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Mozambique is entertaining a proposal to establish a development finance institution (DFI), a public sector second-tier lender that could work with a number of lending agencies. What must policymakers keep in mind in evaluating the risks and benefits of a DFI? An overview of the purpose of DFIs and experience with them in developing countries can help answer this question.
Purpose of Development Finance Institutions
The support of enterprise depends on a range of institutions and the existence of a real economy that can sustain debt. Rarely a major element in a country’s overall structure for financing enterprise, DFIs provide credit to underserved but deserving economic sectors by supplementing the panoply of banks and nonbank financial institutions such as cooperatives and lending, leasing, and factoring companies. Industrial development banks, which provide long-term capital to industry, were among the first and largest.1 Other banks focus on agricultural production, housing, and small enterprise.
Many development banks in industrial countries are privately owned. They typically gain their funds on a long-term basis by selling bonds or providing long-term savings facilities. This corresponds to the long-term lending they often conduct. Experience with DFIs in industrial countries is mixed—many have failed or require continued subsidization and their contribution to national growth is controversial. In developing countries they have enjoyed considerable vogue, especially as promoted by the World Bank.
Footnote:
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One of the most prominent, the Credit Mobilier, wreaked havoc on the French economy in the 19th century
but seems to have made its promoters’ fortunes.
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