The future of DFI model


Economics • Economics

Eps 1: The future of DFI model


Charting the trendline of DFI growth from 2000 until now, DFIs should have surpassed $100 billion in annual investment for the first time between 2015 and 2016.
Given current attention on the role of private in global development, DFI commitments will play a growing role in the years to come.
All views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Rhonda Romero

Rhonda Romero

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The Global Future Council on Development Finance, convened by the World Economic Forum and composed of representatives of the United Nations, the World Bank, the International Monetary Fund, the IMF, and other international financial institutions, focuses on innovative ways to address systemic challenges that limit the flow of development finance. The Council, which brings together representatives of governments, private sector organisations, civil society groups, non-governmental organisations, business and academia, considers that traditional approaches to financing development are not sufficient to address the real challenges facing countries at national level.
Change is needed, and we are moving from a closed system to an open system of strategic financing approaches, in which country consultants attach greater importance to the need to mobilize private capital and scale, to open systems and strategic financing approaches, in which countries and their advisors must address the needs of mobilizing private capital.
Accordingly, development finance institutions (EFIs) are trying to use their resources to improve outcomes in these areas, attract more private investment and improve the impact of financing on development. In a report published today, the Council proposes four ways in which countries can meet the challenge of increasing the level of development finance needed to achieve the Sustainable Development Goals.
In this context, the systematic review on which this article is based addresses the following questions: What is the role of DFI in the financing for development model and its impact on development? As we approach these issues, we focus on the additionality that Dfi could create in terms of growth and poverty, and draw conclusions from the findings to help development finance institutions align their investments to maximize the impact of their financing on growth, poverty reduction, and development outcomes.
This creates a vicious circle in which fragility discourages private investment, stifling economic growth and ultimately sustaining poverty levels, and thus poverty.
The technology sector, eager to expand its product coverage, can help the world move closer to achieving Sustainable Development Goals. The sector was financed by the World Bank, the International Monetary Fund (IMF), the European Union (EU) and the United Nations.
Today, emerging markets are approaching a new tipping point, adjusting to new technologies decimating their growth models rather than helping them grow. Development finance instruments, which are a key component of the development finance system in developing countries, enable development and financial institutions to make effective investments in sustainable development and generate profits. This will ultimately lead to more money going into development finance, "Zelikow said.
DFIs are on the rise, here's a quick overview of why they can't be ignored, and why the future of development finance models is important.
JPMorgan Chase has shaken up the world of development finance by announcing that it will become the first commercial bank to establish a joint venture with J.P. Morgan Chase & Co. in the United States. The aim is to prove "that development financing is a profitable business area for the Institute, and thus to sustainably expand its presence and attract new capital to the sector," says Zelikow. J & P Morgan acts as an intermediary, which is responsible for settling trades and then distributing them to other investors, rather than keeping them on its own balance sheet.
The new Development Finance Facility is expected to provide up to $100 billion a year for development activities, but the Green Climate Fund has struggled to raise $100 billion for climate-related projects in developing countries. To clarify, the UN estimates that the annual shortfall to achieve the Sustainable Development Goals (SDGs) will be around $5-7 billion a year by 2030, with an additional $2.5 billion a year shortfall.
All countries in the world have joined the Global Goals and recognized the need to attract private capital to finance these goals through the Addis Ababa Agenda for Action.
The development finance community has made significant progress over the last four years and a number of innovative financial instruments and platforms have been created to mobilise private capital for sustainable development. Perhaps the most notable advance has been the growth of blended finance, which has stimulated additional sources of private capital by combining commercial investment with public resources, thereby jeopardizing the sustainability of development projects in developing countries. Although most of them have themselves been sustainable in recent years, they need to diversify their sources of financing and ensure that the structure of liabilities is consistent with the assets they hold that are sustainable in the long term. Many stakeholder initiatives are being launched to help address these key challenges.
Last but not least, development finance institutions need to review their institutional suitability and business model in order to increase their impact on development while remaining financially sustainable. They should pursue sustainable strategies, management and implementation capacities that support the long-term sustainability of their business models and the development of a sustainable financial model.