Development Finance Institution

Development finance institution (DFI) is generic term used to refer to a range of alternative financial institutions including microfinance institutions, community development financial institution and revolving loan funds. These institutions provide a crucial role in providing credit in the form of higher risk loans, equity positions and risk guarantee instruments to private sector investments in developing countries. DFIs are backed by states with developed economies. In 2005, total commitments (as loans, equity, guarantees and debt securities) of the major regional, multilateral and bilateral DFIs totalled US$45 billion (US$21.3 billion of which went to support the private sector).

DFIs have a general mandate to provide finance to the private sector for investments that promote development. The purpose of DFIs is to ensure investment in areas where otherwise, the market fails to invest sufficiently. DFIs aim to be catalysts, helping companies implement investment plans and especially seek to engage in countries where there is restricted access to domestic and foreign capital markets and provide risk mitigation that enables investors to proceed with plans they might otherwise abandon. DFIs specialise in loans with longer maturities and other financial products. DFIs have a unique advantage in providing finance that is related to the design and implementation of reforms and capacity-building programmes adopted by governments.