The Role of DFls in the Emerging 3.0 Responsible Funding Landscape – Responsible Corporate Governance and Beyond

Development Finance Institutions (DFIs) have been a major funder in microfinance since the 1990s when they took over from donors and brought in a more commercial approach, coupled with much needed capacity building at all levels of the financial system. In their role as catalysts, DFIS have been successfully crowding in the private sector which has brought a fundamental change and diversity to the microfinance funding landscape. Most importantly, local deposits have emerged as the main source of funding which is encouraging as financial intermediation to a large extent replaces the channeling of cross-border funds.

In equity finance, private social investors, mostly in the form of Microfinance Investment Vehicles (MIVs), increasingly take the place of DFIs and their standard- setting role in the governance of MFIs. Governance is perceived as a key risk in microfinance, as shown in the Microfinance Banana Skins surveys, with weaknesses prevailing in main governance areas such as clear ownership structure, disclosure and transparency, and the role and responsibilities of the board. Equity investors are not fully capitalizing on the opportunity to strengthen MFI governance. They must more actively engage in and beyond the board room and ensure adequate qualifications, commitment and continuity of their board nominees.

Several trends visible today are likely to gain momentum and shape the microfinance funding landscape of tomorrow: (i) public funding and subsidies for microfinance will decline further, (ii) local funding and especially local deposits will become the dominant funding source, (iii) more investors will shift from debt towards equity finance (iv) the diversity of funders and their comparative advantages provide a fertile ground for complementarity, and finally (v) the DFIs will continue to play a role as catalysts and standard setters, albeit in a more indirect role from the back seat while MIVs and other intermediaries will be more in the driver seat.