In-country DFIs: Profitability under state ownership

Abstract

The credit landscape in commercial private finance is fast evolving as available funds continue to chase for enhanced returns, for optimised risk acceptance. On the other hand, developing countries, and economies in transition continue to grapple with factors such as public debt, widening fiscal gaps often exacerbated by persistent budget deficits. As a result, governments prioritise provisioning of critical public goods, which then leaves a gap in the financing of less urgent, yet developmentally important investments. This gap is often left to state-owned Development Finance Institutions, or DFIs to fill (UNCTAD, 2019), yet success for these institutions has been generally dismissed (Xu, Ren, & Wu, 2019). This paper appraises the continuing importance of DFIs and analyses factors that drive their sustainability, with the state ownership dynamic in mind. A secondary research approach is taken, predominantly applying the document analysis method, i.e., extant literature from reputable sources on the subjects of state-owned enterprises, development finance, profitability of financial institutions, and firm financial structure. The paper concludes that DFIs are still relevant, and that the type and cost of carefully blended capital available to them is a fundamental determinant of effectiveness in the context of the two-pronged objectives SOEs are known to have. A practical framework by which this can be achieved is proposed.