Risk management

Organization of risk management

For FMO acting in its role as Fund Manager (hereafter ‘FMO’) to be able to carry out the Fund’s strategy, it is essential to have an adequate risk management system in place to identify, measure, monitor and mitigate financial risks. MASSIF (hereafter ‘the Fund’) has a pre-defined risk appetite translated into limits for group, client, country, region and currency exposures. Limit usages are monitored on a monthly basis and for each proposed transaction.

The Fund Manager reviews each transaction and provides consent to eligible proposals. The Investment Committee, comprising of senior representatives of several departments, reviews financing proposals for new transactions. Each financing proposal is assessed in terms of specific counterparty, product risk as well as country risk. All financing proposals are accompanied by the advice of the Credit department. This department is responsible for credit risk assessment of both new transactions and the existing portfolio. For small exposures, the Credit department has the authority to review new transactions.

In addition, financial exposures in emerging markets are subject to a periodic review, which are in general executed annually. Exposures that require specific attention are reviewed by the Investment Review Committee. The larger and higher risk exposures are accompanied by the advice of the Credit department. If the Investment Review Committee concludes that a client has difficulty in meeting its payment obligations, the client is transferred to the Special Operations department – responsible for the management of distressed assets – where it is intensely monitored.

Risk Taxonomy Framework FMO

Risk profile & appetite

The Fund actively seeks to take risk stemming from debt and equity investments in private institutions in developing countries. This risk profile is supported by maintaining prudent levels of capital and liquidity and strong diversification of the portfolio across regions and sectors.

Capital management

The Fund's aims to optimize development impact. This can only be achieved with a sound financial framework in place, combining a healthy long-term revolvability of ≥100% and sound capital adequacy. Therefore, FMO seeks to maintain a strong capital position for the Fund. The Fund’s structure is based on a contribution from the Dutch government (97.83%) and a contribution from FMO (2.17%). Total contribution from the Dutch government is EUR 351 mln on 31 December 2018 (31 December 2017: EUR 336 mln). FMO contributed EUR 7.8 mln to the Fund. Total fund capital – which is the sum of the contribution by the government, the contribution by FMO, undistributed results from previous years, results from the current year, grants, and evaluations costs – increased to EUR 498.1 mln in 2018 (2017: EUR 457.8 mln).

Reputational risk

The fund's operations in developing and emerging markets, expose us to reputational risks such as environmental and social risks and various types of legal risks. FMO has a limited appetite for reputational risk when such risks would prompt key stakeholders to intervene in the decision making or running of our daily business. Outside of this, FMO has a moderate appetite for reputational risk, accepting that reputational impacts of activities may incidentally lead to negative press coverage, NGO attention, client feedback, or isolated cases of financial losses, as long as these activities at the outset have a clear expected contribution to FMO’s goal to achieve development impact. FMO cannot fully avoid such risks due to the nature of its operations but chooses to mitigate them as much as possible through strict policies, upfront assessment and, when necessary, through agreements with FMO’s clients. FMO manages issues from the perspective of learning lessons and prevention. Through transparency and a willingness to respond to challenges made, we aim to remain accountable and reduce our reputational risk.

Financial risk

Investment risk

Credit risk

Credit risk is defined as the risk that the Fund will suffer economic loss because a counterparty cannot fulfill its financial or other contractual obligations arising from a financial contract. Credit risk is the main risk within the Fund and occurs in two areas of its operations: (i) credit risk in investments in emerging markets and off-balance instruments such as loan commitments and guarantees; and (ii) credit risk in the treasury portfolio, only consisting of bank accounts and money market instruments.

Management of credit risk is FMO’s core business, both in the context of project selection and project monitoring. In this process, a set of investment criteria per sector is used that reflects benchmarks for the required financial strength of FMO’s clients. This is further supported by internal scorecards that are used for risk classification and the determination of capital use per transaction. As to project monitoring, the Fund’s clients are subject to periodic reviews. Credit policies and guidelines have been formulated covering treasury operations; these are reviewed regularly and approved by the ALCO.

Credit risk in the emerging markets loan portfolio

The Fund offers loans in emerging market countries. Strong diversification within the Fund’s emerging market portfolio is ensured through stringent limits on individual counterparties (single client limit of 7.5% of the Fund’s capital, and economic group limit of 10% of the Fund’s capital), countries (20% of the Fund’s capital), continents (50% of the Fund’s capital, and at least 40% in Africa), and local currency (20% of the Fund’s capital).

Internal credit approval process

Credit risk from loans in emerging market countries arises from a combination of counterparty risk, country risk and product specific risks. These types of risk are assessed during the credit approval and credit review process and administrated via internal scorecards. The lending process is based on formalized and strict procedures. Decisions on authorizations depend on both the amount of economic capital and the risk profile of the financing instrument. For distressed assets, the Special Operations department applies an advanced workout and restructuring approach.

In measuring the credit risk of the emerging market portfolio at counterparty level, the main parameters are the credit quality of counterparties and the expected recovery ratio in case of defaults. Counterparty credit quality is measured by scoring counterparties on various dimensions of financial strength. Based on these scores, FMO assigns ratings to each counterparty on an internal scale from F1 (lowest risk) to F21 (highest risk), equivalent from AAA to CCC ratings.

Gross exposure MASSIF portfolio distributed by internal ratings1

Indicative counterparty credit rating 2018

Gross Exposure



F1 - F10 (BBB- and higher)




F11 - F13 (BB-, BB, BB+)




F14 - F16 (B-, B, B+)




F17 and lower (CCC+ and lower ratings)








  • 1 Please note that this does not include the entire portfolio. Equity investments are not rated. In addition,
    there are some other cases in which it may not be possible to make a rating for a client.

Maximum exposure to credit risk of the gross loan portfolio increased to EUR 199.9 mln in 2018 (2017: EUR 180.9 mln). The portfolio shows an overall improvement. Whereas last year’s exposure was spread throughout the F11-F17+ rated investments, the bulk of the portfolio exposure shifted towards the higher-end of credit risk in 2018. Whereas F11-13 exposure decreased by 4.2% and no exposure remained within the F1-F10 range, concentration within the F14-F16 category went from 35% to 43% and the F17+ category increased by 3.2%.

Loans past due and value adjustments

At the end of 2018 the value adjustments on loans were EUR 14.5 mln (2017: EUR 10.4 mln).

Non-Performing Loans (NPL) are defined as loans with a counterparty-specific value adjustment and/or loans with interest and/or principal payments that are past due 90 days or more. The Fund’s NPL ratio decreased from 16.9% to 14.2%. This decrease is mainly linked to counterparty-specific value adjustments for LAPO Microfinance bank’s NPL, and the Fortis Microfinance Bank write-off.

When the terms and conditions of a loan have been modified significantly. FMO considers these loans a restructuring. Changes in terms and conditions usually include extending the maturity, changing the interest margin and changing the timing of interest and principal payments. The loans are assessed to determine if they qualify for de-recognition and if that is the case, they are recognized as a new loan with valuation differences through profit and loss. Value adjustments related to restructured loans are being measured as indicated in the accounting policies under ‘Value adjustments on loans’.

In 2018, write-offs were limited to EUR 3.6 mln of which EUR 1.7 mln relating to loans and EUR 1.9 relating tot equity. Loans were mainly caused by Fortis Microfinance Bank PLC. Equity was mainly caused by Fidelity Equity Fund 1 and 3PM Capital partners.

IFRS 9 loans past due and impairments 2018


Stage 1

Stage 2

Stage 3

Fair value


Loans not past due






Loans past due:


-Past due up to 30 days






-Past due 30-60 days






-Past due 60-90 days






-Past due more than 90 days












Less: amortizable fees






Less: ECL allowance






Plus FV adjustments






Carrying value







Non performing loans (loans past due > 90 days + Impaired loans)



NPL percentage


  • 1 Gross outstanding + accrued interest

Equity risk

Regarding equity risk that results from equity investments, a distinction can be made between:

  • Exit risk, the risk that FMO’s equity stake cannot be sold for a reasonable price and in a sufficiently liquid market;

  • Equity risk, the risk that the fair value of an equity investment decreases.

The Fund takes long-term view on its equity portfolio, usually selling its equity stake within a period of five to ten years. The Fund can accommodate an increase in the average holding period of its equity investments and wait for markets to improve again to realize exits. We have no deadlines regarding the exit date of our equity investments. Equity investments are assessed by the Investment Committee in terms of specific obligor as well as country risk. The Investment Review Committee assesses the valuation of the majority of equity investments quarterly. The performance of the equity investments in the portfolio is periodically analyzed during the fair value process. Based on this performance and the market circumstances, exits are pursued in close cooperation with our co-investing partners. The total outstanding equity portfolio on December 31, 2018, amounted to EUR 252.9 mln (2017: EUR 235.8 mln).

Concentration risk

Country risk

Country risk arises from country-specific events that adversely impact the Fund’s exposure in a specific country. Within FMO, country risk is broadly defined. It includes all relevant factors that have a common impact on the Fund’s portfolio in a country such as economic, banking and currency crises, sovereign default and political risk events. The assessment of the country rating is based on a benchmark of external rating agencies and other external information.

In the fund risk appetite the country risk exposure is set at a maximum of 20% of the total portfolio.

The level of the country limits depends on the sovereign rating. FMO recognizes that the impact of country risk differs across the financial products it offers. In 2018 the rating of Kenya (5% of portfolio), Nicaragua (3% of portfolio) and Sri Lanka (3% of Portfolio) were downgraded by one notch. Tanzania (2% of portfolio) was downgraded by 3 notches. On the other hand, Zimbabwe, which represents 9% of the portfolio, was upgraded by one notch – however, the rating may go back to 2017 levels over the coming year given the current instabilities in the country.

Overview country ratings


Indicative external rating equivalent 2018


FMO-A (%)

F9 and higher (BBB and higher ratings)



F10 (BBB-)



F11 (BB+)



F12 (BB)



F13 (BB-)



F14 (B+)



F15 (B)



F16 (B-)



F17 and lower (CCC+ and lower ratings)






Single and group risk exposures

In the fund risk appetite the maximum customer exposure for MASSIF is set at 7.5% of the total portfolio.

Counterparty credit risk

Credit risk in the treasury portfolio stems from bank account holdings and placements in money market funds to manage the liquidity in the Fund. The Risk Management department approves each obligor to which the Fund is exposed through its treasury activities and sets a maximum limit to the credit exposure of that obligor. Depending on the obligor’s short and long-term rating, limits are set for the total and long-term exposure. FMO pursues a conservative investment policy.

Liquidity risk

Liquidity risk is the risk that insufficient funds are available to meet financial commitments. The Fund has a conservative liquidity management ensuring that sufficient capital is available. In case of a liquidity shortfall the Fund can make a funding request to FMO N.V. for up to a maximum of 10% of the Fund’s net portfolio.

Market risk

Interest rate risk

Interest rate risk is the risk of potential loss due to adverse movements in interest rates. Changing interest rates mainly have an effect on the fair value of fixed interest balance sheet items. Given the balance sheet and capital structure of the Fund interest rate risks are considered limited.

Currency risk

Currency risk is defined as the risk that changes in foreign currency exchange rates have an adverse effect on the value of the Fund's financial position and future cash flows. Limits have been set on currency positions and are monitored on a regular basis.

The Fund offers loans in emerging market currencies. We aim to match the currency needs of local banks and corporates, thereby reducing their currency risk. On December 31, 2018, 80% (2017: 85%) of the committed portfolio was in emerging market currencies. Please note that all equity deals are considered local currency given the local exposure.

Non-financial risk

Environmental, social and governance risk

The Fund faces environmental and social risks in its emerging market projects. These risks stem from the nature of our projects, which in some cases could carry negative environmental and/or social impacts. The Fund accepts that in the pursuit of development impact there is a risk of negative press and/or negative reactions from NGOs in the context of ESG performance and mitigates this risk through environmental and social action plans and monitoring. The risk appetite for deviations from the exclusion list and human rights violations by projects financed by FMO is zero. We furthermore expect the highest standards in professional conduct. Internally, FMO strives to limit the footprint of its own workplace and strives to the highest standards in employee satisfaction. Ensuring a high diversity in staff is a leading Human Resources principle.

Compliance risk

Compliance & integrity means for FMO adhering to relevant integrity laws and regulations, FMO standards and policies and good business practices and acting with integrity. FMO Management is committed to its employees, clients and counterparties adhering to the highest ethical standards.

FMO has a Compliance framework which entails e.g. designing policies, identifying risks, monitoring, training and providing advice. FMO has policies on topics such as know your customer & sanctions, anti-bribery and corruption, conflicts of interest, internal fraud, private investments, privacy and speak up. FMO also regularly trains its employees in order to raise awareness by means of e.g. face-to-face trainings and mandatory compliance related e-learnings. Employees are also encouraged to speak up in case of suspected integrity violations conducted by a FMO employee. Management is periodically, and when required on ad hoc basis, informed on integrity related matters at client or employee level. In case violations, management will take appropriate actions. In 2018 no significant integrity incidents related to FMO employees have been reported and there were no incidents at existing clients’ outside FMO’s risk appetite.

Operational risk

Operational risk is the risk of loss resulting from inadequate or failed processes, people and systems or loss caused by external events. FMO aims to manage operational risk for the fund in a cost-effective way. Operational risks – including those related to information security and personal data breaches – are identified and measured. Controls are implemented and their effectiveness is monitored. Operational risks are managed and monitored in accordance with a three-line defense governance principle. In the first line of defense business management executes and reviews processes, reports incidents and performs risk and control self-assessments. In the second line of defense monitoring is performed by specialized risk departments and committees and the third line of defense is performed by the Internal Audit function. Although controls are in place, incidents sometimes happen, and damages may occur. FMO registers and analyses operational risk events and losses systematically. Analysis of these data triggers actions to improve controls.

Operational risks resulting from new products or activities are considered in FMO’s Product Approval and Review Process. FMO monitors the trends of operational risks, including information security risks and where deemed necessary anticipates on the unfavorable effects.

Other risk

Legal risk

Legal risk is defined as the risk that a (term in a) contract entered into by FMO (or an FMO partner) with a client, or a rule or statute in a relevant jurisdiction, relevant for the full implementation of such term or contract, is interpreted, by a court of law, arbiter or otherwise, in such a way as to adversely affect FMO’s position, for instance because a contract is not (fully) enforceable in accordance with its terms, or the structure of the transaction is deemed invalid or illegal.

FMO has a legal department charged with the review of contracts entered by FMO. Legal risk is mitigated in various ways. Members of the team are qualified in a variety of jurisdictions. Where appropriate, the legal department draws on external expertise, in particular for the legal analysis in the emerging market jurisdictions in which FMO operates. In addition, the legal department manages a library of template documents, which are used to benchmark and standardize transaction documents to the extent possible.