The changing role of DFIs

Development Finance Institutions
are central to the eradication of extreme poverty by 2030 as envisioned in the
Sustainable Development Goals. Closer home, DFIs are an effective tool for realizing
Vision 2030; when deployed strategically. These are government-backed
institutions that invest in private sector projects in priority areas that have
high potential for jobs, economic growth and tax collection.

To do this effectively, there is a growing
need to mobilize resources not just in million, but in billions and trillions. At the same time, traditional official
sources are limited, and unlikely to increase dramatically in the coming
years. Also, with increases in
population, government resources are stretched over competing social needs such
as education, health and security. The implication is that a mix of aid,
domestic government resources and private sector capital is needed to achieve
results.

The key strength of DFIs is the
ability to catalyze investment in the private sector beyond their own resources,
and therefore fill in the resource gap. This is important, because it is now
well understand that economic growth will come from the private sector. Studies
have shown that 9 out of 10 jobs created in the developing world are in the
private sector. The sector therefore
needs to be properly supported in a friendly investment and business
climate. When well deployed, DFI are a powerful
and precise development tool to deliver long term sustainable development
impact.

Access to finance, especially
long-term finance, remains a major constraint to the benefits that the private
sector can deliver. There is therefore need
for policymakers to support DFIs and to deploy them to help drive private
sector investment. This is particularly for
priority areas such as agribusiness, leather and textiles.

DFIs need to engage more fully in
helping to design, or even take the lead in designing private sector
development. To be more effective, DFIs
need to evolve and expand their capabilities to respond to emerging policy
goals. On the other hand, policymakers
need to understand how and where DFIs need to be deployed.

Four areas are key to successful
deployment of DFIs. One, a higher risk tolerance. The risk tolerance of DFIs goes
beyond the conventional banking practice. Two, greater willingness to accept, in most cases, lower returns with a
greater focus on development impact than profit. Three, the need to deploy more
resources in form of finances and staff, in order to play a larger role and
take on new tasks. Four, improvement in ability to disseminate lessons learnt
and to measure impact.

As the policy landscape is changing
to put more emphasis on private sector investment, jobs and growth, DFIs have a
unique and strategic role to play. Policymakers need to support DFIs and to
deploy them to help solve more and emerging economic challenges.

Karen is the Managing Director of
IDB Capital (formerly Industrial Development Bank)

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