 Municipal Development Funds
Municipal development funds (MDFs) are parastatal institutions that lend to local governments for infrastructure investments. MDFs usually start as an intergovernmental approach to municipal credit supply, structured as parastatal organizations, but then evolve to become financial intermediaries focusing on municipal credit. MDFs do not provide credits exclusively for poverty-alleviation programs. However, they are included in this menu as a financing tool since they can be used for poverty reduction objectives, like basic infrastructure investments in low-income areas and development of marketplaces, schools, and clinics for poor residents. In some cases, MDFs can have special windows for poverty alleviation projects, e.g., provision of services for the urban poor. Two types of MDFs. The first type of MDF, currently more common in the developing world, operates primarily as a substitute for government capital grants to local authorities. These programs supply capital through MDFs at below-market rates, often combining subsidized loans with grants. Typically MDFs of this type have a monopoly in lending to the municipal sector. Such MDFs exploit the favorable terms of their loans to impose stricter standards of project preparation on localities and to incorporate central or state government investment priorities in determining which projects should be funded. Credit Local de France and several other MDFs in Western Europe have evolved through financial deregulation from closed-circuit lending institutions, which obtained capital at below-market rates (from state grants) and lent to municipalities at below market rates, to institutions that compete freely with private-sector lenders. The second type of MDF is intended to serve as a bridge to the private credit market. They prepare the municipal and financial sectors for private lending to municipalities. MDFs of this type lend at market rates of interest, allocate capital through arm's-length decisions of commercial banks or other private-sector lenders, require that private lenders assume the credit risk of municipal loans, and try to establish a track record of municipal creditworthiness. One such market-oriented MDF was developed in the Czech Republic. There, the MDF borrows funds from abroad, with a national government guarantee, then on-lends the funds to domestic commercial banks, which in turn lends to municipalities. The municipalities do all project selection and preparation. The commercial banks perform all credit analysis and accept all repayment risk. The parastatal MDF merely confirms the creditworthiness of the commercial banks to which it on-lends and makes capital available to nine banks participating in the system, so as to strengthen competition. The two models of MDFs need not be strict alternatives to each other. MDFs of the first kind normally have been introduced in environments where there is virtually no private lending to local governments and where public authorities believe that private credit markets cannot be developed in the short and medium term.  Back to top
Social Development Funds Social funds and AGETIPs are non-governmental entities that select and finance projects where the formal government institutions are weak, for example, in countries emerging from a period of civil or economic crises. Political independence can be a primary advantage of these entities. Social funds are intermediaries that channel grant resources to small-scale projects for poor and vulnerable groups, based on proposals prepared and implemented by a variety of organizations such as CBOs and NGOs. AGETIPs are delegated contract managers for public works; they prepare and implement subprojects, usually for municipal governments, which take charge of the works upon completion. For a quick reference, see table on Social Development Funds and AGETIPS. Back to top Micro-Finance for Housing and Small Businesses Microfinance schemes target low-income and moderate-income households that do not qualify for formal/traditional credit. NGOs are generally the key actors in packaging small loans and mobilizing private savings. Government funding and small savings of households, coupled with foreign donor assistance, are the typical sources of funding. Loans can be given to communities or individuals for a variety of specific purposes. Loans for housing/home improvement can have multiple benefits because the poor often work out of their homes and rent out extra space as a source of income. For a quick reference, see table on Micro-finance of Housing and Home Improvements. Back to top |
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