Competitive Conditions in Development Finance

This paper evaluates the competitive conditions in development finance and the implications for successfully mobilising private sector finance in order to achieve the United Nations Sustainable Development Goals (SDGs). Using a market definition of cross-border development finance, the analysis uses financial data for 61 development banks from FitchConnect from 2010-2019 and applies the Panzar-Rosse test, supplemented with additional tests for market equilibrium, to gauge the competitive conditions. The key finding is that the international development finance market is in long-term equilibrium and is structured as a competitive oligopoly. The implication is that successful mobilisation of private sector finance will require more innovative structural and funding solutions. Crowding-in of private sector banks on existing terms and in large scale is likely to fall short due to lack of profitability and risk appetite. This has direct implications for the ability of the global financial system to deliver the SDGs