The EFSE does not directly lend to its ultimate target group but provides commercial long-term funds to carefully selected, qualified local financial institutions – EFSE partner lending institutions. They in turn finance:
- Micro and small enterprise loans
- Rural loans for micro and small enterprises located in rural areas or those engaged in agricultural activities
- Housing loans to low-income households
The EFSE is a market-enabler and serves as an incubator for financial innovations. Accordingly, it assists partner lending institutions in tapping into new markets with a promising business potential, ultimately expands the scope and scale of their services for micro and small entrepreneurs and low-income households.
The EFSE is currently invested in more than 70 partner lending institutions, which include:
- Local commercial banks
- Specialised microfinance banks
- Microcredit organisations
- Other non-bank financial institutions (e.g. leasing companies)
- Investment companies or funds with a regional orientation
Any financial institution desiring to become an EFSE partner lending institutions must fulfil strict eligibility criteria. These are based on financial strength, creditworthiness, compliance with the EFSE’s business ethics, and strong corporate governance. EFSE partner lending institutions are also required to channel any funding provided by the EFSE exclusively to the EFSE’s final target group.
The EFSE provides long-term and flexible funding instruments to partner lending institutions through a mix of different instruments. These include:
- Medium to long-term senior loans
- Subordinated loans
- Term deposits
- Subscriptions to bond issues
- Co-investments (syndicated loans)
- Stand-by letters of credit
- Equity and quasi-equity participations.
The terms and conditions of each instrument are subject to individual negotiations with partner lending institutions.
General terms for investments
EFSE investments generally have a maximum maturity of 10 years (in exceptional cases up to 15 years).
The pricing of the refinancing instruments provided by the Fund reflects market conditions based on the following three factors:
Market rates (reference rate - international and/or domestic),
Risk premiums (country and individual client risk profile), and
Interest is generally paid out semi-annually in arrears. Individual repayment schedules are negotiated with each partner lending institution based on funding structure, use of funds and underlying risk profile.
An individual disbursement schedule is defined according to the absorption capacity and effective demand for funding of each partner institution. The total investment amount can be paid out at once or in tranches over several quarters.
Partner lending institutions report to the EFSE on a regular basis on the development of their portfolio of loans to the target group(s) and/or the products that the EFSE wishes to support. Partner lending institutions also submit financial statements on a regular basis.
Partner lending institutions bear the full risk associated with sub-loans and, in principle, are free to define the final terms and conditions to their borrowers. However, to a limited extent, the EFSE’s instruments bear minimum conditions to ensure target group orientation as specified below. The sub-loan ceiling, for instance, is EUR 100,000, and the focus is on loans below EUR 20,000. During the entire the credit cycle, partner lending institutions are required to comply with environmental, social and governance standards in line with international best practices.
Partner lending institutions can avail themselves of the technical assistance, consulting and training provided by the EFSE Development Facility. Its aim is to enhance the long-term development impact of the EFSE’s investments and to mitigate the risk of investments to partner lending institutions.