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Plenary 5 – State-Owned Development Finance Institutions (SDFI): The Political Economy and Performance Assessment

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This paper reviews the reasons for establishing state-owned development finance institutions (SDFIs) and evaluates their performance compared to original expectations. It highlights the lack of consensus regarding meaningful assessment criteria used in evaluation the SDFIs’ performance. The paper further suggests, in the absence of a full cost-benefit analysis that is only rarely carried out to rely on an evaluation methodology based on two primary assessment criteria: the outreach to a well defined target clientele and the subsidy dependence of the SDFI concerned. It further recommends that the debate on whether SDFIs still have any development finance role to play should be shifted somewhat to focus instead on using this assessment framework that calls for estimating the cost, subsidies, and defining and evaluating the “products” delivered by SDFIs.

The paper further describes the drastic transformation of a previously loss-making, poor performing profit center in SDFI in Indonesia about twenty years ago to a very successful one that provides financial services to the low-income rural population. This profit center succeeded in achieving subsidy independence, substantial outreach and high profitability as a result of implementing the ‘best practices’ in rural financial intermediation. There are many lessons to be learned from the experience gained in transforming a poor performing, loss-making SDFI into the world flagship of the rural micro-finance industry. This unprecedented success is better appreciated considering that it is very costly to serve low income and poor rural clients. The provision of low value loans and savings accounts with frequent installments for loan repayments and saving withdrawals entails relatively high administrative costs per $ outstanding loan portfolio (OLP). The lack of traditional collateral and reliable accounting data, as well as questionable creditworthiness and debt servicing capacity of these clients further adds to the financial risk involved. Many of the modes of operations that explain this successful performance can be applied in servicing other target clientele such as small and medium sized enterprises (SME) and urban poor, provided that necessary adjustments to the different socio-economic and cultural values of these clients are appropriately made.

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