Norfund has a mandate whereby investments made by the company are required to be additional, in that they provide access to capital and expertise to companies that would not otherwise have received such financing because of the high risk involved. Norfund’s investments are evaluated through an extensive selection process that consists of checking against Norfund’s mandate, and performing thorough risk assessments and analyses of legal, financial, commercial and ESG-related factors. The Investment Committee and/or the Board of Directors 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 time of making investments. 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, as well as political 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.
The Board has adopted Norfund’s zero tolerance policy, which is based on the risk Norfund is willing to take in order to deliver on its mandate. This includes country risk and political risk. The risk that efforts are actively made to minimise consists of those factors that Norfund can influence in how it chooses its investment partners and how the investment process and other operational processes in the activity are carried out. This includes the risk of corruption, for which risk-reducing measures have been established in the form of working systematically to prevent, detect and immediately respond to cases. Minimizing and managing risk associated with ESG and questions concerning the integrity of our business partners are based on best practice for development finance institutions (DFIs). Norfund’s approach to risk is summarized in a Risk Appetite Statement adopted by the Board and published on Norfund’s website.
Market risk
Market risk is an umbrella term for the risk of losses occurring as a consequence of changes in conditions, exchange rates or prices that impact the earning ability of the companies in which we have invested. Norfund’s mandate is to invest in developing countries, which entails higher risk, as the macroeconomic conditions and uncertainty are complex and mixed. Future returns depend among other things on the ability to manage and mitigate risk in all phases of an investment.
Fixed income
Norfund’s income is also substantially affected by fluctuations in the fixed income market, as 30% of the investment portfolio is in the form of loans, 57% of which have a floating interest rate, with SOFR + margin making up the largest proportion. In addition, Norfund has significant cash holdings and a bond portfolio (see Note 13) which accrue interest. Thus the interest rate level has a substantial direct effect on Norfund’s operating and financial revenue.
Credit risk
Norfund has a significant number of loans, and individual semi-annual reviews are conducted of the borrowers’ financial standing, history and other relevant factors. If default on a loan is considered highly likely, it is written down. A loan is regarded as non-performing when a payment has not been made within 60 days of the due date. In the event of default, our total investment in the borrower is evaluated.
Norfund does not carry any general loss provisions for the loan portfolio, but makes specific provisions for each individual loan; see also Note 12.
Liquidity risk
Liquidity risk is the risk of Norfund being unable to fulfil its commitments, which are therefore monitored closely in relation to available liquidity. To ensure strong financial freedom of manoeuvre, Norfund aims to maintain a real and solid liquidity reserve that must at least cover future committed investments plus a minimum amount. Liquidity is strengthened through annual allocations from the Owner, and through repayments from the investment portfolio in the form of interest, repayment of the principal, dividends and exits from companies. Norfund does not use debt instruments in its liquidity management.
The liquidity reserve consists of bank deposits, short-term fixed deposits in banks with terms of up to one year, liquidity loans, and a bond portfolio. Deposits in anything other than Norfund’s relationship banks must be in accordance with the investment mandate laid down by the Board, which regulates amounts and time frames.
The Finance Department monitors Norfund’s liquidity and adapts the investment of resources with a view to securing an appropriate return pending future investments.
Currency risk
Norfund’s operations are strongly exposed to currency risk, as allocations are made in NOK while investments largely take place in other currencies, USD being by far the largest. In consequence, costs associated with investments will also largely be in currencies other than NOK.
Norfund’s base currency is NOK, so Norfund’s future returns and gains/losses for accounting purposes will be strongly influenced by the exchange rate between NOK and other currencies. Investments are subject to a greater or lesser degree to fluctuations in the exchange rate between USD and the local currency in the individual country, which in turn may affect the results and values of investments in these companies in Norfund’s balance sheet.
Three-month forward contracts are used to hedge the portion of the bond portfolio denominated in EUR and GBP against USD; see Note 13.
Norfund’s liquid assets are mainly deposited in NOK-denominated, interest-bearing accounts in Norges Bank, while its USD-denominated liquid assets are mainly deposited in DNB and other liquidity placements.
| Exchange rates used in conversion | ||||
|---|---|---|---|---|
| Currency | 31/12/24 | 31/12/23 | Change during the year | |
| US dollar | USD | 11.353 | 10.172 | 11.6 % |
| South African rand | ZAR | 0.601 | 0.552 | 8.8 % |
| Indian rupee | INR | 0.133 | 0.122 | 8.4 % |
| Kenyan shilling | KES | 0.088 | 0.065 | 36.3 % |
| Ugandan shilling | UGS | 0.003 | 0.003 | 15.5 % |
| Mozambican metical | MZN | 0.178 | 0.161 | 10.8 % |
| Bangladeshi taka | BDT | 0.095 | 0.093 | 2.5 % |
| Ghana shilling | GHS | 0.775 | 0.849 | -8.7 % |
| Tanzania shilling | TZS | 0.005 | 0.004 | 15.4 % |
| Euro | EUR | 11.795 | 11.241 | 4.9 % |
Operational risk
Operational risk is the risk of financial losses occurring as a consequence of errors in internal processes and systems, human error or as a consequence of external events such as criminality or natural disasters. Management of operational risk has become increasingly important in Norfund in recent years, as the company and the complexity of both organization and portfolio have grown.
The identification, management and control of operational risk is a management task, and is coordinated through Norfund’s Enterprise Risk Management System. In accordance with this system, semi-annual reviews are conducted of the risk picture and action plans of all the company’s risk-owners, with appurtenant reporting to the Board.
Norfund places emphasis on a culture of transparency and awareness, leadership, authorization hierarchies, clear descriptions of procedures and clearly defined areas of responsibility as elements of our framework for managing operational risk.
Norfund’s risk exposure and the management thereof are followed up by the company’s external internal auditor, and reports are submitted regularly to the Board and the Risk and Audit Committee.