Role Reversal Revisited

By January 10, 2012 No Comments

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Role Reversal Revisited: Are Public Development Institutions Still Crowding Out Private Investment in Microfinance?

In little more than 20 years, microcredit has grown into a $100 billion plus industry. This makes it one of the rare development success stories. The nascent microcredit experiment matured into a financially sustainable and profitable model that could then access capital markets to fund its stunning growth.

This report looks at the respective role of development finance institutions (DFIs) and private lenders in funding microfinance institutions (MFIs). While DFIs are expected to pave the way for private funders to support MFIs as the industry matures, “Role Reversal,” a 2007 report published by MicroRate and sponsored by Calmeadow, indicates that this is not the case. The 2007 paper observed that DFI lending was heavily concentrated towards the most creditworthy MFIs, leaving investment in smaller or riskier MFIs to private microfinance funds. This new report re-examines the situation and finds that after five years, DFIs not only continue to lend fund mature, credit-worthy MFIs, but have also become more risk averse, use subsidize pricing to compete with private funds, and have increased their share of financing for microfinance funds.

Written by: Damian von Stauffenberg, Daniel Rozas. Jan 2012.