Development Finance is a specialised sector of the financial industry, and aims to bridge the gap between commercial investments and State development aid.
Development Finance Institutions (DFIs) typically invest in either public or private-sector projects, or sometimes both. Whereas commercial banks provide finance for businesses to invest in relatively low-risk projects in the industrialised countries, development banks play a hugely important role in servicing the investment needs of developing countries and emerging markets.
The financial support DFIs bring to relatively high-risk projects help to mobilise the involvement of private capital, bringing in such diverse actors as commercial banks, investment funds or private businesses and companies. In addition, development banks often act in co-operation with governments and other organisations in providing funds for technical assistance, feasibility studies, and management consultancy, as well as serving as channels for policy implementation in the areas of responsible governance, compliance with environmental regulations and good business practices in relation to staff and the wider community.
Development Finance Institutions are specialised development banks that are usually majority owned by national governments.
DFIs come in two types:
1) bilateral and
The bilateral DFIs serve to implement their government's foreign development and co-operation policy. The multilateral DFIs, also known as International Finance Institutions (IFIs), usually have greater financing capacity and provide a forum for close co-operation between governments. Both types of institutions retain strong operational independence.
DFIs provide funds, either as equity participation, loans or guarantees, to foreign or domestic investors. These investors will initiate or develop projects in industry fields or in countries in which the traditional commercial banks are reticent to invest in without some form of official involvement. DFIs are equally fundamental in the SME sector (small and medium enterprise) where micro loans, traditionally viewed as high-risk, form the bulk of investment activity.
DFIs source their capital from national or international development funds or benefit from government guarantees which ensures their credit-worthiness. DFIs can thus raise large amounts of funds on the international capital markets and provide loans or use equity on very competitive terms, frequently on a par with commercial banks. Their efficiency and expertise make them self-sustaining and even profitable, and consequently form an extremely valuable bridge as public-private partnerships. The investment activities of DFIs, which focus mainly on economic performance and return on investment, not only mark a departure from the past in a bid to reduce dependence on development aid, but encourage the entrepreneurial spirit of millions of individuals and companies worldwide on both sides of the economic divide.