Role Reversal Revisited: Are public development institutions still crowding out private funders?

In little more than 20 years, Microcredit has grown into a $100 billion plus activity. This makes it one of the rare development success stories. Such a stunning rate of growth was made possible, because the poor who receive these credits use them to create wealth. That newly created wealth in turn allows borrowers to repay their loans with interest. Unlike typical development projects, which depend on subsidized funding, microcredit pays for itself. It can thus access capital markets to fund its growth.

This report looks at the respective role of official development finance institutions (DFIs) and private lenders in funding microfinance institutions (MFIs). It starts from the premise that as the microfinance industry matures, its growth can and should be financed by private resources. The role of DFIs is to pave the way for those resources: DFIs should only go where private lenders don’t yet dare to tread and act as catalysts for private funding but they should not compete with it.

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