Financial risks

The mission of FMO is to take risks that commercial parties are not usually prepared to take. A glance at FMO's portfolio reveals our development mission: it is a highly diversified portfolio made up of investments in emerging markets. The most significant financial risks FMO runs are the credit and equity risks related to our investment activities.

FMO has no appetite for other risks than the risks related to our investments in emerging markets. In order to identify, measure, monitor and mitigate its financial risks, FMO has an adequate risk management system in place. Our key risk management bodies and committees reflect the specific nature of the various risks in order to ensure that risks are managed within limits set in a transparent and timely manner.

All individual financing proposals for investments in emerging markets are assessed by our Investment Committee in terms of specific counterparty risk, as well as country risk. FMO has clearly defined its risk appetite per country and for counterparties in its loan portfolio and this is taken into account by the Investment Committee throughout the approval process. An important input for the assessment of the credit risk in our loan portfolio is the internal scorecard that is used for all loan investment proposals. In 2011 this internal rating methodology has been upgraded. Moody's has supported FMO in this project and has validated the new methodology. FMO now has a methodology in line with Basel's Internal Ratings Based (IRB) approach for measuring credit risk - which is transparent and best practice amongst financial institutions. The ratings will also be submitted to the Global Emerging Markets data pool (a joint initiative of IFC and EIB) in order to share loss data with other DFI's worldwide.

In addition, all individual financial exposures are subject to a periodic review process in the Investment Review Committee. All individual exposures are assessed at least once every year and if necessary more often. Throughout FMO's credit process a four eye principle (two person review) with proper involvement of Risk Management is applicable.

The Asset and Liability Management Committee (ALCO) is responsible for managing FMO's risks on a portfolio level. Key responsibilities of the ALCO include setting policies on credit, country, currency, interest-rate and liquidity risks, as well as capital adequacy. At monthly meetings, the ALCO assesses risk reports and advises on new products and limits.