Development finance institutions grapple with their growing role

WASHINGTON — Small agencies that work alone, siloed off from the rest of a country’s development work: That’s how development finance institutions might have been described just a decade ago. But DFIs have gained prominence as the role of the private sector has been accepted and because their work can be put in direct service of meeting the Sustainable Development Goals.

As the paradigm shifted from a focus on social service support and grant-based official development assistance to one more driven by private sector development, countries have turned to development finance institutions to provide solutions to help create jobs, spur economic development, and reduce poverty. As a result, the number of institutions has proliferated.

The United Kingdom has directed a big influx of capital toward its DFI, the CDC Group. Canada created a DFI in 2018, and the U.S. Congress will launch a new DFI this year with more capabilities and double the investment capacity than its current institution. Other countries, notably Australia, are considering creating DFIs.

In 2017, bilateral DFIs were managing just over $65 billion in assets, according to data gathered by Devex, up from about $41 billion in 2012. That’s a roughly 57 percent increase in a five-year period.

Growth is clear in Europe, according to the Association of Bilateral European Development Finance Institutions, or EDFI. There were about seven active DFIs when the association for European DFIs was founded some 25 years ago; today there are 15. And the balance sheets of those DFIs tripled between 2005-2015.

“They did things that were relevant for development, but a number of them were financial institutions living a quiet life without any significant profile in any development policy of their countries,” said Soren Andreasen, the general manager at EDFI. “Many countries didn’t have economic development or private sector development policy as part of their aid strategy and none had [a] policy on how DFIs fit into private sector strategy.”

As DFI budgets grow and they play a more prominent role in development, they are also facing more scrutiny. DFI leaders are grappling with how to increasingly invest in the least developed or low-income countries, how to ensure they are collaborating rather than competing, and how to effectively mobilize private capital rather than crowd it out. Amid calls for them to be more transparent, and to prove their investments are achieving development results, they are also working on new ways to measure their impact.

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Source: Devex


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