What innovative financial tools (RAFAD-type guarantee funds, SIDI-type equity investments, counterpart funds, alternative banks, venture/promotion capital, etc.) are presented in detail? Are analyses of their implementation conditions provided?
The sources provide significant details on several innovative financial tools designed to strengthen the financial autonomy of development organizations (DOs/NGOs). They also offer, to varying degrees, analyses of their implementation conditions. Here is a detailed presentation of these tools, based on the available information:
1. GUARANTEE FUNDS (RAFAD TYPE) #
- Detailed Presentation: The RAFAD Foundation (Research and Applications of Alternative Financing for Development) is presented as a concrete example of an international guarantee fund. Created at the initiative of partners from the South, notably from the IRED network, RAFAD aims to provide an international tool for financing and access to bank credit. Its main activity is to partially or fully guarantee the risks taken by a local bank when granting credits or other banking facilities to a development association. RAFAD also acts in the support and monitoring of associations, the search for new financial tools (leasing, housing financing, debt conversion, insurance), and the dissemination of experiences.
- Conditions of Implementation and Analysis:
Access to Bank Credit: The RAFAD guarantee allows development associations to access the banking system, which would otherwise be difficult due to the lack of traditional guarantees. It acts as a leveraging mechanism for local savings to grant credit.
Negotiation of Advantageous Conditions: The guarantee allows you to negotiate more advantageous credit conditions with banks, because it covers part of the risks.
Guarantee Obtaining Process: DOs/NGOs must present their programs and projects, particularly their financial feasibility, to RAFAD. They must also have previously contacted their local bank to check whether it is willing to grant credit based on an international RAFAD guarantee. The application is then submitted to the RAFAD General Secretariat in Geneva.
Management of the Guarantee Fund: The RAFAD guarantee fund is managed from Geneva and allows the issuance of bank-to-bank guarantees after evaluation of requests.
Risk Sharing: RAFAD shares risks with local banks, with a percentage of risk assumed by RAFAD which can change over time (for example, 0% the first year, then gradually increasing).
Leverage Effect: The RAFAD example shows a significant leverage effect, where the volume of credits granted by local banks is significantly higher than the volume of RAFAD guarantees.
- Need for Local Partners: RAFAD works with a network of local consultants, NGOs, consultancy firms and local banks capable of supporting the institutional strengthening of partners.
- Limitations and Risks: Although RAFAD’s loss rate relative to guaranteed volume and granted credits is generally low, there is a risk of non-payment. Prudent management and rigorous project selection are therefore crucial.
2. ACQUIRING SHARES IN COMPANY CAPITAL (SIDI/ESFIN TYPE) #
- Detailed Presentation: The Société d’Investissement et de Développement International (SIDI) and ESFIN Participations are listed as financial institutions that take equity stakes in companies, particularly those in the social economy. The objective is to finance social economy development projects by acquiring shares issued by non-cooperative companies. SIDI’s stake is a minority stake and is based on the long-term economic viability of the projects and their profitability. Although not primarily aimed at generating profits, SIDI’s contributions must be adequately remunerated to cover the expenses incurred.
- Conditions of Implementation and Analysis:
Economic Viability: The decision to take an equity stake is conditioned by the assessment of the long-term economic viability of the project.
Profitability: The profitability of the project is an essential criterion for taking an interest.
Minority Interest: SIDI takes a minority interest, which suggests a willingness to support without taking control of the company.
Remuneration of Contributions: Although the primary objective is not maximum profit, remuneration is necessary to ensure the sustainability of the investment instrument.
Adaptation to the Third World: Sources suggest that the tools developed in the North by institutions such as ESFIN and IDES can be taken up and adapted to the needs and realities of the Third World, by federating at the international level.
3. DEBT PURCHASE COUNTERPART FUNDS (DEBT/DEVELOPMENT SWAPS) #
- Detailed Presentation: Converting Third World debt into development projects (counterpart funds) is presented as an innovative financing approach. This mechanism allows DOs/NGOs, governments, central or commercial banks, and local authorities to finance projects while reducing a country’s debt. The principle is based on the exchange of debt (often purchased at a discount on the secondary market) for local assets (cash, bonds), which are then used to finance development initiatives.
- Conditions of Implementation and Analysis:
Multi-stakeholder negotiations: Implementing debt swaps requires negotiations between indebted countries, creditor banks, and development organizations. The agreement of local financial authorities (Ministry of Finance, Central Bank) is essential.
Debt Discounts: Debt repurchases are generally carried out at a discount, which allows for the financing of amounts in local currency that exceed the initial investment in hard currency. The discount rate may vary depending on the investment sector.
Areas of Intervention: Matching funds can finance various areas such as education, health, environment, rural development, heritage restoration, etc.
Intervention Criteria: Some funds, such as FAPRODE, ensure that funding is recoverable to maximize the number of projects supported and that administrative costs remain limited.
Technical Support: The importance of providing technical support to small NGOs to enable them to access the benefits of the complex engineering of debt swaps is mentioned.
Technical Conditions and Feasibility: Feasibility depends on the availability of receivables and the conditions negotiated with banks and authorities.
Concrete Examples: The sources mention examples of countries (Guinea) and funds (FAPRODE) involved in debt conversion operations.
4. ALTERNATIVE BANKS AND ALTERNATIVE SAVINGS AND CREDIT SYSTEMS #
- Detailed Presentation: Alternative banks, such as TRIODOS in the Netherlands, are presented as financial institutions pursuing different objectives from conventional banks, focusing on alternative and ethical financing. They are grouped within the global INAISE network, which brings together alternative banks, ethical funds, and guarantee funds for those without access to conventional banks. Savings and credit unions, particularly in Africa, are also mentioned as alternative financing initiatives that allow small producers to access credit for their limited investments. Women’s banks and village savings and credit unions are other examples of local financial tools.
- Conditions of Implementation and Analysis:
How Savings and Credit Unions Work: These local systems channel local savings and grant loans. Their success depends on community participation and managerial skills. Establishing a savings and credit network requires developing a business case, consulting with partners, and holding training and brainstorming sessions. Specific financial arrangements (guaranteed savings, high shareholdings, differentiated interest rates) must be discussed.
Women’s Banks: The example of the PRDA shows how local initiatives controlled by women can be a first step towards credit.
Synergies with the Conventional Banking System: Some support organizations are creating their own financial instruments to avoid certain compromises or to mobilize resources. There is also a growing recognition by commercial banks of the importance of the small business sector, although they are not always well equipped to respond to it. Mutual understanding and risk sharing are essential.
INAISE Network: The INAISE network facilitates collaboration and exchange between alternative finance players.
5. VENTURE CAPITAL AND PROMOTION CAPITAL #
Detailed Presentation: The concepts of venture capital and promotional capital are presented as financial mechanisms adapted to the needs of ODs/NGOs.
Venture Capital: It is used to finance short-, medium-, and long-term credit (internal revolving funds, bank loans, guarantees, insurance, equity capital, venture capital). Venture capital is built through its own contributions, both local and external. From this capital, various credit access, equity, guarantee, and insurance funds are created.
Promotional Capital: This consists of reserves, endowments, donations, and legacies. The goal is to avoid destroying the initial capital, but to use only the income generated to promote activities. The board of directors of a non-profit organization/NGO can also transfer a portion of its annual profits or negotiate direct transfers to promotional capital with external assistance.
- Conditions of Implementation and Analysis:
Capital Formation: Venture capital is made up of various contributions (own, local, external), while promotional capital comes more from long-term sources such as donations and reserves.
Fund Management: Venture capital is often managed by depositing the funds in a commercial bank, but the final decision rests with the administrators of the NGO/DO. It is possible to combine both types of capital in the same institution (foundation, bank) while keeping them separate from each other in accounting.
Venture Capital Lending Terms: Interest rates may vary depending on the source of funds (member savings vs. bank loan) and market conditions. The decision to lend is based on the viability of the projects submitted.
- Differentiated Objectives: Venture capital aims to finance specific activities with repayment potential, while promotional capital aims to ensure the long-term self-financing of the organization.
- Importance of Own Effort: Building a local fund from own effort and savings is often an essential first step.
In conclusion, the sources present a variety of innovative financial tools for the autonomy of DOs/NGOs. They provide details on their operation, their objectives, and, to some extent, the conditions necessary for their implementation. The example of RAFAD is particularly well documented in terms of mechanism and process. For other tools, such as equity investment and venture/promotion capital, the sources outline the principles and objectives, but the operational details and analyses of implementation conditions may require more in-depth case studies, some examples of which are mentioned in the cited works.
