State-Owned Development Finance Institutions (SDFI): Political Economy and Performance Assessment

This paper reviews the reasons for establishing state-owned development finance institutions (SDFIs) and evaluates their performance against original expectations. The paper:

• Highlights the lack of consensus regarding meaningful assessment criteria used in evaluating SDFI performance;
• Suggests reliance on an evaluation methodology based on two primary assessment criteria:
  • The outreach to a well defined target clientele;
  • The subsidy dependence of the SDFI concerned.

It then recommends that the debate, on whether SDFIs still have any development finance role to play, should be shifted to focus on using this assessment framework that calls for estimating the cost, subsidies and defining and evaluating the products delivered by SDFIs.

The paper also describes the transformation of a previously loss-making profit center in Indonesia into a very successful one that provides financial services to the low-income rural population. It does this to demonstrate that many of the modes of operations that explain successful performance can be applied in servicing other target clientele such as the urban poor, provided that necessary adjustments to the different socio-economic and cultural values of these clients are appropriately made.