DEG promotes lending to small businesses in Latin America

Loan totalling USD 15 million for Locfund Next

Latin American countries have been hit particularly hard by the impact of the coronavirus pandemic. That makes it all the more important to ensure that local microenterprises can survive. DEG – Deutsche Investitions- und Entwicklungsgesellschaft mbH is currently offering financing to help with this, by providing the fund Locfund Next (Locfund) with a long-term loan of USD 15 million. The fund will use this funding for Tier II and Tier III microfinance institutions in Latin America and the Caribbean region, allowing them to grant loans to microenterprises. Their average loan size is around USD 1,200.

Microfinance institutions are the backbone of the Latin American economy, which is often organised informally. The financing they provide enables people to found their own businesses and generate local income. Locfund Next’s financing has reached 21 microfinance institutions in nine countries since its launch 15 months ago, including Bolivia, Ecuador and Nicaragua. It aims to reach at least 70 institutions in the coming years.

Debt fund provides loans to microfinance institutions

Locfund Next is a so-called debt fund, meaning that it invests by granting loans. That includes financing in local currency, to reduce the exchange rate risk for microfinance institutions. Locfund Next also supports institutions with the introduction of environmental and social standards and with risk management. There is an additional focus on digital transformation.

Contribution to financial inclusion

“With our commitment we are supporting small businesses and microenterprises in Latin America, which are particularly important, and not just during the coronavirus pandemic. As a lender to Locfund Next, DEG is strengthening the fund’s capital base and thereby mobilising further investors. We’re also contributing to financial inclusion,” said Monika Beck, a member of the Management Board of DEG.

Locfund Next is managed by the fund management company BIM Asset Management Ltd., one of the few local fund managers in the microfinance sector. The company was founded in 1997 and has set up 14 associated companies and special funds to date, including two predecessor funds to Locfund Next.

“We understand financial inclusion in the region is an area that needs great attention aiming to achieve the SDGs by 2030. At BIM, as managers of Locfund Next, our local presence allows us to better understand the market, the institutions, and their needs. That is how we can adapt and continuously support the growth of the MFIs we work with”, said BIM’s CEO, Fernando Sanchez.

As one of Europe’s largest development finance institutions, DEG not only finances businesses directly but also makes long-term funding available to banks and funds. This financing helps to promote the provision of long-term loans to small and medium-sized enterprises. Loans to debt funds such as Locfund Next are another way to enhance the positive local impact of financial services provided by financial intermediaries such as banks and funds.