How development finance institutions can play a catalytic role in the 2030 agenda

18 December, 2017

Original source:  Development Finance

Twenty-five years ago, seven bilateral European development finance institutions (DFIs) dedicated to the private sector in developing countries formed a group devoted to exchanging views and experiences, co-investing and harmonising standards at a high level.

Back then, development policy did not focus on private sector development at all. DFIs were rather small and not really considered an important component of development finance. Since 1992, several new DFIs have been established in Europe, and today, the European Development Finance Institutions (EDFI) represents 15 European DFIs.

Their combined portfolios have grown from approximately US$2 billion 25 years ago to close to US$50 billion in 2017. Countries outside Europe have also strengthened their bilateral DFIs and, most recently, Canada has decided to create its own institution. International Finance Corporation and the private arms of the regional development banks have also gained considerable strength. It is very clear that DFIs are becoming a significant and rapidly growing actor in financing sustainable development.

When we look back, we have to ask what DFIs’ key achievements have been. A quarter of a century ago, investments in emerging markets were at very low levels compared to today. It is worth highlighting a few of the specific industries in which DFIs showed support, places no other investors dared venture. When DFIs started financing mobile phone networks in Africa two decades ago, they were the only ones investing in this sector and in these economies. At the same time, many doubted the relevance of financing this industry in Africa. Mobile phones were deemed a luxury good that would deprive people from the income they needed to acquire basic needs. We now know how mobile phones have completely changed people’s lives by improving access to information, creating innovative ways of doing business and bringing access to banking services in remote areas.

DFIs have been key to building the private equity industry in emerging markets, providing seed funding to several hundred new fund managers, helping the industry grow at least 10-fold in the past 10-15 years, providing risk capital to small and medium-sized companies and at the same time fostering environmental, social and governance standards. Financial inclusion is critical to support the growth of MSMEs, whose contribution to job creation and income growth is indispensable. Thanks to DFIs that have made significant investments in micro-finance institutions, this industry has become a worldwide industry worth multiple billions.

The Sustainable Development Goals (SDGs) dramatically raise the bar for of us and also for the private sector in development finance. All DFIs are compelled by their mandate to contribute to the SDGs by creating decent jobs, financing the renewable energy revolution and ensuring sustainable land use. The work to develop strong local capital markets and robust financial institutions is meanwhile far from complete in many developing countries. DFIs are seeking ways to meet increasing expectations. They must keep growing their financial resources and play an even more catalytic role in the mobilisation of private capital, especially that of institutional investors.

This is where blended finance, for example, has the high potential to increase developmental impact by enabling investors to go further than they would otherwise manage within their own capital regulations. Together we need to mobilise about US$2 trillion by crowding in commercial investors if we are to reach the SDGs by 2030. To achieve this objective, we must develop more scalable and bankable projects, especially in infrastructure and SME finance. The challenge is to finance these in local currencies to avoid transferring the currency risk to the clients.

And we can only succeed in each one these objectives if we bring together all the partners in the development finance community, financiers, business, governments and NGOs, to collaborate and offer solutions that meet the needs of the private sector and the developing countries where we invest.

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