Tri Hita Karana Working Paper for Development Finance Institutions: The Role of DFIs and their shareholders in building back better in the wake of Covid-19

This paper reflects the current thinking of the THK community and will require further consultations with DAC Donors and DFIs regarding how to move forward. The introduction outlines the predicted impact of the Covid-19 crisis for developing countries, in particular MSMEs, which act as the backbone of their economies. It demonstrates the critical need to use development finance in order to recalibrate these economies back towards achievement of the sustainable development goals (SDGs) and 2030 Agenda. What follows in the first section is an examination of the initial DFI response, including action taken to support existing and new clients through the maintenance of local presence and greater collaboration. The second section outlines current structural constraints that prevent DFIs from harnessing their full development potential, including balance sheet concerns, limitations on the use of catalytic blended finance, as well as general risk aversion and a tendency towards conservative lending practices. The third section highlights what needs to change, including the creation of better enabling environments, the strengthening of local partnerships and the mobilisation of private finance at scale to invest in MSMEs, with a focus on sustainability and resilience, as well as gender. The final section suggests how such reforms could be realised, most notably in the creation of a Covid-19 stretch fund. Finally, the conclusion distils the findings of the paper into recommendations for stakeholders across DFIs and their shareholders, with a view to triggering discussions amongst stakeholders.