According to Norfund’s mandate, the company’s investments are intended to be additional, in that they provide access to capital and expertise to enterprises that would not otherwise have had such funding because of the high risk involved. Norfund’s investments are assessed through an extensive selection process that consists of checking against Norfund’s mandate, thorough evaluations and analysis of legal, financial, commercial and ESG-related aspects. The Investment Committee and/or the Board take the final decision regarding investment.

Efforts are made to diversify portfolio risk by achieving portfolio breadth in terms of countries, industries, business partners, instruments and investment times. Norfund exercises active ownership in the largest investments in its portfolio through representation on boards, investment committees or other governance bodies .

Norfund is exposed to several different types of risk, including liquidity risk, credit risk, currency risk, interest-rate risk and other market risk. The financial risk management has been established to identify and analyse these risks, and to establish appropriate risk limits and risk controls. Norfund regularly reviews the established risk management guidelines and the system that has been established to ensure that changes in markets are reflected in the risk limits.
Responsibility for Norfund’s risk management and control is shared between Board and management. The Board decides on goals and limits within all risk areas, including risk management guidelines.

Market risk

Norfund’s mandate is to invest in developing countries, which means investing in countries, markets and companies that are characterised by high risk. Future returns depend among other things on the ability to manage and mitigate risk in all phases of an investment.

In addition, movements in interest rate levels and inflation in the individual markets in which Norfund operates will influence the results achieved. Loans to projects are usually based on variable LIBOR plus a margin.

Credit risk

Norfund has a substantial number of loans, and a semi-annual review is made of the borrowers’ financial situation and their ability to service the loan in accordance with the payment plan. Loans are assessed individually, and if default appears highly likely, the value of the loan is written down.

Norfund does not carry any general loss provisions for the loan portfolio, because the loans are very different, particularly in respect of context.

Liquidity risk

Liquidity risk is the risk of Norfund being unable to fulfil its commitments. This risk is regarded as low, as Norfund operates with substantial cash holdings, receives annual allocations from the Owner and has an investment portfolio that generates reflows in the form of interest, payments, dividends and through sale of enterprises. These are intended to cover committed investments that have not yet been disbursed.
The cash holdings are mainly placed in Norges Bank.

Currency risk

Norfund’s investments are largely made in USD (more than 90%), but in some cases in other currencies, the next largest being EUR and ZAR. Since Norfund’s base currency is NOK, its future returns are strongly influenced by the USD/NOK exchange rate. The portfolio companies may also be subject to fluctuations in the exchange rates between local currencies and USD, which in turn may affect the results and value of the companies.

Norfund does not use any currency hedging instruments.

Norfund’s liquid assets are mainly placed in NOK-denominated, interest-bearing accounts in Norges Bank.

FX Rates Used in Conversion
31.12.202031.12.2019Change During the Year
US DollarUSD85338780-2.80%
South African randZAR0.5810.625-7.10%
Rwandan francRWF0.0090.009-6.60%
Kenyan shillingKES0.0780.086-9.50%
Ugandan shillingUGS0.0020.002-2.10%
Mozambican meticalMZN0.1130.142-20.20%
Bangladeshi takaBDT0.0990.102-2.40%
Cambodian rielKHR0.0020.002-1.90%
Swaziland lilangeniSZL0.5840.626-6.70%

Operational risk

Operational risk is the risk of financial losses occurring as a consequence of faults in internal processes and systems, human error or as a consequence of external events. In principle, we expect this risk to be low. Norfund’s procedures and guidelines are used to manage operational risk.

As described in the annual report, Norfund suffered a major incident in 2020 which inflicted a financial loss of NOK 102 million. In the wake of this event, Norfund’s internal control procedures have been reviewed and strengthened where it was considered to be necessary.