The Retreat of Development Donors from Grassroots Financial Intermediation

Strategic Insights -

Over the past three decades, Non-Bank Financial Institutions (NBFIs) have played a pivotal role in extending financial services to underbanked regions across the Global South. Supported by bilateral and multilateral donors, these institutions have helped democratize access to finance, particularly in rural areas and among low-income populations. However, recent trends indicate a marked decline in donor interest and investment flows into NBFIs, raising critical questions about the future of grassroots financial intermediation. This realignment of donor priorities raises concerns about the potential impact on financial inclusion, institutional development, and the livelihoods of millions of people in developing economies.

Key Takeaways:

  • The donor community's interest in NBFIs peaked in the 1990s and early 2000s, with institutions like the Consultative Group to Assist the Poor (CGAP), the International Fund for Agricultural Development (IFAD), and USAID leading technical and financial assistance.
  • By 2015, total assets in the global microfinance sector had grown from USD 4 billion to over USD 100 billion, with donor contributions instrumental in achieving this scale.
  • Donors are withdrawing from NBFIs due to a shift in their priorities towards fintech-enabled ecosystems, digital public infrastructure, climate finance, and large-scale policy-based operations.
  • NBFIs must adapt to remain relevant in the evolving development finance architecture by prioritizing digital transformation, aligning with climate and SDG priorities, improving risk governance and institutional integrity, and aggregating or forming strategic partnerships.
  • A CGAP study (2020) showed that over 80% of MFI clients in South Asia were women, contributing to improved household welfare and education outcomes.
  • In Nigeria, donor-backed programs helped transform over 1,000 microfinance institutions into regulated entities between 2006 and 2015 through the efforts of the Microfinance Department of the National Deposit Insurance Corporation with technical assistance from CGAP.

Statistics:

  • The percentage of adults with access to formal financial services in developing economies rose from 42% in 2011 to 71% in 2021, according to the World Bank Global Findex Report (2021).
  • Donor contributions to NBFIs dropped by 26% between 2019 and 2023, according to OECD-DAC (2023) official development assistance statistics.
  • Fewer than 15% of active financial inclusion projects in Sub-Saharan Africa now directly support NBFIs, as noted in CGAP's 2024 Annual Funder Survey.
  • Total assets in the global microfinance sector grew from USD 4 billion in 2000 to over USD 100 billion by 2015, according to MIX Market data.
  • Over 30% of licensed MFIs in Sub-Saharan Africa operate with negative net assets, according to a World Bank (2023) assessment.

Sources:

  • CGAP. (2024). Annual Funder Survey 2024. www. cgap.org
  • OECD. (2023). Official Development Assistance Statistics: Sectoral Data. www.oecd. org
  • World Bank. (2023). Financial Inclusion and the Sustainability of NBFIs in Africa.
  • IFC. (2022). Digital Financial Services and the Future of Inclusive Finance.
  • MIX Market. (2020). Trends in Microfinance Performance 20002020
  • GSMA. (2023). Mobile Money State of the Industry Report.
  • FMO. (2023). Annual Impact Investment Report. MicroLead (UNCDF). (2021). Digitizing Microfinance in West Africa: Lessons and Case Studies.
  • Greenlight Planet and USAID Power Africa. (2022). Scaling Energy Access through Microfinance.
  • SPTF. (2023). Universal Standards for Social Performance Management.