Since its independence in 2002, Timor-Leste has made progress in poverty reduction, but it remains a fragile, post-conflict nation. The country has continued to struggle with poverty in rural areas, where 80 percent of the population live, high rates of youth unemployment, and low rates of labor-force participation from women. To ensure inclusive and sustainable economic growth and stability, Timor-Leste needs to support the development of a strong private sector that will create jobs for its fast-growing working age population, women, and rural populations.
Access to credit is a key constraint for business development in Timor-Leste—the country has one of the lowest financial penetrations in the East Asia and Pacific region, with 35 percent of the adult population financially excluded. The agriculture sector, especially, faces a large financing gap as commercial banks are reluctant to venture into the agricultural sector, where the perceived risk is higher than other sectors. This is particularly true for micro borrowers, as financial institutions are unable to appropriately assess their creditworthiness.
An International Finance Corporation (IFC) investment, supported by the IDA Private Sector Window (PSW), in the microfinance institution Kaebauk Investimentu No Finansas (KIF) will contribute to agricultural market creation in Timor-Leste.
The project will significantly increase access to finance for farmers and agricultural businesses. The investment will help strengthen KIF’s institutional capacity to extend financing to the agriculture sector, provide access to financial services for women, and improve its risk management. KIF will also build out its digital financial services, implement changes to its processes, and create new products to better serve the needs of this market.
Rationale for Using Concessional Funding
Commercial banks in Timor-Leste have a limited appetite for investments in agriculture. Microfinance institutions, who provide micro loans to rural populations, have very limited financing available. The agriculture sector is an integral part of Timor-Leste’s economy and limited access to finance has been a constraint on its growth. The project will provide longer-term funding to help KIF develop suitable products to address the financing needs of its borrowers in the agriculture sector. Increasing access to finance for micro borrowers in the agriculture sector will boost crop yields leading to increased exports, jobs, and income. The project may also help reduce Timor-Leste’s gap in financial inclusion, particularly when women benefit from microfinance as borrowers.
The project consists of a loan from IFC of $5 million to KIF, of which up to 50 percent is a senior concessional loan from the IDA PSW’s Blended Finance Facility. The IDA PSW concessional loan is allowing IFC to provide viable pricing, which then enables KIF to on-lend to rural farmers and women in Timor-Leste, where perceived risks are high and commercial financing for agriculture remains scarce.
Impact on Markets
The project is expected to contribute to the development of a farming-to-financing market, a holistic approach to agriculture sector development. The project is also expected to improve agricultural business productivity for rural farmers and women—78 percent of KIF’s clients are in rural areas and 71 percent of KIF’s clients are women.
If KIF is successful, the project could help attract other financial institutions to the sector with similar financial products. As the market evolves, the perceived risks are expected to be reduced, resulting in less need for concessional finance. The project’s outcome is expected to be reinforced by the Timor-Leste government’s commitment to grow its agriculture sector through both financial and policy support.
Blended Finance Facility-supported projects are made possible thanks to close cooperation from multiple teams across IFC and IDA.