Development Finance
Core concepts
Development finance uses capital to create economic and social returns alongside financial returns. Candidates must understand multilateral and bilateral development banks, concessional vs non-concessional finance, blended finance, guarantees, technical assistance, and impact measurement. Know the additionality principle (the finance would not have happened otherwise), catalytic capital, and the tension between development mandate and financial sustainability. Understand SME and MSME finance, financial inclusion, and de-risking instruments.
Traps in questions
- Concessional vs commercial: concessional terms (below-market rates, longer tenors, grace periods) are a feature, not a sign of weak credit.
- Additionality: a project that would proceed anyway lacks additionality, even if it is worthy.
- Blended finance: public or philanthropic capital mobilises private capital; it is not simply subsidy.
- Guarantees: a guarantee transfers risk, not cash; it is contingent.
- Impact vs output: outputs are activities (loans disbursed); impact is change (jobs, access). Do not conflate them.
Worked example / rule of thumb
Rule of thumb: "Development finance asks two questions: would this happen without us, and does it create measurable change?" Example: A development bank offers a partial credit guarantee that lets a commercial lender extend SME loans it would otherwise decline. The guarantee is catalytic because it mobilises private capital and the lending is additional. If the commercial lender would have lent anyway, the guarantee adds little additionality and the examiner expects that critique.
Exam discipline
Separate inputs (capital, TA), outputs (disbursements), outcomes (borrower behaviour), and impact (societal change). State the instrument class before evaluating it.