Changing development finance market space

JP Morgan announced in January 2020 that it is establishing a new Development Finance Institution. A new operator providing finance to underserved markets is welcome.

More financial and human capital are needed to develop and deliver solutions for growing populations, increasing consumption, depleting natural resources and negative effects of climate change. Estimates of the annual financing needed to reach the Sustainable Development Goals in low income countries range from USD 350 billion estimated by Professor Jeffrey Sachs^[1] to USD 2.5 trillion estimated by UNCTAD^[2].

Many of the DFIs have existed for decades and operated much with the same mission: providing patient capital for the private sector in high risk and underserved markets with the aim to mitigate the gap in available finance in order to generate economic and social development.

For example, CDC in the UK was established in 1948 and the Dutch FMO in 1970. Finnfund was established in 1980 and will this year turn 40. Finnfund is specialized in building a strong investment pipeline primarily in least developed and lower middle-income countries with emphasis on Africa.

The JP Morgan DFI aims to mobilize USD 100 billion annually. If all the finance is additional, this is a significant increase in financial capital for the emerging markets. For example, the European Development Finance Institutions (EDFI) and IFC financing in 2018 amounted to approximately USD 30 billion.

It will be interesting to see whether there is differentiation in the operating model and value proposition of the new JP Morgan DFI. Related to this, important questions have been raised for example by the CEO of CDC, Nick O’Donohoe in a recent blog post on project selection criteria, approaches on impact and directing capital to the most challenging markets.

Another timely aspect is the supply of bankable projects. Availability of capital is not enough to solve the SDG financing gap but supply of bankable projects that meet commercial investment criteria is needed as well. A joint challenge facing all DFIs is the availability of bankable and impactful projects.

Established DFIs have existing networks and the experience needed to source projects. An important question is how the existing and new operators can best work to solve the challenge of bankable project supply to ensure solid investment pipelines in order to close the SDG financing gap.

Karoliina Lindroos
Senior Environmental and Social Advisor

Karoliina Lindroos is Finnfund Senior Environmental and Social Advisor. She is currently on leave to carry out an MBA on Finance and Change Management in Aalto Executive Education Ltd.

_{[1] Sachs et al. (2018). Closing the SDG Budget Gap
[2] UNCTAD (2014). World Investment Report}

Karoliina Lindroos