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Developing the Inclusive Business landscape – What's the role of Development Financial Institutions?

11. Feb 2016

Historically, DFIs (Development Financial Institutions) have tended towards public sector investments mainly in the form of infrastructure. However, in the recent past, conversations and investments have begun to move towards the private sector and focusing on inclusivity. Do DFIs have the capabilities and characteristics to develop the IB landscape?

DFIs have gained several capabilities as a result of their investments over many years

Given these capabilities DFIs have the potential to effectively support developing the IB landscape

 

Support Bucket

Support from DFIs

How does it help?

Finance

Develop a country level fund for IB investments, with ticket size from $500k-3million

Eg SNV Inclusive Business Fund in Vietnam

 

IBs struggle to access financing from investors, especially during the post-pilot stage (when attempting to scale), due to a lack of strong investment networks, a lack of specific interest in IB from investors, and a mismatch in IB and investor expectations

 

Earmark portion of DFI portfolio for IB investments, and invest this capital with IB-tailored terms

 

When capital is available, it is often not appropriate for IBs (e.g. large ticket sizes, high return expectations, short repayment period, high collateral) due to the low risk and high return appetites of both impact and commercial investors

 

Technical Assistance

Establish a country-specific accelerator or incubator for IBs (including those that currently do not meet DFI criteria)

Generates future pipeline of investments that align with DFI investment criteria and improves business acumen and general capacity of IB

 

Create a fund which IBs can access to pay for advisory services and TA

IBs have a limited ability in accessing quality advisory services, and therefore making these services more accessible to IB

 

Incentivize current investees to become more inclusive through training (and potentially follow on funding)

 

Moves companies that already align with DFIs’ risk and return preferences towards inclusivity

Accreditation

Accredit or certify businesses as inclusive

 

Creates legitimacy for IBs, and sets an industry standard for inclusivity and also reduces search and due diligence costs for investors by creating a proxy for ensuring inclusivity

Eg Rainforest alliance – organic certification

 

Develop impact benchmarks to create IB industry standards

 

Reduces time and resource investment from IB on evaluating and reporting impact

Creates clearer metrics for impact investors

 

Knowledge Sharing

Develop knowledge products spotlighting successful IB investments (and their terms) and laying out a business case for IB investment

Disseminates best practices for replication, and establishes early industry standards on returns, timelines, etc.

Promotes IB investment among impact and commercial investors, reducing the perceived risk

 

Develop a publicly available skills toolkit for IBs, providing tips and resources for setting up, piloting and scaling

 

Develops broad business acumen skills (market entry, business model refinement, governance, etc.)

Improves IB capacity to define their financing needs and pitch to investors

 

Convening

Create a network of investors and IB aggregators to serve as a pipeline of IB investments

Generates deals for DFIs and other investors without increasing search costs

Eg Business Call to Action

 

Build a platform for profiling specific IB investment opportunities and interested investors

Generates deals for DFIs and other investors without increasing search costs

Creates an investor network for IBs

Eg Microventures venture fund

 

Build a platform for innovation sharing between IBs globally

 

Allows IBs to establish partnerships

Host convening events, such as conferences, matchmaking and networking events for IBs (along with other relevant players)

 

Creates opportunity for cross-sharing between IBs to build capacity and create industry norms

Creates network of IBs and others, such as investors

 

Build a platform to facilitate local partnerships between NGOs, government, donors and IBs

 

Leverages local expertise of NGOs, gov’t and donors to help IBs enter new markets and refine inclusive models, products/services

But DFIs can be fairly bureaucratic and risk averse

There are certain characteristics of DFIs, that must be considered before DFIs gear up to support inclusive businesses more aggressively, as DFIs tend to be risk averse and rigid based on their size, structure and mandate

1.DFIs are large and bureaucratic multilateral institutions

  • Decision making can be long and arduous, as processes tend to be precise and rigid due to many internal checks and balances that must be satisfied in an effort to ensure fairness and objectivity
  • Governments and others are willing to collaborate with DFIs due to their perceived credibility and relative lack of political bias resulting from their structure
  • DFIs can partner and liaison closely with other bilateral and multilateral agencies given their legitimacy and similar mandates

2. DFIs were established for the purpose of investment and have a mandate to be financially sustainable in those investments

  • DFIs are often well funded with sizeable investment portfolios, making them significant players in the sector
  • DFIs are often risk averse in their selection of investment opportunities in an effort to ensure sustainable returns in risky developing markets (often manifesting as a preference for public sector infrastructure investments or large private sector investments)

3. DFIs are mandated to increase economic growth in developing countries, and must maintain a AAA rating to ensure low financing cost

  • Aim to maintain a low-risk portfolio (prefer riskier geographies but stable investments)
  • Teams primarily set up for infra projects (~9/10 investment officers at one DFI are infra bankers)

DFIs need to adapt internally to overcome these challenges so that they are better suited to support the IB landscape

1. DFIs must develop Internal alignment to support IBs

-DFIs need to incorporate IB into their strategic objectives

-They need to measure their performance on social as well as financial issues and communicate this performance internally and externally

2. Investments in IBs can be promoted by creating incentives or separate teams to promote IB deals

-Setting performance incentives for IB deals secured

-Hiring IB focused teams as regular investment officers are typically focused on large infrastructure deals