Developing the Inclusive Business landscape – What's the role of Development Financial Institutions?
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
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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
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Earmark portion of DFI portfolio for IB investments, and invest this capital with IB-tailored terms
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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
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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
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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
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Incentivize current investees to become more inclusive through training (and potentially follow on funding)
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Moves companies that already align with DFIs’ risk and return preferences towards inclusivity |
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Accreditation |
Accredit or certify businesses as inclusive
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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
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Develop impact benchmarks to create IB industry standards
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Reduces time and resource investment from IB on evaluating and reporting impact Creates clearer metrics for impact investors
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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
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Develop a publicly available skills toolkit for IBs, providing tips and resources for setting up, piloting and scaling
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Develops broad business acumen skills (market entry, business model refinement, governance, etc.) Improves IB capacity to define their financing needs and pitch to investors
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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
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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
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Build a platform for innovation sharing between IBs globally
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Allows IBs to establish partnerships |
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Host convening events, such as conferences, matchmaking and networking events for IBs (along with other relevant players)
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Creates opportunity for cross-sharing between IBs to build capacity and create industry norms Creates network of IBs and others, such as investors
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Build a platform to facilitate local partnerships between NGOs, government, donors and IBs
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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