Inclusive and innovative finance

For more than 25 years, Luxembourg Development Cooperation has been actively supporting the development of microfinance and inclusive finance to reduce global poverty, in order to promote economic development, inclusive growth and the socio-economic inclusion of women and young people.

Today, microfinance investment instruments based in Luxembourg account for over half the assets under management globally. These funds are mainly invested in developing countries and thus constitute a significant proportion of the direct foreign investment in these countries. This is an example of the leverage that private funds can have in promoting sustainable development across the world.

In 2021, Luxembourg Development Cooperation continued its support to various players active in inclusive and innovative finance. The new cross-cutting strategy in the field of inclusive and innovative finance was presented at the Luxembourg Development Cooperation sessions held on 17 and 18 May, a flagship conference bringing together all those active in Luxembourg Development Cooperation. This strategic document provides the framework for the implementation of Luxembourg Development Cooperation’s sustainable finance objectives in the coming years.

As regards its strategic partnerships, the Directorate for Development Cooperation and Humanitarian Affairs has renewed its support for the Inclusive Finance Network Luxembourg ASBL (InFiNe.lu) for three years through a new agreement. InFiNe.lu’s unique make-up brings together the main actors in the public and private sectors and civil society in Luxembourg to take advantage of the considerable knowledge available in the country in order to promote the deployment of inclusive finance worldwide.

Through the Catapult: Inclusion Africa seminar, the Luxembourg House of Financial Technology (LHoFT) supports African fintechs and facilitates the scaling up of the most promising solutions through the creation of partnerships.

The year 2021 also featured the European Microfinance Week, an annual fixture for experts in the sector, whose flagship event is the presentation of the European Microfinance Award. This took place at the European Investment Bank (EIB) on 18 November, in the presence of Her Royal Highness the Grand Duchess. In a hybrid ceremony, the award was presented to Fonkoze of Haiti, in recognition of its “Boutik Santé” programme, an initiative for training clients in health screening and education.

In December, the agreement under which the Ministry of Foreign and European Affairs donates to Appui au développement autonome (ADA), an NGO working to promote inclusive development for vulnerable populations, was renewed with a new mandate. This commitment by Luxembourg Development Cooperation will cover a four-year period (from 2022 to 2025) and will have a budget of EUR 63 million. Through its activities, ADA supports the priorities of Luxembourg Development Cooperation, including priority access to responsible agricultural finance, markets and innovative practices for small farmers, as well as access to suitable financial and economic opportunities for young people and women.

The Luxembourg Microfinance and Development Fund (LMDF) is a public-private microfinance investment fund whose activity consists of targeted support for small and medium-sized microfinance institutions and populations excluded from the traditional finance system, stimulating entrepreneurship. Through its investments in Asia, Africa and Latin America, the fund, which in 2021 had grown to more than EUR 45 million, has financed more than 290 000 micro-entrepreneurs since it was set up and has created measurable results in terms of financial inclusion.

Together with the Ministry of Finance and the Ministry of the Environment, Climate and Sustainable Development, Luxembourg Development Cooperation continues to support investment in sustainable projects. Through technical assistance to the Forestry and Climate Change Fund (FCCF), Luxembourg Development Cooperation promotes investment in tropical forest forestry projects in Central America, with the objective of restoring secondary or degraded forest areas and making them economically, environmentally and socially viable.

Luxembourg Development Cooperation works closely with the Consultative Group to Assist the Poor (CGAP), which works to improve the lives of disadvantaged populations by promoting innovative solutions that give them better access to inclusive finance markets. In 2021 this cooperation was strengthened in the area of the financial inclusion of women in rural areas.

In addition, Luxembourg Development Cooperation supports respect for human rights through its actions in the inclusive and innovative finance sector by recognising the need to create common rules and standards to promote social responsibility and performance in the financial sector. By leveraging its leading financial centre and expertise in sustainable finance, Luxembourg thus intends to play an active normative role and will continue its support for the development and implementation of internationally recognised standards and principles in the field of responsible finance. For example, the Universal Standards for Social and Environmental Performance Management issued by the Social Performance Task Force (SPTF) is a comprehensive set of standards and good practices created for the inclusive finance sector to support human rights. Another example is LuxFLAG, an independent and international non-profit association created in Luxembourg in 2006 by seven public and private founding partners, including Luxembourg Development Cooperation. The agency aims to promote the raising of capital for the socially responsible investment sector by, among other things, assigning a recognisable label to eligible investment vehicles. The label’s aim is to denote that an investment vehicle falls into the category of socially responsible investment. The Luxembourg inclusive finance sector is thus positioning itself as a pillar to help financial institutions to achieve their social objectives. Moreover, through multi-stakeholder coordination, Luxembourg Development Cooperation is working to develop other global initiatives aimed at developing measurable and verifiable social assessment principles and standards. As a result, the Luxembourg financial centre is at the heart of the development of social responsibility for financial products and services.