from local commercial banks. The average investment will be between USD 5 million and USD 20 million.

• Proposed EIB finance: Up to EUR 10 million.
  Total cost: The target size of the fund is USD 120 million.
• Mezzanine Facility for Growth

In 2009, the Mezzanine Facility for Growth was approved. This EUR 1bn fund of funds mandate granted by the EIB is to be invested in hybrid Debt/Equity funds throughout Europe, with a view to playing a catalytic role in this market segment. The purpose of this fund is to provide alternative financing to support, for instance, shareholding reorganization or expansion for more mature businesses and late stage or expansion technology companies. It can be tailored to meet the specific financing requirements of these companies and in the current market situation where bank lending remains limited, it is well adapted to long term financing.

Carbon Credit Market - Multilateral Carbon Credit Fund (MCCF)

According to the Kyoto Protocol countries signatories are required to reduce their greenhouse gas emission. To help these countries achieve their emission reduction goals at the lowest possible cost, the Protocol created three flexibility mechanisms: one such mechanism is the Clean Development Mechanism (CDM). The CDM allows signatories countries to earn emission reduction credits, each equal to one ton of CO2, by investing in projects that reduce greenhouse emissions in developing countries. The owners of these projects can sell their credits to countries to help these countries meet the Kyoto emissions target.

The carbon credit market can promote clean-energy products at the same time increase revenues of farmers, especially for those living in rural and remote areas wherein access to energy is difficult.  For instance in deforested areas, projects could be an incentive for farmers to reforest and manage these areas. Through the forests sequestration of greenhouse gases, farmers would sell back carbon credits.

Households usually use traditional biomass stoves with charcoal, wood or grass to heat or cook. By switching to more eco-friendly energies they could sell back their carbon credits, increase their revenues, and improve their health through the better quality of the in-door air.

Participants to the MCCFE are private and public companies, European Bank for Reconstruction and Development (EBRD) and EIB shareholder countries. They purchase carbon credits from emission reduction projects in Central Europe and Central Asia which are financed by the EIB or EBRD to meet their mandatory or voluntary greenhouse gas emission reduction targets.
Other examples of projects:

• Energy Efficiency in industry (co-generation) and larger projects in the residential sector (double glazing, insulation)
• Renewable Energy such as wind, hydro, biogas (from landfills/wastewater) and biomass
• Avoidance of venting/flaring from gas exploration, transport and distribution and petro-chemical plants
• Fuel-switching from carbon intensive (coal, mazut, oil shale) to less carbon intensive fuels such as natural gas