Publication: Public Financial Institutions Crowding out Private Investment in Microfinance

http://www.microrate.com/pdf/rolereversal.pdf

Role Reversal: Are Public Development Institutions Crowding Out Private Investment in Microfinance?
The rapid growth of foreign private lending to microfinance institutions (MFIs) in the last several years has led to a surprising reversal of roles between government-owned development institutions and private lenders. Development institutions (International Financial Institutions -“IFIs”) are concentrating their loans in the strongest MFIs, leaving private lenders to look for opportunities among smaller, riskier borrowers. Development institutions are “crowding” private lenders out of the best MFIs. In the last three years, the volume of international private lending has exploded: in 2005 alone, outstanding loans doubled to nearly $1 billion. IFIs publicly claim to take risks the private sector is unwilling to take. One would therefore have expected government-owned development institutions to shift their lending to more risky MFIs as soon as private lenders entered the field. The opposite is happening. Development agencies are today heavily concentrating their funding in the largest and most successful MFIs, exactly the target investment market of private investors.