In the last thirty years,Non-Bank Financial Institutions (NBFIs)have acted as essential channels for financial access, particularly in regions with limited banking services and in the Global South.
Backed substantially by bilateral and multilateral donors, charitable foundations, and development finance institutions (DFIs), non-bank financial institutions (NBFIs) including microfinance institutions (MFIs), savings and credit cooperatives (SACCOs), leasing firms, and digital lenders have made a significant impact in delivering financial services to areas not covered by conventional banking systems.
However, current developments suggest asharp decrease in donor attention and capital inflows into NBFIs, as the development capital moves towards more extensive digital public infrastructure, fintech-driven ecosystems, climate financing, and major policy-oriented initiatives. This shift in donor focus brings up important questions:Why are contributors stepping back from NBFIs? What effect has their previous assistance created? And what steps can NBFIs take to stay significant within the changing landscape of development finance?
Historical Background: The Emergence of Donor-Supported Non-Banking Financial Institutions (1990–2015)
The focus of the donor community on non-bank financial institutions became significant in the late 1980s and early 1990s, driven by the understanding that formal banks lacked both the capability and motivation to cater to low-income customers, particularly in rural regions. Organizations like the Consultative Group to Assist the Poor (CGAP), the International Fund for Agricultural Development (IFAD), and USAID spearheaded a surge in technical and financial support designed to enhance the capabilities of microfinance institutions and other non-banking entities.
By the early 2000s, microfinance had evolved into a worldwide initiative. As per data from the Microfinance Information Exchange (MIX Market), the total assets within the global microfinance industry expanded from $4 billion in 2000 to more than $100 billion by 2015. Support from donors, either directly or via development finance institutions such as IFC, KfW, and FMO, played a key role in reaching this level of growth. These financial contributions aided in improving institutional professionalism, promoting regulatory frameworks, and setting up credit information systems in developing economies.
For example, in Africa, Kiva, UNCDF, and DFID (now FCDO) provided assistance to rural SACCOs, women-focused financial programs, and training for the shift towards digital finance. In Latin America, the Inter-American Development Bank (IDB) made significant investments in NBFIs that focused on indigenous populations and informal business owners. In South Asia, BRAC, Bandhan, and SKS expanded greatly with backing from donors.
Generated Impact: Financial Inclusion and Institutional Development
The results of these donor-NBFI collaborations were substantial:
Financial InclusionAs per the World Bank Global Findex Report (2021), the proportion of adults who have access to formal financial services in developing economies increased from 42% in 2011 to 71% in 2021. Non-Banking Financial Institutions played a major role in this growth, especially in regions such as Bangladesh, Kenya, and Bolivia.
Gender Inclusion:Several donor initiatives focused on women, resulting in a growing presence of female clients in microfinance portfolios. According to a CGAP report (2020), more than 80% of MFI clients in South Asia were women, which helped enhance family well-being and educational achievements.
Institutional DevelopmentDonor grants and technical support allowed non-banking financial institutions to create effective credit evaluation systems, digitalize their processes, and comply with regulatory requirements. In Nigeria, programs supported by donors facilitated the transformation of more than 1,000 microfinance institutions into licensed entities from 2006 to 2015.
Policy and RegulationDonor support enabled governments to establish regulatory systems for tiered licensing, agent banking, and institutions that do not accept deposits.
The agreement in this stage was evident: NBFIs played a vital role in making finance more accessible, and donor funding was a key driver of this objective.
The Change in Strategy: 2020–2025 Reduction in Donor Attention towards NBFIs
After 2020, a slow but noticeable change in the focus of donors became apparent. According to data from the OECD-DAC (2023), there was a 26% decrease in ODA (Official Development Assistance) allocated to non-bank financial institutions between 2019 and 2023. Likewise, CGAP's 2024 Annual Funder Survey indicates that less than 15% of ongoing financial inclusion initiatives in Sub-Saharan Africa currently provide direct support to NBFIs.
A number of elements have contributed to this shift:
The Emergence of Fintech and Digital Financial Systems: Increasingly, donors are seeing fintech platforms as more efficient and data-driven tools for promoting financial inclusion. In contrast to traditional NBFIs, fintech companies provide real-time insights, reduced incremental costs, and the capacity to combine payments, savings, and credit within one platform. For instance, the Gates Foundation, which previously heavily supported MFIs, now directs the majority of its digital finance funding towards mobile money systems, such as MoMo in Ghana and M-Pesa in Kenya.
Need for Systemic and Digital Public Infrastructure: After the pandemic, donors have focused more on developing digital public goods, such as interoperable payment systems, digital identification, electronic Know Your Customer (e-KYC) processes, and data protection frameworks. These initiatives are considered essential for enabling a wider transformation of the financial sector. As a result, funding is now being directed towards central banks, fintech regulators, and entities that support the ecosystem, rather than specific institutions.
Issues Related to Environmental Responsibility and Growth Potential:Even after years of assistance from donors, numerous NBFIs have faced challenges in attaining financial self-sufficiency. Elevated operational expenses, poor governance, and severe debt issues (particularly in India and Cambodia) have led donors to doubt the effectiveness of their funding. As per a World Bank (2023) report, more than 30% of registered MFIs in Sub-Saharan Africa function with negative net worth.
Climate and Sustainable Finance LeadershipThe emergence of climate finance has shifted donor funds toward green bonds, funding for renewable energy, and agriculture that is resilient to climate change. Non-banking financial institutions, typically concentrating on working capital or microloans, are seen as not matching this new area of development, unless they change their investment focus to include green lending.
Risk and Governance Failures: A number of prominent governance failures, such as instances of fraud within East African SACCOs and high-interest rate practices in South Asia, have damaged the reputation of certain NBFIs. This has led cautious donors to become more risk-averse.
What Non-Bank Financial Institutions Should Do to Regain Investor Funding
Although the donor community might have reduced its focus on NBFIs in recent years, the essential developmental requirement for local financial intermediaries is still significant. NBFIs need to change to show their relevance and flexibility in this evolving environment. The following routes are important:
Digital Evolution and Data Planning:NBFIs should speed up their digital transformation, going beyond just implementing core banking systems to incorporating data analysis, credit evaluation algorithms, and mobile-driven service provision. Donors are increasingly expectingimpact identification and fund visibility, which digital systems are capable of providing.
Initiatives such as MicroLead (UNCDF) in West Africa demonstrate how donor funding tends to be more easily directed towards NBFIs that have strong digital infrastructure and clear performance metrics.
Consistency with Climate and SDG Objectives:NBFIs should "green" their loan portfolios by supporting clean energy microenterprises, climate-friendly agriculture, or projects related to water and sanitation. For example, Greenlight Planet's collaboration with Microfinance Institutions in East Africa to provide financing for solar kits has drawn climate-related funding from USAID’s Power Africa initiative and GIZ.
Risk Management and Organizational Ethics:Enhancing board governance, internal controls, and audit practices is essential. Investors are ready to fund organizations that can manage capital effectively. Participating in credit databases, releasing verified financial reports, and implementing social performance standards (such as SPI4 or SPTF's Universal Standards) can rebuild trust.
Aggregation and Cooperative Models:A major issue is fragmentation. Non-Banking Financial Institutions (NBFIs) can draw in donors by establishing federations, cooperatives, or shared-service platforms that create cost efficiencies. The National Association of Microfinance Institutions (NAMFI) in Peru serves as a solid example, demonstrating how pooling donor-funded digital infrastructure can lead to success.
Collaborations with Financial Technology Companies and Ecosystem Stakeholders:Instead of opposing fintech companies, NBFIs ought to establish partnerships, leveraging their local networks and credibility to promote fintech offerings, while fintechs manage the digital processes. Hybrid approaches are more appealing to donors looking for broader influence.
Demonstrating Development Outcomes:NBFIs should move past just financial inclusion statistics to demonstrate results in areas like livelihoods, gender equality, youth job creation, and climate adaptability. This involves funding impact assessment systems that match structures like IRIS+, SDG Indicators, and GIIN measures.
Conclusion
The exit of investor funds from non-bank financial institutions isn't an indication of their importance, but rather a sign of changing focuses within the development finance sector. In a landscape where digital technologies, climate challenges, and large-scale changes are at the forefront, NBFIs need to evolve or face becoming outdated.
By adopting digital transformation, supporting environmental and social objectives, enhancing oversight, and advancing service models through collaborative strategies, NBFIs can establish themselves as essential participants in the inclusive financial ecosystem. Although donors might be changing their focus, with appropriate adjustments, NBFIs can once more serve as effective investment avenues within the global development financing system.
References
CGAP. (2024). Annual Funder Survey 2024. www.cgap.org
OECD. (2023). Official Aid Statistics: Sector-Based Information. www.oecd.org
World Bank. (2023). Financial Access and the Long-Term Viability of Non-Bank Financial Institutions in Africa.
IFC. (2022). Digital Financial Services and the Tomorrow of Accessible Finance.
MIX Market. (2020). Microfinance Performance Trends from 2000 to 2020.
GSMA. (2023). Mobile Money Industry Status Report.
FMO. (2023). Annual Impact Investment Report.
MicroLead (UNCDF). (2021). Digital Transformation of Microfinance in West Africa: Insights and Examples.
Greenlight Planet & USAID Power Africa. (2022).Expanding Energy Availability via Microcredit.
SPTF. (2023). Common Guidelines for Managing Social Performance.
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