Question

Assess any five (5) reasons why it is essential to have development financial institutions (DFIs) in an economy to complement the banking industry. (750 - 900 words)

Answer 1

The Development Financial Institutions (DFI) have been created with the view of economic and social development. The DFI performs banking as well as development function.

It complement the banking sector in an economy which has a crucial role in economic and social development through verities of services. Even though banks failed to assist the needy sometimes. DFI support them with credits and other programs. This stimulate the priority sectors like infrastructure, agriculture etc.

The role of DFI has enhanced after the sub-prime financial crisis-2008. During the crisis period the banking institutions were in a difficult situation, they faced difficulties in providing credit facilities, then DFI played a crucial role in lending. This efforts by DFI enhanced the recovery of economy from the crisis.

When the entrepreneurs face problem to raise fund from market the DFI help them with providing credits and guarantees.

It encourage risky business by providing funds where ordinary commercial banks are risk-averse in such situations.

The DFI evaluate and encourage projects by funding them.

When a DFI alone can’t fund to a project where the investment and risk is too high then they form a consortium with commercial banks to provide large fund and control risk.

NB: These are the hints to write the essay. You have to elaborate the hints.