Enhancing the development impact of Financial Institutions with British Investment International (BII)

Gareth Davies

The potential for Financial Institutions (FIs) to promote inclusive economic growth, poverty reduction, and access to basic services in developing countries has long been recognised. To realise this potential, development organisations such as Development Finance Institutions (DFIs) and donor-funded aid programmes use a range of different Technical Assistance (TA) and grant instruments to enhance the development impact of FIs. But what is the best way to use these instruments, which FIs should receive support, and is there any evidence to suggest these tools actually work?

At Tandem we’ve been working with British Investment International (BII), the UK’s DFI, to answer these questions. We reviewed nearly 80 external documents and undertook over 30 interviews with a range of DFIs, donors, and TA providers. We identified seven key lessons:

Look beyond the Financial Institution

Depending on the context, critical barriers to FI practice change can lie outside the FI itself. For example, due to the high levels of regulation and supervision in the financial sector, the regulatory landscape was commonly cited as a constraint to financial product innovation. TA/grants programmes that are able to work both at the level of individual FIs and at the wider sector-level are more likely to generate sustainable, transformational impact, particularly in countries with weak or underdeveloped financial sectors. Even if the TA/grant project does not have the scope to work at a sector-level, understanding beyond-the-firm constraints is still important in order to identify risks and potential barriers to project success.

Understand and build the FI’s incentives for change

When selecting potential TA/grant recipients, one of the most critical success factors is the incentive for change within the FI. Due to the critical importance of maintaining a reputation for prudential management and the high levels of regulation and supervision, many retail FIs are relatively risk-averse, making it particularly challenging for TA/grant providers to catalyse innovation and change. TA/grant projects should therefore be prepared to build and reinforce the incentives for FI practice change, based on a well-reasoned business case. CEO buy-in is vital, although given the organisational size and complexity of many FIs, buy-in at multiple levels also seems to be important.

Prioritise know-how over money

Although it varies by FI-type and stage in the business cycle, what holds back most FI practice change is not financial constraints but knowledge and know-how (as well as the organisational structures and processes to put new knowledge into action). Consequently, providing non-financial support (e.g. advice and expertise) is generally seen as more effective than just providing grant funding, although combining non-financial and financial support in order to buy-down risk can also be effective in catalysing innovation in risk-averse FIs.

Tailor the TA/grant to the FI

FIs can be complex organisations, offering a range of different financial services to a range of different clients, and facing a range of different constraints and opportunities. Comprehensive, tailored packages of TA/grant support, based on a detailed understanding of the recipient FI, are therefore more likely to promote sustained FI practice change than short-term, standardised TA/grant packages.

Aim for deeper institutional change through long-term engagement

Given the relative complexity of many FIs, promoting a particular practice change is often more effective and sustainable if addressed from a wider institutional perspective.  This means targeting fundamental organisational change rather than a specific single practice change, which requires longer-term engagement that can touch on a range of different functions and departments. For example, within the product innovation space, supporting financial institutions to become customer-centric organisations (which could involve departments from product design, to marketing, to IT) is seen as more effective than narrowly supporting a particular product or technology.

Think and act local

Due to the complexity of financial systems and their varying levels of development in low-income countries, it is advantageous to have a local presence when designing and delivering TA/grant projects.  This allows project teams to build a better understanding of the local market and context, maintain good industry networks, and be more responsive and adaptive.  For similar reasons, and given the organisational complexity and risk-aversion of many FIs, using local consultants in the project team who can navigate the organisation and build long-term relationships with their FI counterparts will also typically deliver better results and value for money.

Be flexible and adaptive

The organisational complexity of FIs and the dynamic nature of financial systems means that being flexible and adaptive is a critical success factor when delivering TA/grant support.  This means being prepared to change the TA/grant package over time as needs and opportunities within the FI change, and in response to what is working – and not working – on-the-ground.  This requires projects to invest in a good monitoring and evaluation system that provides regular feedback and useful insights to project teams and the FI itself – however, there is a limit to what FIs can be expected to measure (and measure well).  It also requires flexibility in project work-plans and budgets.

To see what else we found, read the full report here: https://www.bii.co.uk/en/news-insight/insight/articles/making-effective-use-of-grants-and-technical-assistance-to-support-financial-institutions/