Development Finance Institutions: Where, how and why do they invest?

Author: Nepal Invests Platform

Original Publication Date: 21st September 2021

Where do development finance institutions want to invest?

Development finance institutions (DFIs) usually invest in harder, fragile and emerging markets – investing in challenging markets goes to the heart of the mandate of a DFI, and they typically invest where their capital can have the greatest impact to bring positive and long-term economic, social and environmental change. Likewise, DFIs are willing to take more commercial risks on their investments than most private investors. This is why they prefer to make investments in those companies and contexts that are often deemed too insecure for commercial investors.

In the past DFIs invested in more developed markets and in financially viable companies, but more recently they have shifted their focus to the least developed countries that have more challenging investment climates. DFIs usually rank countries on the basis of investment difficulty, which considers measures like access to finance, ease of doing business, and GDP per capita. They then target their portfolios to deliver significant impact by achieving economic prosperity.

DFIs invest across many sectors. Some major priority sectors are real estate and construction, education, financial services, food and agriculture, health, infrastructure and manufacturing. These sectors have the strongest potential to meet DFI needs, including by creating the most jobs for the capital invested, addressing a lack of enabling infrastructure, increasing efficiency, increasing opportunities for the poorer parts of society, and/or contributing towards many of the Sustainable Development Goals. [1]

DFIs also ideally want to invest in countries where there is a relatively well-defined regulatory environment and relatively stable political landscape, reducing the overall risk profile of the portfolio. They need to have a clear understanding of issues such as foreign direct investment (FDI) thresholds, restricted sector lists, instruments they can use and the registration/operational process as a whole.

What do DFIs want from their investments?

As DFIs mostly invest in challenging investment climates, they tend to consider a number of different aspects when investing. These include those shown in the image below:

As CDC Group explains, ultimately DFIs can take more risks than commercial investors as they “…want to pave the way for other private investors to invest in these markets.” If successful, they can demonstrate the possibilities open to other private sector investors in that market: “Eventually DFIs want to exit an investment a step closer to that market or sector attracting enough private capital to be sustainable and self-sufficient.”[2]

How do DFIs invest?

DFIs use different kinds of instruments to invest, including debt, equity and guarantees. This can either be through direct investment, or an intermediary. Debt is often considered the most feasible and least risky instrument, and in Nepal regulatory uncertainty around equity tends to make debt investment preferable. Equity deals must get the approval of the central bank – the Nepal Rastra Bank – but the process for approval can be long and not always clear, leaving investors uncertain about what to expect. There are many examples of debt financing of larger investments in infrastructure and energy projects in Nepal, including the Asian Infrastructure Investment Bank’s (AIIB) US$112.3 million loan to Nepal in 2019 to increase access and improve the quality and efficiency of electricity supply across the country’s western regions. However, equity is being tested in small amounts. In 2019 CDC Group invested US$12 million in WorldLink, the largest private sector internet service provider in Nepal and this was CDC Group’s first equity investment in Nepal. In 2016 the Dutch Entrepreneurial Bank (FMO) made an equity investment of more than US$26 million in NMB Bank, one of the leading commercial banks of Nepal. FMO is providing technical assistance to NMB Bank to help it become a market leader in managing E&S risks and to have in place a proper and strengthened corporate governance structure, setting an example for Nepal on sustainable finance.

‘Ticket size’ is also relevant for DFI investments. Typically, DFIs want to invest where investees can absorb large investments (US$10 million or more). However, this does not mean that they only make larger investments (large ticket sizes) as they also invest in SMEs with smaller ticket sizes through intermediaries, including banks and PE/VC funds. This is the case in Nepal where there are relatively few organisations capable of attracting large DFI investments. Thus, SMEs and local businesses are funded via PE/VC funds instead of direct investment from DFIs. For example, recently a private equity fund, Business Oxygen (Bo2) backed by the International Finance Corporation (IFC) – a DFI – invested US$500,000 in MedPro International Nepal. MedPro is an out-of-hospital healthcare service provider led by a cardiac surgeon and healthcare entrepreneur in Nepal and this investment is one of the first of its kind in the medical sector of Nepal.

Likewise, larger DFI investments are normally deployed in sectors like energy (particularly hydropower), tourism and hospitality. For instance, in 2013 the European Investment Bank (EIB) financed €55 million for the construction and operation of the Tanahu Hydropower Plant, which was the first EIB loan in the renewable energy sector in Nepal. Similarly, EIB with the support of Kreditanstalt Fuer Wiederaufbau (KFW) invested around US$53 million in the Chilime-Trishuli hydropower transmission line. In addition to this, IFC and FMO together invested US$5.5million in Nepal’s hospitality and hotel sector to develop Fairfield Marriot, a three-star hotel in Thamel, in order to expand access to tourism infrastructure: international standard hotels such as the Fairfield Marriott property help emerging markets like Nepal attract business and leisure travelers.

What does this mean for future DFI investment in Nepal?

Nepal is one of the emerging markets in south Asia and lies 51st out of 179 countries on the Fragile State Index. With a huge gap in provision of services like healthcare and education and poor infrastructure, it is amongst the poorest countries in the world and currently ranks 142nd out of 187 countries on the Human Development Index. For impact investors like DFIs these gaps present an opportunity to achieve their social mandate – albeit in a difficult market – and more DFIs interested in expanding their investments in Nepal.

Pre-2013 DFI investment in Nepal was limited, but since then the trend of DFI investment has increased. This has been driven by DFIs like CDC Group, FMO, Finnfund, Swedfund and the IFC which are now increasingly investing in different sectors of Nepal. Though some DFIs are ‘sector agnostic’, the majority of them have prioritised their investments in agribusiness, tourism/hospitality, ICT, manufacturing, financial services (banks, PE/VC and FinTech) and green energy, all of which help further development – and importantly – create long-term impact. In the context of Nepal, DFIs cannot invest in prohibited sectors like primary agro-production, cottage and small-scale industries, personal service businesses, liquor, tobacco and other sectors which have a negative environmental impact. To understand more about DFI investment in Nepal to date, please visit Nepal Invests’ first blog post.

DFI investment into Nepal is clearly on an upwards trend and increasing slowly, but challenges remain. This includes policy and regulatory barriers around FDI; small investment pipelines (including for SME financing); limited understanding of and demand for growth capital; and the need to standardise and encourage an approach to ESG principles in sectors including banking and hydropower.

To help continue the momentum of increased DFI investments into Nepal, Nepal Invests Platform will be promoting this agenda under its five pillars. Please see our website and follow us on LinkedIn for updates on these activities.

[1] See

[2] See



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