In the Shadows of Support: Unintended outcomes of DFIs’ intermediated lending in Africa

Abstract

Blended finance is central to development finance, catalyzing private capital alongside public resources to address global challenges in developing countries. Despite its growing importance, empirical evidence on its ability to leverage private lenders’ credit supply remains limited. This paper addresses this gap by analyzing the lending behavior of supported banks in Africa. Using bank-level data and a comprehensive database of intermediated lending programs offered by major development finance institutions between 2010 and 2021, the study finds that supported banks reduce their lending activity post-program, with a significant 8% decline in loan growth. This phenomenon is attributed to the limited absorptive capacity of recipient banks, which leads them to prioritize new clients at the expense of existing borrowers. Additional analysis suggests that there is no spillover effect to ineligible banks. We also document that the lending activity of supported microfinance institutions remains unchanged.