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Kreditanstalt für Wiederaufbau


Palmengartenstrasse 5-9
D-60325 Frankfurt am Main

Telephone: (49) (69) 74 31-0
Fax: (49) (69) 74 31 29 44

Government-Owned Company
Incorporated: 1948
Employees: 1,827
Operating Revenues: DM 315 billion (1998)
NAIC: 52111 Monetary Authorities--Central Bank

Company Perspectives:

As a bank the KfW has a public mission. Although it is not an institution with political responsibilities, its mission is to serve the public interest in the country which it serves through banking means. Its public mandate cannot be rigidly defined for in the course of its fifty-year history the KfW repeatedly had to--and did&mdashapt rapidly and flexibly to the frequently changing political and economic requirements with an efficient decision-making procedure not subject to a long, bureaucratic chain of command. Again and again its experience and qualifications as a multipurpose institution have enabled it to perform complex and large-scale financing operations in the public interest&mdash well as customized administrative tasks--efficiently, cost-effectively and discreetly. This achievement has been based on a corporate ethos characterized by close and harmonious cooperation with its partners and a spirit of mutual understanding--understanding on the part of the politicians and ministries for the bank's possibilities and limitations, and understanding on the part of the bank for the needs and constraints of the politicians and ministries.

Company History:

The Kreditanstalt für Wiederaufbau (KfW) is a promotional bank serving the German domestic economy, and a development bank for the developing countries. Some 80 percent of its DM 1 billion in equity capital is owned by the German Federal government, and 20 percent by the German Länder (equivalent to U.S. states) governments. On behalf of the Federal Republic of Germany, the KfW finances investments for approximately 1,600 projects to develop social and economic infrastructure, industry, and environmental protection in over 100 countries along with advice. The KfW raises the funds for its programs in the domestic capital market, and--through its wholly-owned subsidiary KfW International Finance Inc. in the United States--in foreign capital markets. Governed by the German Banking Act, loans taken out and bonds and notes issued by KfW, as well as loans to third parties guaranteed by KfW, are considered equivalent to obligations of the Federal Republic of Germany itself. With a 1998 balance-sheet total of DM 315 billion and DM 10.6 billion in capital and reserves, the KfW ranks among Germany's largest banks. Headquartered in Frankfurt am Main, the bank also has a branch office in Berlin.

The KfW's "Investment Finance" program provides purpose-tied, long-term loans that finance projects at favorable fixed interest rates for German small and medium-sized enterprises; the energy, steel, and coal industries; communal infrastructure and housing projects; and in particular for environmental protection and innovation. The "General Export and Project Finance" program provides long-term loans to German firms in manufacturing; raw materials extraction; telecommunications; and the energy sector, for the export of capital goods. "Special Export and Project Finance" is awarded to projects in the shipping, air transport and land-based transport industries, including seaports and airports. The KfW also administers subsidies for ship and aircraft export in the German federal budget. In addition, the KfW helps launch projects at home and abroad in which Germany has considerable interest, primarily in developing and newly industrialized countries as well as in Central and Eastern Europe.

Financing Germany's Reconstruction: 1948--53

As its name Kreditanstalt für Wiederaufbau (reconstruction loan corporation) suggests, the KfW was founded to finance urgent reconstruction projects after World War II. It became well known as the financial institution which allocated Marshall Plan funds in Germany. After World War II had ended, the American and British military governments discussed the possible structure of a new banking and monetary system in Germany. While the Americans preferred the idea of decentralizing the German banking system by creating a "Bank of German States" with central banks on the state level, the British military government insisted on establishing a central financial institution for the German reconstruction.

Finally in the summer of 1947, after almost a year of negotiations, they agreed on a compromise which included the establishment of a central "Loan Corporation" to finance reconstruction projects. In June 1948 all the parties agreed on the main principles for this institution, and the Anglo-American military government assigned the German authorities the task of setting it up. In October 1948, the "KfW Law" was passed by the German Economic Council and went into effect on November 18, 1948. In January 1949--the year in which two separate German states were founded--the KfW started its business operations as a corporation under public law directly answerable to the federal government.

It took the young Federal Republic of Germany, founded in 1949, about five years to rebuild the country after World War II. The German economy grew at about eight percent per year. The KfW contributed to this effort significantly, mainly by channeling funds from the Allied forces into industries that were key in attracting economic growth and by long-term export financing.

KfW's first chairman, Marshall Aid advisor Dr. Otto Schniewind, calculated in 1948 that about DM 8.3 billion was needed to fund urgent reconstruction projects, but finding sources of funding proved extremely difficult. Foreign capital markets were out of reach, the new German Deutschmark had lost 14 percent of its value in only six months, and it was feared that massive government deficit spending would have weakened trust in the new currency. KfW's first attempt, in the fall of 1949, to raise money on the limited German capital market by issuing long-term bonds failed miserably. In the end, the KfW was left with the counterpart funds from the Allies, including GARIOA and the Marshall Fund money. GARIOA counterparts were food and commodity imports financed by the U.S. defense budget before the Marshall Aid program, announced by U.S. secretary of state George C. Marshall in June 1947, was actually carried out. However, those sources were usually connected with far-reaching ideas on the part of the givers about how they were to be used.

In the reconstruction years, the KfW allocated about half of its credit volume directly to companies, while the other half was issued through the borrower's "house bank." Tens of thousands of individual farmers received individual loans as blanket credit lines from two specially designated banks for farmers. However, upon request of the Allies, counterpart funds were granted only by the German federal government, which also evaluated the applicants and even scheduled individual loans.

Between 1949 and 1953, the KfW concentrated on providing financing for sectors crucial to economic reconstruction which needed a large amount of financing and industries with limited access to funds, such as the highly regulated energy and housing sectors. More than half of the KfW's credit volume in those years went into coal mining, power generation, and steel, which helped manage the rising demand for energy and raw material by other industries. A total of DM 1.1 billion was provided mainly for larger manufacturing companies in the chemical, cement, and other raw materials industries and for export-intensive machinery building and mechanical and electrical engineering firms. About DM 286 million went into the shipbuilding industry. By 1953 the KfW had channeled DM 623 million into residential construction. Another DM 500 million&mdashout 20 percent of KfW's total credit volume in those years--was directed into the farming and food industries. The KfW also transmitted about DM 705 million, raised by the Confederation of German Industry, to help the basic goods sector finance its investment needs in 1951.

Securing Sustainable Growth: 1954--60

By 1954, the KfW had basically fulfilled its mission to allocate financial aid for German reconstruction. However, the German government did not want to dissolve an organization that had gained a great deal of expertise on the support of economic development that was politically desirable. KfW board member Dr. Herbert Martini, who had assisted Schniedewind in carrying out Marshall Aid programs and authored a big part of the KfW Law, showed brilliant strategic foresight and initiative in opening new sources of funding and new tasks for the KfW. He convinced older, skeptical KfW board members as well as politicians in Bonn that the KfW could be developed into a multi-purpose financial institution that acted in the public interest of Germany.

After the London Debt Agreement of February 27, 1953 had established the amount of international debt owed of Germany to the United States, the European Recovery Program (ERP) special fund was set up by the German government. Administered by the former Ministry for the Marshall Plan, which was now called Ministry for Economic Cooperation, the ERP special fund soon became KFW's foremost source of capital, totaling over DM 4.6 billion between 1954 and 1960. Between 1958 and 1960 the KfW also raised almost DM 1 billion by establishing long-term bonds and new medium-term fixed-rate notes shortly called KOs--the abbreviation for "Kassenobligationen"--on the German capital market.

Most of the funds provided through the KfW in the second half of the 1950s were aimed at supporting structurally weak regions such as the Saarland (which joined the Federal Republic after French occupation ended in 1957), the regions bordering East Germany, and isolated West Berlin. Beginning in 1954, the KfW administered the "Berlin Contract Financing" program fueled by the ERP special fund which offered investment loans for West German companies who contracted with suppliers in West Berlin. Beginning in 1960 the KfW offered liquidity assistance to commercial banks in West Berlin. The KfW opened its Berlin office in 1960 to carry out those programs, and by the end of the year the loans issued reached a total of DM 728 million. Almost DM 500 million was earmarked by the KfW for environmental protection projects, primarily sewage disposal and water purification. Another DM 664 million was channeled through the KfW by the European Coal and Steel Community (ECSC) granted to promote the German coal, iron, and steel industries between 1954 and 1960.

Export financing was another important field of activity which the KfW had begun in the early 1950s. At that time, commercial banks only offered short-term loans to German exporters. The federal government ordered the KfW to finance middle- and long-term German export risks--in particular industrial plants and equipment--for up to 24 months. To secure its own share of this risky but potentially promising business, the private banking sector formed the Ausfuhrkredit Aktiengesellschaft (AKA) in spring 1952. The AKA took over the DM 600 million rediscount facility, 14 specialists, and all the contracts previously managed by the KfW. However, it soon became clear that the AKA was refusing to back exports to politically unstable countries such as Turkey and Yugoslavia, and was not interested in financing export risks for more than four years. Realizing the need for longer-term export financing, the KfW offered AKA-follow-up loans with practically no risk to exporters. The so-called Hermes credit programs were backed financially by the German government and managed by the Hermes Kreditversicherungs AG, one of the world's leading Export Credit Agencies. In the following years, the KfW was able to raise significant funds for export financing to developing countries, mainly from public insurance companies and also--after the Deutschmark became freely convertible in 1958--from free capital markets. Up until 1959, export financing was granted to German suppliers. From 1959 on the German government also offered credits to foreign buyers tied to German exports through the KfW, the so-called "Hermes guarantees." In 1960 KfW's DM 265 million for export financing was granted for exports of power stations and industrial plant to such countries as Pakistan, Mexico, Chile, Spain, and Greece, with 58 percent of the total issued as buyer loans.

By the end of the 1950s, the KfW had transformed itself from an interim distribution agency for postwar reconstruction funds into a financial institution supporting the German economy in gaining and sustaining a leading position in the world markets. Owned jointly by the federal and Länder governments, its new long-term funding basis was established through the ERP special fund as well as through KfW bonds in the capital market. While the KfW operated with some 50 employees in 1949, that number increased to about 150 in 1951 and reached about 180 in 1960. At the same time, KfW's balance sheet total rose from under DM 1 billion in 1949 to about DM 5 billion in 1954--at that time the largest of any German credit institution, according to Heinrich Harries. In 1960 KfW's assets/liabilities totaled about 7.5 billion.

New Tasks as a Development Bank: 1961--70

In 1959 Schniedewind was succeeded by the institution's first spokesman of the management board, Dr. Hermann Josef Abs. The excellent banker and prewar chairman of the Deutsche Bank with a strong ability to influence political leaders had headed the German delegation in the London Debt Agreement negotiations. Martini succeeded retiring spokesman of the KfW's board of management Otto Neubaur. He drew on his experience at the former economics ministry and the Berlin stock exchange, helping develop a solid foundation for the further success of the KfW.

On August 16, 1961, when the Wall was being erected in Berlin, the KfW Law was amended to add a new task to the bank's agenda in addition to investment and export financing: financing projects in foreign countries, development aid projects in particular. At the same time the KfW's capital structure was altered. The federal government took over 80 percent of KfW's equity capital which was increased from DM 1 million to DM 1 billion, while the Länder, now including the Saarland and Berlin, held 20 percent. For this transaction the German government converted DM 90 million worth of loan claims on ERP special funds into capital stock. DM 850 million was guaranteed by the federal and Länder governments should the money ever be needed to pay the KfW's liabilities. This way, neither party needed to draw on budget resources.

In the 1960s the KfW made a massive entrance into the international arena. As early as in 1958 the KfW had granted loans to foreign countries such as Iceland, Sudan, and India to enable them to pay German exporters quickly. A legendary program was the secret "Operation Business Partner" under which the KfW channeled about DM 630 million covert loans to Israel between 1961 and 1965 on behalf of the German government. The program arose after the Israeli prime minister, David Ben Gurion, met German Chancellor Adenauer at the Waldorf Astoria Hotel in New York City in March 1960 and requested financial help. Following German official diplomatic recognition of Israel in 1965, Israel was given official capital aid. In 1966 a general agreement between the German federal government and the KfW regulated the KfW involvement in bilateral capital aid projects between Germany and developing countries. The agreement stated that "it was the government which ... assumed the blanket refinancing and the credit risk of capital aid," according to Heinrich Harries in Financing The Future. Harries added, "For its part the KfW had to maintain its autonomous profile as a credit institution [and] could decide on its own whether to grant a loan for its own account or on behalf of the federal government."

One of KfW's international credit programs was aimed at securing raw material supplies for the German economy, which was traditionally highly dependant on imports. In 1960 the KfW granted its first financing loan of DM 208 million to the Lamco iron ore project in Liberia. Other loans were given to mining companies in South Africa. A special five-year mineral oil promotion program was launched in 1964. For larger international projects in which more than one party had a stake, the KfW worked with other financial institutions, pooling resources and distributing the risk. In 1961 the KfW became involved for the first time in a co-financing project with the World Bank and the International Development Organization (IDA) in the Roseires dam project in Sudan, organizing a mixed financing loan amounting to DM 175 million. In another co-financing project in Bolivia, KfW became partners with the Inter-American Development Bank and the United States Agency for International Development (AID) in 1962. Four years later the bank co-financed textile projects in Cameron and Chad with the Deutsche Gesellschaft für wirtschaftliche Zusammenarbeit (DEG), a German economic development organization, and the European Investment Bank (EIB). Two particularly noteworthy commercial German mixed financing projects were the UNINSA steelworks in Spain and the Atucha I nuclear power station in Argentina to which the KfW contributed DM 450 million and DM 175 million, respectively.

The change of ministers in Bonn under four chancellors in the space of a decade resulted in a high turnover rate on the KfW's board of directors. However, new tasks meant growth. Its staff rose from over 200 in 1961 to more than 400 in 1966, and reached over 500 in 1970. The balance sheet total grew steadily during that decade, from about DM 11 billion in 1961 to approximately DM 23 billion in 1970. In 1961 the KfW granted about DM 2.6 billion to domestic and international organizations. At the end of the decade KfW's financial commitments totaled more than DM 3.5 billion. The bank's financial resources during the 1960s were comprised of DM 6.5 billion from the German government--with about three-quarters of that coming from the ERP special funds--and DM 4.9 billion raised on the capital market from the issue of long-term bonds and bearer debt securities.

Funding German Business and Fundraising on Wall Street: 1971--89

The KfW started the 1970s with a fundamental restructuring program. First of all, its main focus was re-directed towards the domestic economy. The collapse of the Bretton Woods international monetary system based on fixed interest rates in the early 1970s, as well as extensively increasing oil prices caused by the newly formed OPEC cartel, created difficult domestic and international market conditions for the German economy. To serve German industry better, new departments were set up which specialized in promotional programs for particular industry sectors which also included the proven export financing and commodity loan programs. KfW's international activities, including development aid and other financial cooperation projects, were served by departments organized by country or geographical region. On the personnel side, Martini resigned as spokesman of the board of management in 1971. In 1974 Helmut Schmidt--then German finance minister and later German chancellor--became chairman of the board of directors at KfW.

In order to promote domestic investment the KfW developed its own low-interest loan programs which were not funded by the German government as in the reconstruction years, but by funds raised on the capital market. The share of the ERP special fund in KfW's total financial funding for the promotion of domestic projects dropped from 32 percent in 1971 to 15 percent in 1989. The new programs were targeted at small and mid-sized businesses which, because of their small size, did not traditionally have access to the international capital markets to satisfy their financial needs. The KfW offered long-term investment loans with favorable interest rates to this clientele through its so-called "M-programs" by refinancing the other bank loans that borrowers had to apply and be approved for. The M-programs encouraged investments aimed at energy saving, environmental protection, and innovation; their annual volume grew from DM 500 million in 1971 to DM 6 billion in 1989. Another program introduced in 1971, the ERP equity participation program, helped strengthen the equity capital base of small and medium sized businesses. It was supported by the German economics ministry, as was a cyclical stimulation program launched jointly with the federal government in 1981 to encourage the development of new energy technologies with a budget of DM 5.4 billion. In 1978 the KfW granted its first loan in a foreign currency; in succeeding years a growing part of its business was conducted in foreign currencies.

Besides KfW's activities for small and mid-sized businesses, the bank also supported large German companies by co-financing certain projects of high importance: a conveyor belt built by Krupp for the transportation of phosphates stretching over 100 kilometers through the Spanish Sahara; the Bosporus bridge in Istanbul which connected Asia with Europe; the Atucha II nuclear power station in Argentina to which KfW contributed loans worth DM 1 billion; and the Channel Tunnel connecting the Great Britain with Europe. International capital aid and financial cooperation (FC) projects were more and more directed towards social infrastructure.

A particularly noteworthy international aid project received financial support from the KfW in fall 1975 when Poland was granted a loan of DM 1 billion to facilitate the migration of ethnic Germans to the Federal Republic. A major project which served commercial goals was the Airbus project. The Airbus, a civilian jumbo jet developed in the 1960s by a consortium of European aircraft manufacturers, had to break into the competitive world market dominated by North American firms such as Boeing, Douglas, and Lockheed. In 1976 the KfW granted Airbus-loans to airlines in Korea, India, and South Africa. Two years later the KfW co-financed a major deal with Eastern Airlines--the first Airbus order from a United States airline.

In order to sustain its ambitious programs, the KfW was constantly looking for new sources of funding. One of those new sources came in the form of partners from Arabia who had been able to accumulate significant wealth during oil crises between 1973 and 1982. In 1975 the KfW raised its first loans against borrowers notes from the Saudi Arabian Monetary Agency (SAMA), mainly due to the personal effort of management board member Alfred Becker. In the mid-1980s the KfW took another crucial step towards new fundraising opportunities when it applied for an international credit rating. For its domestic six percent DM bond, backed by the institutional liability of the Federal Republic of Germany, KfW was rated "Triple-A," the highest rating possible, by the agencies Moody's and Standard & Poor's in 1986. In the year of KfW's 40th anniversary it issued its first foreign currency bonds: a $200 million Euro-bond and CHF 100 million private placement. The same year the KfW was admitted by the Securities and Exchange Commission as the first German financial institution to issue bonds on the United States capital market. KfW International Finance Inc. headquartered in Wilmington, Delaware, started doing business in 1988 by issuing the first bonds worth $500 million on Wall Street. As a result of these efforts, the KfW raised funds worth DM 17.4 billion on the capital markets in 1989, compared with DM 2.4 billion in 1971.

The substantial growth in business experienced by the KfW during the 1970s and 1980s was reflected in its balance sheet total which increased from DM 25 billion in 1971 to DM 199 billion in 1989. KfW's financial commitments reached DM 20 billion in 1988. According to Harries, the promotion of domestic trade and industry grew by no less than 800 percent during that period of time; the volume of FC projects doubled; and the volume of export financing grew fivefold. In 1973 the number of KfW employees exceeded 600 for the first time and reached 920 by 1989.

Reunification and Global Challenges: 1990 and Beyond

In the 1990s the KfW, a child of World War II, had to deal with the war's ultimate aftermath. After the fall of the Berlin Wall in 1989, a large portion of the financing offers was directed at projects aimed at rebuilding the eastern German economy. As early as March 1990 the KfW opened an office in Berlin again after its previous one had been closed at the end of 1974. During that year the bank launched various programs: a start-up program for companies owned nationally by the German Democratic Republic (GDR); an environmental program; a program for mid-sized East German firms; a municipal loan program for the new East German Länder; and a housing modernization program. By the end of 1990 the KfW's financial commitments to the new East German Länder reached DM 4.2 billion, and over two-thirds of all investment loans channeled into the domestic economy went there.

However, the biggest deal in the history of the KfW was made when the German government agreed to spend DM 7.8 billion in subsidies on the construction of new homes in the Soviet Union for officers of the USSR army leaving eastern Germany. Over half a million Soviet soldiers and civilians stationed in the GDR in 1989 had to be transferred back to the Soviet Union by the end of 1994. In December 1992 German Chancellor Kohl agreed to spend additional DM 550 million to co-finance this ambitious project. More than 45,000 dwellings, together with the necessary technical and social infrastructure (from power stations to playgrounds), were built in the Soviet Union in only four years. Other KfW programs were launched to give former members of the Soviet army a civilian professional training, and to enhance living conditions for ethnic Germans in the former USSR. In 1992 the KfW also started coordinating Germany's economic consultation activities for Central and Eastern European countries. In the following years coordination agencies were opened in Moscow, Kiev, and Minsk. In 1996 the KfW granted a DM 1 billion loan to the Russian foreign trade bank for financing projects of mutual interest.

In 1994 the KfW merged with Staatsbank Berlin, the central bank of the former GDR. Effective October 1, 1994, the federal finance minister transferred the assets and liabilities of the Staatsbank Berlin to the KfW. After the merger the bank's equity capital was raised to DM 7.23 billion and its staff grew to 1,615. KfW's sectoral business was reorganized and an advisory council for promotional measures in the new Länder set up. With the year 1998 two amendments of the German Banking Act went into effect which placed the KfW on a level with the federal government as a borrower, and the government became legally liable for funds raised by the KfW and for associated derivatives business.

In 1992, 90 percent of the KfW's financial commitments resulted from self-refinanced programs. In 1998 the American subsidiary KfW International Finance, issued Euro-bonds for $1 billion while the parent company at home issued global bonds worth DM 4 billion--the largest issue in the bank's history. In 1998 KfW's commitments for domestic economic promotion totaled DM 48.8 billion; DM 13.1 billion were committed to export and project financing; DM 2.7 billion were budgeted for developing countries; and DM 400 million were set aside to finance advisory and other services. Total commitments reached DM 65 billion in 1998, compared with DM 28 billion in 1989. KfW's balance sheet totaled DM 315 billion in 1998, and the bank's net income was DM 452 billion. Of the DM 69.6 billion in funds raised in 1998, less than one-tenth came from public budgets. A big challenge KfW faced in 1999 was the conversion of its business to the new EURO currency.

Principal Subsidiaries: KfW International Finance Inc. (United States).

Further Reading:

"FOCUS-Gulf Air Secures $350 Mln Loan for Plane Buy," Reuters, June 13, 1999.
"Germany's KfW to Fund Indian Renewable Energy Projects," AsiaPulse News, March 19, 1999.
Harries, Heinrich, Financing the Future: KfW--The German Bank with a Public Mission, Frankfurt am Main: Fritz Knapp Verlag, 1998.
Kemp, Peter, "A Growing Emphasis on Environment," MEED Middle East Economic Digest, September 5, 1997, p. 12.
"KFW: Policy Push as the Price of Support," MEED Middle East Economic Digest, November 4, 1994, p. 10.
"KfW spürt Investitionsboom," Die Welt, May 6, 1999.

Source: International Directory of Company Histories, Vol. 29. St. James Press, 1999.

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