Role Reversal Revisited: Are Public Development Institutions Still Crowding out Private Investments in Microfinance?

This report examines the roles of official development finance institutions (DFIs) and private lenders in MFI funding. It begins with the premise that microfinance industry growth can and should be financed by private resources as the industry matures and DFIs should pave the way for these resources.The report builds on a 2007 MicroRate report, Role Reversal, which documented DFIs' tendency to avoid risk when lending to MFIs. Role Reversal led many DFIs to pledge themselves anew to a policy of supporting and complementing private funders. The current report reviews whether DFIs have fulfilled their promise, four years later. Findings indicate that DFIs have:

• Not stepped back to make room for private loans;
• Significantly increased their share of foreign loan financing for microfinance funds;
• Become more risk averse;
• Use subsidized pricing to compete with private funders;
• Created Funds that are prone to lend to large, creditworthy MFIs at subsidized rates.

The report highlights the need to complement actions taken by DFI managements by creating an effective dialogue between Funds and DFIs and by encouraging DFIs policy-making bodies to evaluate DFIs effectiveness in supporting private funding for microfinance.