Development finance institutions : a discussion of donor experience

A recent review of donor evaluation reports of DFI projects shows, however, that these intermediaries have had and may continue to have considerable difficulty achieving these ends. Three particular problems are highlighted. (1) DFI-directed credit programs have encountered serious problems in reaching targeted beneficiaries, especially the informal sector and marginal farmers. (2) The poor financial and management performance of many DFI's has caused some donors to question their sustainability. (3) DFI's have not proven effective in strengthening Third World financial markets due to increasing competition from commercial banks and other long-term credit sources and the restrictive financial policies of many host countries. Moreover, donors themselves have operated at cross purposes by supporting a multiplicity of DFI's aimed at a wide range of economic sectors. The result has been confusion among sub-borrowers and inefficient use of loan funds. It is recommended that donors: (1) adopt more coordinated responses to promoting DFI's; (2) encourage DFI's to lower the administrative cost of loans, charge real positive interest rates, and emphasize credit and financial market development; (3) reconsider the objective of DFI self-sustainability; and (4) support policy reforms to increase competition among DFI's.