Photo: Cenpromype

Inclusive and innovative finance: a key element for the Luxembourg Development Cooperation in Central America

How Luxembourg is supporting sustainable development in the region
Fri July 2023

Through new regional development cooperation projects, flanked by bilateral interventions in Costa Rica and El Salvador, the Luxembourg Development Cooperation aims to strengthen its activities and impact in Central America. These projects will include specific actions in the field of inclusive and innovative finance, a cross-cutting theme.

The Luxembourg Development Cooperation has been active in Central America since the early 1990s, particularly in Nicaragua and El Salvador. Following Nicaragua’s sociopolitical crisis in 2018, however, Luxembourg froze its bilateral programs with the Nicaraguan authorities and decided to refocus its action in the country towards support for civil society and food security and nutrition.

A new strategy for development cooperation with Central America

To incorporate the changes in the development context and policies of the last decade, Luxembourg drew up a new strategy for international cooperation with Central America in 2022. The aim of this strategy is to contribute to the implementation of Agenda 2030, the 17 Sustainable Development Goals and the principle of “leaving no one behind” by integrating regional development priorities on the one hand with the overall strategic dimensions of Luxembourg’s Development Cooperation and the European Union’s external action on the other.

The general objective of the strategy is to contribute to the transition towards sustainable development in the region by 2030, addressing its economic, social and environmental challenges as well as paying particular attention to the inclusion of the most vulnerable populations, including women, young people, minorities and migrants.

The Luxembourg Development Cooperation’s activities in Central America primarily support regional development objectives, which are complemented by support at national level, targeting El Salvador and Costa Rica. Later this year, Luxembourg will open an embassy in Costa Rica, which will be joined at a later stage by a LuxDev office, the Luxembourg Development Cooperation Agency and one of its primary operational pillars for development cooperation.

Financial inclusion as an enabler

The development cooperation initiatives carried out in Central America focus on three priority and interconnected areas of intervention: the socioeconomic integration of women and youth, climate resilience and environmental sustainability, and social cohesion, human rights and migration. More specifically, Luxembourg’s Development Cooperation is in the process of identifying and formulating bilateral development cooperation projects in the fields of triangular cooperation, migration, and digitalization and cybersecurity in Costa Rica, and in the fields of youth employment, digitalization and triangular cooperation in El Salvador.

To achieve the desired results and impacts in its three priority areas, Luxembourg will develop specific actions in the field of “Digital for Development”and inclusive and innovative finance, depending on context and relevance. Migration and forest management projects currently include components on financial inclusion and improving access to finance. In this area, Luxembourg will draw on its extensive national network of key players in the field of finance, particularly the NGO ADA (Appui au développement autonome), which has a longstanding collaboration with the regional microfinance network Redcamif.

ADA will pursue its financial inclusion activities in Central America by focusing on three thematic axes: support for agricultural and forestry value chains, access to basic services for vulnerable households, and support for youth entrepreneurship (such as the Young Entrepreneurs Sustainable Funding Initiative – YES FI). ADA acts as an investment advisor for the Luxembourg Microfinance and Development Fund (LMDF). The total LMDF portfolio in Latin America comprised 19 MFIs as of late June 2023.

Considering the Central American context, where less than half the population has access to formal financial services, Luxembourg aims to facilitate the mobilization of additional funding through inclusive and innovative finance mechanisms to enable access to finance for micro, small and medium-sized enterprises, and vulnerable populations. Luxembourg’s Development Cooperation will also support the transfer of knowledge, expertise and technologies to its partners and will seek to strengthen multi-stakeholder partnerships, particularly through the involvement of the private sector and the development of local solutions in areas where it has a comparative advantage, such as digital financial services.

Supporting financial inclusion in the region

Since May 2021, Luxembourg’s Development Cooperation has been implementing, the Regional Programme for the Promotion of Women’s Entrepreneurship – Phase II through LuxDev in partnership with Cenpromype (Centro Regional de Promoción de la Mipyme). This program contributes to the creation of a regional environment that is favorable to the equitable participation of women within the economic fabric of the eight countries of the Central American Integration System (SICA) region.

To achieve this objective, the program promotes access to finance for women entrepreneurs through a credit line for financing women’s businesses for amounts ranging from USD 20,000 to 100,000, and the establishment of a guarantee fund. So far, 468 women with formal businesses employing between two and five people have been supported, out of 1,200 targeted by the end of the program.

At the end of 2022, Luxembourg launched a pilot project with the Alliance for Financial Inclusion (AFI) in Latin America and the Caribbean. This innovative project aims to implement financial inclusion strategies in the region and foster knowledge sharing in this field, with a particular focus on digital financial services, inclusive fintech, national inclusive finance strategies (especially in Costa Rica), green inclusive finance and gender-inclusive finance.

Finally, Luxembourg’s Development Cooperation is implementing a regional project to support sustainable forest management. This project focuses on forestry value chains and social inclusion and provides technical assistance to the Forestry and Climate Change Fund, an impact finance fund managed in Luxembourg that invests in companies restoring degraded forests in Mexico, Guatemala, Nicaragua and Costa Rica. The project also facilitates the financial inclusion of forest value chain actors, with the collaboration of ADA. All of these actions aim to contribute to addressing the major challenge of sustainable development in the region.

This article is a joint publication of the Directorate for Development Cooperation and Humanitarian Affairs of the Ministry of Foreign and European Affairs of Luxembourg, and LuxDev, the Luxembourg Development Cooperation Agency.




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