They may be structured to incentivize banks to increase lending to SMEs (e.g. through stepdown or step-up interest rates, loan covenants). Unlike lines of credit where the credit risk is with the DFI/development bank, DFI products are structured so that the financial institution takes some or all of the credit risk. This ensures that the financial institution has incentives to use market intelligence to select creditworthy SMEs.

- **Knowledge transfer** – the product innovations that DFIs bring can be adopted across the bank’s lending activities and is not restricted to the amount of financing provided. This includes advice on digitization of financial services, which is expected to accelerate in response to the crisis.

- **Risk mitigation and risk sharing** – DFI products can be designed to mitigate the risks of SME lending (e.g. by introducing new borrower screening tools, using advisory services to improve borrower creditworthiness); and may be structured to transfer some of the residual risk to DFIs or another party (e.g. through first loss structures) where banks are unwilling or unable to bear the full credit risk. For example, an IFC program supporting SMEs in Côte d’Ivoire’s tourism value chain re-organized resources to include a customized audit for each firm to assess their risk exposure and priority actions  to survive this period if immediate stress and be better placed to resume activity during the recovery (Freund & Mora, 2020).

- **Foreign currency** – where appropriate (e.g. for trade finance), DFIs should provide forex which domestic liquidity expansion does not provide.

- Evaluation evidence suggests that DFIs SME finance operations were important components of the response to the Global Financial Crisis and have helped expand overall lending since then. In the case of the World bank Group, for example, trade finance operations and supply chain finance helped SMEs whose needs would not have been met<sup>30</sup> (IEG, 2012).

**Equity:** Venture capital plays a key role in financing innovative startups, which will particularly be needed during the recovery phase. A small proportion of SMEs have sufficiently strong growth prospects that they can afford to take on external equity. These SMEs have a disproportionate impact on job creation. DFIs provide venture capital with new fund managers in frontier markets lacking in fund management capacity. Providing equity is strongly complementary to government financial policies which expand the availability of debt capital. Without equity, SMEs will not be creditworthy borrowers, and excessive leverage can jeopardize their survival and resilience to future shocks.

A major concern is that DFIs might not necessarily be in the countries where severe disruptions are underway. According to IFC data, for example, SME projects in 2018 were in place in 71 countries and COVID related commitments in the financial sector were only reported in 16 countries. Moreover in countries where DFIs are present, their commitments might not be commensurate to the impact facing the countries.

To expand their reach and presence DFIs would need to invest in relationships with key market players and financial institutions in countries where the pandemic is having the greatest impact. Leveraging existing relationship to launch COVID-related support is one way to do this rapidly. IFC for example has non-COVID related commitments in 19 additional countries in FY2020, indicating potential. Although outstanding SME related portfolios are present in about 70

> 30 IEG (Independent Evaluation Group). 2012. The World Bank Group’s Response to the Global Economic Crisis—Phase II. Washington, DC: Independent Evaluation Group, the World Bank Group.

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