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Development Finance Institutions (Dfis) : Fm302 Financial Management in The Pacific Region

Development Finance Institutions (DFIs) are specialized banks, usually government-owned, that invest in private sector projects in developing countries to promote economic growth and job creation. DFIs can be bilateral institutions owned by a single country or multilateral and owned by several countries. DFIs help increase productivity through financing productive projects, introducing new technologies, and supporting activities with backward linkages that create supplier jobs. Studies find DFI investment significantly increases labor productivity and promotes structural economic transformation in developing nations.

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Hitesh Maharaj
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29 views

Development Finance Institutions (Dfis) : Fm302 Financial Management in The Pacific Region

Development Finance Institutions (DFIs) are specialized banks, usually government-owned, that invest in private sector projects in developing countries to promote economic growth and job creation. DFIs can be bilateral institutions owned by a single country or multilateral and owned by several countries. DFIs help increase productivity through financing productive projects, introducing new technologies, and supporting activities with backward linkages that create supplier jobs. Studies find DFI investment significantly increases labor productivity and promotes structural economic transformation in developing nations.

Uploaded by

Hitesh Maharaj
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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FM302

Financial Management in the Pacific Region


Week 5: Lecture 9

Development Finance Institutions (DFIs)


Objectives
• Definition of DFIs
• Importance of DFIs
• Features of DFIs
• Bilateral
• Multilateral
• Role of DFIs in job creation
Development of Development
FIs

https://www.un.org/esa/ffd/wp-content/uploads/2015/08/AAAA_Outcome.pdf
Development of Development
FIs

https://www.un.org/esa/ffd/wp-content/uploads/2015/08/AAAA_Outcome.pdf
Development of Development
FIs

https://www.un.org/esa/ffd/wp-content/uploads/2015/08/AAAA_Outcome.pdf
Development of Development
FIs

• https://www.investopedia.com/terms/s/subsovereignobligation.asp
• https://www.un.org/esa/ffd/wp-content/uploads/2015/08/AAAA_Outcome.pdf
Development Finance Institutions (DFIs)

• are specialized development organizations,


usually in large part owned by national
governments.
• invest in private sector projects to promote
job creases and sustainable economic
growth.

8
Development Finance Institutions
(DFIs)
• National or international finance institution (DFIs) are
specialized development banks or subsidiaries
• set-up to support private sector development in developing
countries
• are usually majority owned by national governments
• source their capital from national and international
development funds or benefit from government guarantees.
• Government guarantees ensures their credit worthiness,
enabling them to raise large amounts of money on
international capital markets

Source:
https://www.oecd.org/development/development-finance-institutions-private-sector-develo
pment.htm
Bilateral DFIs

• Can be independent institutions, such as the


Netherlands Development Company (FMO) -
https://www.fmo.nl/
• Or can be part of larger bilaterla development
banks such as German Investment and
Development Company (DEG) -
https://www.deginvest.de/International-financing/
DEG
/
Multilateral DFIs
• Are private sector arms of international financial institutions (IFIs)
• Established by more than one country and subject to international
law.
• The shareholders are generally national governments, but could
include other international or private institutions.
• They finance projects in support of the private sector mainly through
equity investment, long-term loans, and guarantees.
• Usually have greater financing capacity than bilateral development
banks.
• They also act as a forum for close co-operation among government.
• Have broad mandate to contribute to sustainable development and
combat poverty particularly in low- and middle-income countries.
• Also focus on green finance as part of sustainable development goal
Multilateral DFIs
• Main multilateral DFIs (multilateral development banks) are:
• Africa Development Bank (AFDB)- https://www.afdb.org/en
• Asian Development Bank (ADB) - https://www.adb.org/
• European Bank for Reconstruction and Development (EBRD)
- https://www.ebrd.com/home
• European Investment Bank (EIB) - http://www.eib.org/
• Inter-American Development Bank (IDB) -
http://www.iadb.org/
• International Finance Corporation (IFC) - http://www.ifc.org
/
• Islamic Development Bank (ISDB) - https://www.isdb.org/
• World Bank - https://www.worldbank.org/
Multilateral DFIs
• These institutions' financing activities are conducted in compliance
with specific environmental and social requirements.
• For full details can be accessed from: https
://firstforsustainability.org/sustainability/development-finance-institu
tions/approach-of-other-development-finance-institutions
/ and
• https://globalnaps.org/issue/development-finance/
DFIs promote productivity

• “Productivity is commonly defined as a ratio between the output volume and


the volume of inputs. In other words, it measures how efficiently production
inputs, such as labour and capital, are being used in an economy to produce a
given level of output. Productivity is considered a key source of economic
growth and competitiveness ”

Source: https://www.oecd.org/sdd/productivity-stats/40526851.pdf
Also:
• “Productivity isn't everything, but, in the long run, it is almost everything. A
country’s ability to improve its standard of living over time depends almost
entirely on its ability to raise its output per worker [emphasis added].”

Paul Krugman, Professor of Economics and International Affairs Emeritus at Princeton University and
a columnist for The New York Times. Source: https://
blogs.worldbank.org/psd/productivity-prosperity-long-run-it-almost-everything
Paper The role of development finance institutions
in promoting jobs and structural transformation:
a quantitative assessment
• examines the role of Development Finance Institutions (DFIs)
• Capacity to generate jobs, increase labour productivity and promote structural
transformation
• Argues that DFIs have a significant effect on labour productivity
• Links:
• DFIs affect job creation directly as additional source of finance,
• DFIs can have a direct effect on productivity by supporting
productive projects and hence the influence economic
structure of an economy.
• DFIs can increase country-wide productivity and hence affect
structural transformation by supporting activities that are more
innovative and productive than the average level in the
economy
The role of development finance institutions in
promoting jobs and structural transformation:
a quantitative assessment
• DFIs also create jobs through
• forward and backward linkages
• fostering technical change in companies, with possible spill-over effects for the
sector and the whole economy
• DFIs can support activities (e.g. manufacturing firms) that have indirect
effects through the need for inputs provided by suppliers (backward
linkages).
• This can lead to employment change in suppliers who in turn can generate
spending and employment effects.
• The DFI supported activities can also lead to growth and employment change
upstream.
• Labour-augmenting technical change
• DFIs set economic, social and environmental performance standards,
• DFIs Have representatives on company boards,
• DFIs can direct fund managers,
• DFId can provide technical assistance and act as a port of knowledge through which
investee companies can adopt new product and process innovation.
The role of development finance institutions in
promoting jobs and structural transformation:
a quantitative assessment
• DFIs also catalyze new capital with embodies new technologies and
hence fosters technical change.
• Thus DFIs can increase productivity in the investee company.

• Productivity increases can over time increase productivity in other


companies.
• DFI supported investment in infrastructure (ports, roads, energy) can
increase productivity in a range of firms which can support economic
activities and jobs.
• other firms can learn through linkages and imitation. …
• Spill-over effects depend on a number of factors including policies, institution
and local supplier capacity.
The role of development finance institutions in
promoting jobs and structural transformation:
a quantitative assessment
• Key findings from empirical analysis
• for all low and middle income countries suggest
that the investment value and the DFI over GDP
ratio have a significant impact on labor
productivity
END OF LECTURE

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