A significant new report on investing in financial institutions in frontier markets has been published as part of the “Foundations of Growth” series by the Africa Resilience Investment Accelerator (ARIA). The research was authored by Michael Coates and Philippe Belot of GBRW, with review and additions by ARIA.
The report provides insights into the challenges and opportunities for development finance institutions (DFIs) operating in frontier markets across Africa. These markets, characterised by fragile governments, weak institutions, macro-economic instability, and high poverty levels, present unique challenges that require tailored investment approaches.
The report highlights several key characteristics of financial sectors in frontier markets, including low levels of financial intermediation, limited experience in SME and agricultural finance, and the pressing need for local currency solutions. The research emphasises that financial institutions in these markets often lack capacity to meet DFI requirements for risk management.
Drawing from past DFI activity, the report cautions against overly prescriptive qualification criteria that inhibit customer origination while acknowledging that loosening credit standards would increase defaults. It stresses that equity investments can improve corporate governance and that credit without technical assistance often underperforms.
The report recommends several approaches for effective investment, including developing products tailored to local conditions, focusing on SME lending, creating instruments to reach the agricultural sector, and combining financing with technical assistance. The authors advocate for partnerships with private sector development programs and simplified success measurement frameworks.
This research, funded by British International Investment (BII), provides a roadmap for DFIs seeking to balance development impact with their responsibilities to taxpayers while unlocking the growth potential of frontier markets in Africa.