The vehicle for extending development finance is called development financial institution (DFI) or development bank.
A DFI is defined as “an institution promoted or assisted by Government mainly to provide development finance to one or more sectors or sub-sectors of the economy.
The institution distinguishes itself by a judicious balance as between commercial norms of operation, as adopted by any private financial institution, and developmental obligations
it emphasizes the “project approach” – meaning the viability of the project to be financed – against the “collateral approach”; apart from provision of long-term loans, equity capital, guarantees and underwriting functions, a development bank normally is also expected to upgrade the managerial and the other operational pre-requisites of the assisted projects.
Its relationship with its clients is of a continuing nature and of being a “partner” in the project than that of a mere “financier”
A Development Finance Institution (DFI) is a financial organization that provides long-term financing and other types of financial support to projects that promote economic development and social progress in developing countries. DFIs are typically owned by governments, international organizations, or a combination of both.
DFIs provide a range of financial products and services to support development projects, including equity, debt financing, guarantees, technical assistance, and risk management services. DFIs often focus on projects in sectors such as infrastructure, agriculture, healthcare, education, and energy, which are critical for economic growth and poverty reduction.
DFIs play a crucial role in mobilizing private investment and financing for development projects. They often operate in challenging environments where private investors may be hesitant to invest due to factors such as political instability, weak institutions, and limited access to finance.
Moreover, DFIs are often able to provide more flexible and patient capital than traditional commercial banks, which can be crucial for long-term development projects that require significant upfront investments and may take several years to generate returns.
DFIs also play an important role in promoting sustainable development and environmental sustainability by incorporating environmental and social considerations into their investment decisions.
Development finance institutions use direct loans, loan guarantees, equity investments, and a variety of other products to support and enable these investments—and to mitigate political and commercial risk.
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