NORSAD Operations to Date

NORSAD, the Fund and the Agency, was established in 1990 pursuant to an agreement, with attached statutes, between the governments of four Nordic countries (Denmark, Finland, Norway, Sweden) and the governments of 10 Southern Africa Development Community (SADC) countries (Angola, Botswana, Lesotho, Malawi,  Mozambique, Namibia, Swaziland, Tanzania, Zambia, Zimbabwe). Mauritius joined in NORSAD in May 2002.

The purpose of the organisation was to contribute to the economic development and self-reliance of participating SADC countries by extending foreign currency facilities for operations of private sector enterprises in the SADC region.

The Part towards a SADC Development Finance Institution

NORSAD was established to provide foreign currency funding to private sector projects with a Nordic investment through guarantees from SADC development finance institutions, who would then take security in the assets of financed enterprises. The initial capital of NORSAD provided by Nordic countries was DKK 200 million (USD 33.5 million).

The initial business model has been altered along the way. By the time NORSAD began its operations in 1991, the market conditions had already changed compared to what was envisaged in the Agreement and Statutes in the sense that foreign currency was no longer scarce and consequently, NORSAD was of little relevance to SADC SMEs. This led to a change in the NORSAD Agreement and Statutes in 1993 allowing NORSAD to provide financing directly to enterprises against security in the assets of these enterprises. NORSAD was then on its way to becoming a development finance institution, with SMEs as the main target group. The financing activities really started to take off from then on.

However, the growth was still curtailed by the requirement of a direct Nordic investment partner in all NORSAD’s projects, and the availability of financing only in the Nordic currencies. The interest by Nordic companies invest in Africa had diminished because the changes in Eastern Europe in early 1990s which made the companies to concentrate their investment on that region. In addition, the currency in demand was USD and to a lesser extent local currencies. The difficulty in finding fundable projects had a negative effect on the quality of projects funded. This resulted in increased operational losses.

Between 1999 and 2001, NORSAD received an additional DKK 150 million (USD 19.5 million) from the Nordic countries. In 2002 the Fund’s Board of Governors made the significant decision to remove the requirement of a Nordic investment partner in NORSAD´s projects and add USD and GBP as possible financing currencies. These two decisions had a remarkable effect on the operations of NORSAD. Direct financing was still NORSAD´s main delivery strategy, but it now had the opportunity of providing unrestricted intermediary financing. To provide direct financing in 11 countries with its base in one country proved quite expensive to NORSAD, with regard to marketing, project processing and monitoring of SME projects. Therefore, to remain cost effective there was a concentration on larger direct projects, with the risk that NORSAD was gradually moving away from its main target group -  the SMEs.

Present Business model - Financing SMEs through Intermediary Financial Institutions 

In order to remain cost effective and focus on SMEs, the Governors decided in 2005 that NORSAD’s main implementation strategy should be through intermediary financial institutions while maintaining the possibility to finance projects directly. To meet the changing requirements, of the SADC financing market, the Governors also decided that NORSAD could provide financing in local currencies in cases where it would be possible to hedge the currency risk. To reduce the overall currency risks, NORSAD’s accounting currency was changed from DKK to USD, the organisation’s main financing currency.

NORSAD’s current loan portfolio is divided equally between financing through intermediaries and direct loans to SMEs. NORSAD’s present strategy is primarily to provide secured loans to SADC commercial banks, SADC development finance institutions and other types of finance institutions for on-lending to SMEs. NORSAD is at present targeting second and third tier banks that have limited access to other sources of financing. NORSAD services to these institutions are credit lines and agency lines and partial guarantees. As a secondary strategy, NORSAD still provides direct loans to the SADC SMEs. Projects are often co-financed with local commercial banks and SADC or European development finance institutions.

The removal of the requirement of a Nordic investment partner in NORSAD’s projects,  the possibilities of financing projects in USD in 2002, and the new implementation strategy through intermediaries in 2005, have significantly increased NORSAD’s financing options and have moved NORSAD much closer to a full utilisation of its available funds.