Development finance institutions lift bets on emerging Asia financial services sector
Development finance institutions (DFIs) are increasing their investments in financial services across emerging Asian markets, particularly India and Nepal.
These investments aim to generate returns while also advancing environmental, social and governance (ESG) objectives.
At the launch of British International Investment's (BII's) 2023 annual review on July 17, CEO Nick O'Donohoe highlighted the UK's $9 billion development fund's efforts in India.
He emphasised BII's focus on developing non-bank lenders to complement the traditional banking sector.
BII
“SMEs need more flexibly than banks’ rigid terms regarding [things like] repayment. Investment should flow more to non-bank lenders as well as to banks. We’ve vividly seen the [benefits] in India,” he said.
BII’s investment in Utkarsh Small Finance Bank, into which BII first invested in 2014, has grown from a small Indian microfinance fintech to a viable small-finance bank, using data-driven model to make loans to SMEs, across 22 states in India, which listed on the National Stock Exchange of India and BSE (formerly Bombay Stock Exchange) in 2023.
BII's investment in Utkarsh Small Finance Bank exemplifies its long-term approach. Initially investing in 2014 when Utkarsh was a small Indian microfinance fintech, BII has supported its growth into a viable small-finance bank.
Utkarsh now employs a data-driven model to lend to SMEs across 22 Indian states. In 2023, the bank listed on both the National Stock Exchange of India and BSE (formerly Bombay Stock Exchange).
India currently dominates BII’s Asia allocations, accounting for $2.38 billion, more than three times what it invests in Egypt, its second largest target country.
The review restated the fund's commitment to playing “an important role in offering climate finance in India”, particularly in areas where capital markets are slower to take risk and provide capital at scale. Its other South Asian allocations are Bangladesh, with $325 million, Pakistan, $173 million, Sri Lanka, $39 million.
NON-BANK INTERMEDIARIES
In May, Agnes Dasewicz, COO of the US International Development Finance Corporation (DFC), the world’s largest sovereign development fund, emphasised the importance of non-bank lenders.
“Remember banks are not the only intermediaries, non-banks are deploying all kinds of funding," she said while addressing the annual conference of Norfund, Norway’s $4 billion development finance fund in Oslo.
DFC
“So, we are providing guarantees on this lending capital to local intermediaries who understand local businesses better than we do.”
Dasewicz highlighted DFC's work in Iraq as an example of their broader strategy. She explained that the fund invests in both bank and non-bank businesses to enable them to take on more risk. This approach, she stated, supports "greater economic and political stability" not only in Iraq but in other regions where DFC operates.
O’Donohoe pointed to the work of Invest for Impact Nepal (IIN), a collaboration between Development Finance Institutions (DFIs), including BII and impact investors.
“Over the past three years … with support from [the] programme … DFIs’ investments in the financial services industry have surged from $98 million to $625 million. This is at a time when foreign direct investment in the country hit a decade low in 2023,” noted BII’s annual review, published on July 17.
Deep Karki, IIN’s technical director, speaking at the July BII event, explained that the number of financial services investments from development funds had increased from 3 in 2020 to more than 20, representing a total of $563 million, of which $463 million had filtered through directly to SME finance.
At the July BII event, IIN's technical director Deep Karki reported a significant increase in development fund investments in financial services, rising from just three in 2020 to over 20 currently, totalling $563 million. Notably, $463 million of this sum has been channelled directly into SME finance.
GOVERNMENT TIES
The IIN iniative also resulted in a memorandum of incorporation (MOI) between DFIs and Nepal's government, promoting cooperation on financial sector development and influencing changes in government policy.
Until recently, BII, the Dutch Entrepreneurial Development Bank (FMO), and the Swiss Agency for Development Cooperation (SDC), were the only development banks in the country, operating only in agri-business, IT and banking, Karki noted.
He added that a lack of foreign investment was the biggest single factor holding back the development of Nepal’s economy, highlighting a substantial financing gap in the economy, ranging from $3 billion to $4 billion.
Karki also outlined several challenges impeding the attraction of both development bank funding and private investor capital.
"Nepal's private sector generally doesn't generate opportunities for development banks and impact investors, like other [countries] do. 90% of enterprises need small investments in local currency. There are very few export-oriented businesses, foreign exchange [risk] is a challenge, the [small] ticket sizes mean investments are generally not attractive."
“The hydropower sector, typically seen as [having] the most scalable opportunities, has had only one major project attract foreign investment,” he said, referring to Upper-Trishuli-1, a hydropower development to which BII provided funding in 2019.
Karki noted the project had faced delays created by regulatory and environmental factors.
Government data estimates that every year in Nepal roughly 500,000 workers join an economy that provides only 20,000 new jobs.
The result is that many must work abroad: in the year to April, 550,000 Nepalis received permits to work abroad, with the UAE and Saudi Arabi the most popular countries.