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      Public development institutions are still crowding out investment in microfinance

      Public development institutions are still crowding out investment in microfinance

      In a recent report, "Role Reversal Revisited", the microfinance rating agency Microrate argues that development finance institutions (DFIs) not only continue to hinder the growth of the industry by undercutting commercial competition but, also, that they have greatly increased the scale on which they do so.

      “This is a serious charge,” admit the authors, who first revealed this phenomenon in a report “Role Reversal” published in 2007.  

      The argument runs like this. At present, the industry meets only 10% of potential demand. If a billion people are to gain access to microcredit, rather than the 100m or so at present, there is no alternative to commercial funding. The role of DFIs is to pave the way for those resources: “DFIs should only go where private lenders don’t yet dare to tread” say the authors, adding that “the DIFs themselves and the governments that control them agree with this premise.”

      But that’s not what is happening. To quote one statistic from the report, between 2008 -2010 just 10 large MFIs absorbed nearly half of all DFI lending.

      The competition from DFIs became even more intense after MFI growth came to a standstill in 2008: DFI lending continued to grow rapidly while private funds “struggled with unprecedented levels of liquidity.”

      What should they be doing? Good examples include the setting up of MFX, a developing market currency hedging facility that would not have been possible without DFI support, or taking first-risk positions in investment funds that target 2nd and 3rd tier MFIs. 

      How come things are going wrong, in a field where everybody has the best motives? The report identifies two principle reasons for the role reversal, and proposes some solutions. ER