A Guide to Development Finance Institutions
Development finance institutions are a possible alternate funding solution for large-scale development projects in areas and industries that private investors may otherwise struggle to access.
Development Finance Institutions are organisations that reinvest the profits they make from successful investments into new socially impactful projects.
Whether you’re an aspiring property developer or an investor looking to finance property or infrastructure projects – a DFI may be the option.
Development Finance Institutions serve as catalysts for both economic growth and infrastructure development.
In this brief guide, we’ll explore how DFIs operate, eligibility requirements, and the benefits they can offer to individuals or companies that fit the criteria.
What are Development Finance Institutions?
DFIs are specialised financial institutions that focus on providing long-term funding for development projects, particularly in areas where traditional banks may be reluctant to lend.
For example, the UK’s development finance institution BII is owned entirely by the British government and invests exclusively in businesses based in Africa, Asia, and the Caribbean.
They address gaps in the financial sector and can facilitate sustainable economic growth. DFIs focus on developing infrastructure and large-scale projects that can provide long-term financing for transportation, energy, and housing initiatives.
With community empowerment at heart, DFIs can offer flexible repayment terms, which often give businesses in underdeveloped areas the chance to succeed in the long term.
By bridging gaps between traditional institutions and necessary community development, DFIs can aid sustainable economic development worldwide.
DFIs have adapted their strategies over time and expanded their focus beyond infrastructure projects. They now actively support sectors such as agriculture, healthcare, education, and small and medium enterprises (SMEs).
How do DFIs work?
Development finance institutions aim to foster long-term economic growth in areas that may otherwise struggle to get investment. They identify target countries and sectors for investment based on growth potential and development needs.
Through thorough due diligence and risk assessments, they ensure the feasibility of specific projects and weigh any potential risks against the positive outcomes.
These institutions operate at a national or regional level and typically cater to the funding needs of governments, public institutions, and private entities involved in infrastructure development.
In terms of how they are funded, DFIs borrow from governments and insurance companies, pension funds and sovereign funds, and, lastly, other international financial institutions. They may also issue bonds and securities to finance their operations.
They offer a range of financing options tailored to meet project-specific requirements and closely monitor and evaluate project outcomes and impacts.
What types of projects do DFIs fund?
Development Finance Institutions fund projects across sectors. They are crucial in financing infrastructure such as; transportation, energy, water, sanitation, media, and urban development.
DFIs can also provide small and medium enterprises (SMEs) funding for their growth and expansion.
In the agricultural sector, DFIs finance agribusiness, farming, irrigation systems, and rural infrastructure development projects.
Regarding more community-based projects, DFIs can encourage financial inclusion by supporting and improving financial services in underserved areas.
As well as this, they prioritise projects that address climate change and promote sustainability.
Additionally, DFIs invest in healthcare and education sectors, funding projects like hospitals, clinics, schools, vocational training centres, and educational infrastructure.
Are DFIs limited to supporting developing countries?
Development Finance Institutions are not limited to supporting developing countries.
While DFIs often play a significant role in financing projects in developing nations, they can also operate within the UK and Europe.
The main focus of all DFIs is to provide long-term financing for infrastructure and large-scale projects that may be challenging to fund through traditional sources.
DFIs in developing countries primarily aim to address the infrastructure gaps and financing needs that hinder economic growth.
These institutions help fund critical sectors such as transportation, energy, water, media, etc.
By providing financial support and expertise, DFIs contribute to creating essential infrastructure that stimulates economic activity, improves living standards, and has a positive community impact.
In developed countries, such as the UK, DFIs may have a different set of priorities.
They may focus on supporting projects that promote sustainability, innovation, and economic competitiveness.
These projects could include renewable energy initiatives, technology advancements, urban development, or large-scale property development projects and upgrading existing infrastructure.
What will securing finance from a DFI cost?
Securing finance from development finance institutions involves various costs - subject to the scale and scope of any given property or infrastructure project.
Firstly, interest rates with DFI financing are usually competitive and will be based upon project risk, borrower's creditworthiness, and market conditions (amongst other factors). Interest rates will vary depending on the specific institutions.
Fees are another aspect to consider. DFIs may charge application, due diligence, commitment, and loan administration fees.
These fees help cover the costs of evaluating and managing the loan application.
DFIs will also impose collateral requirements. Borrowers need to provide assets or financial guarantees as collateral. The valuation and associated costs of delivering collateral should be taken into account.
Legal and advisory costs are incurred when engaging professionals to navigate the DFI funding process. These experts can assist in structuring the financing arrangement, reviewing contracts, and ensuring compliance with DFI requirements.
Depending on the project and DFI policies, insurance and risk mitigation measures may be necessary. Costs can arise from obtaining property insurance, project performance guarantees, or implementing environmental and social risk mitigation plans.
With all this said, paying close attention to the specific terms and conditions of DFI funding, including the associated costs, during the application and negotiation process is important.
What are the eligibility criteria for accessing DFI funds?
Development Finance Institutions provide funds for infrastructure and large-scale projects.
The criteria for such DFI funds depend on factors such as; project scope, financial viability, creditworthiness, and benefits to the community.
A key part of the eligibility is demonstrating the project’s financial sustainability. A solid business plan and repayment strategy are essential.
DFIs usually prioritise projects that positively impact economic growth, job creation, social development, and sustainability goals.
Some DFIs may have specific programs or initiatives dedicated to property development, while others may have a broader focus on infrastructure projects.
It is important to refer to the individual DFI's guidelines to check their funding criteria for large-scale property development projects before the outset.
What’s the difference between DFIs and CDFIs?
CDFIs primarily focus on community-level, regional financing and support. In contrast, DFIs have a broader mandate and focus on funding large-scale infrastructure projects that encourage economic growth at a national or global level.
Additionally, CDFIs are regulated in the UK by the FCA, whereas DFIs are regulated by the government or multilateral development institutions.
How do DFIs measure the impact of their projects?
DFIs evaluate project impact through social and economic indicators, environmental sustainability, and alignment with development goals.
They monitor progress, conduct impact assessments, engage stakeholders, and promote transparency for positive societal, economic, and environmental outcomes.
Do DFIs provide grants or loans?
DFIs may provide some of their funding as grants, particularly for projects or initiatives with vital social or environmental objectives.
However, most DFI financing is in the form of loans. Once the money has been repaid, it can be reinvested in future development projects.
DFI loans can be provided to governments, public entities, private companies, financial institutions, and other eligible borrowers.