The Unexpected Effects of Intermediated Lending Programs in Africa on Loan Supply

Access to financing remains a significant challenge for small and medium-sized enterprises (SMEs) in Africa, hindering their growth and job creation potential. Numerous intermediated lending programs have been implemented to encourage banks to increase their credit to SMEs. However, evaluations of the impact of these intermediated lending programs are limited. Our study, which focuses on support offered by development finance institutions, reveals an unexpected finding: supported commercial banks experienced an 8% reduction in loan growth. This finding is attributed to a reallocation effect within these banks.

The importance of intermediated lending programs to support SMEs in Africa

The private sector plays a prominent role in development but remains fragile in Africa due to the dominance of informal activities and a small number of formal businesses. Consequently, numerous programs have been launched to promote private sector development. Due to the importance of financial constraints, many initiatives have focused on relaxing credit rationing. One common approach is to use public resources to incentivize banks to lend to SMEs. Public resources are used to provide low-cost funding or cover potential losses for banks. Despite the importance of these intermediary lending programs, few evaluations exist. The existing analyses primarily focus on the programs' effectiveness in reaching the intended recipients (Amamou et al., 2023; Aydin et al., 2024). However, they do not consider the potential repercussions for other borrowers or non-targeted banks.

Evaluating the impact of intermediated lending programs in Africa

We (Léon, 2025) address this gap by examining the impact of intermediated lending programs on the loan supply of supported banks in Africa. To this end, we compiled a database of 900 projects financed by the primary Development Finance Institutions (DFIs) operating in Africa from 2010 to 2021. DFIs are public financial institutions that support private sector development in low- and middle-income countries. They are the primary providers of intermediated lending programs in Africa.

We merged this dataset with banking information to evaluate how the programs influence the lending activity of supported banks. The final sample includes 952 banks, 156 of which received support between 2010 and 2021. Our analysis compares the lending activity of supported banks with that of a group of similar banks before and after support implementation.

Unexpected reduction in credit supply for supported banks

Contrary to expectations, the empirical results show that banks that received support experienced an 8% contraction in loan growth. The remaining question is how to explain this surprising result, which has survived many robustness checks.

We explored various explanations for this phenomenon. Specifically, we rejected the hypotheses that the contraction in lending is due to the political motivations of development finance institutions, the prioritization of distressed banks, or the strict constraints imposed on supported banks (e.g., the establishment of exclusion lists for certain sectors).

The most plausible explanation, supported by our data analysis, is that beneficiary banks have limited absorptive capacity. The analysis of the data suggests that beneficiary banks have a limited ability to handle additional demands or resources, which is referred to as "limited absorptive capacity." Because their resources, such as staff, are limited, these banks cannot fully serve new clients brought in by the program and their existing, traditional clients simultaneously. Therefore, they must make trade-offs. This trade-off is especially problematic for smaller, less efficient banks because

• They already struggle with inefficiencies in their operations.

• They have fewer resources to begin with due to their small size.

Consequently, the negative effects of the program (e.g., lower performance or service quality) are more pronounced in these small, inefficient banks because they cannot effectively manage the added pressure and responsibilities that come with participating in the program.

The analysis concludes with two further investigations. First, we observed that banks that do not receive support from DFIs are unaware that some of their competitors benefit from this support. Specifically, we document ineligible banks do not suffer when a bank operating in the same market benefits from the support of a DFI. Second, we then examine whether the observed patterns for supported banks are also valid for microfinance institutions (MFIs) that receive support from a DFI. The analysis on MFIs is limited by the imperfect nature of the data. However, we found that these programs have no effect, whether positive or negative, on the loan supply of microfinance institutions. 

Implications for future programs

The results of this study call into question the effectiveness of programs designed to stimulate credit supply in Africa. Our findings suggest that these programs may impose costs on other borrowers from the same banks. However, the macroeconomic effect remains uncertain and depends on the ability of these "traditional" clients to access alternative financing sources. Future programs should consider this risk and be structured to better support the targeted banks. For example, DFIs could adjust overhead costs in their funds to reflect the actual costs of supported banks. They could also provide intensive technical assistance to banks.

References

• Amamou, R., Gereben, A., & Wolski, M. (2023). Assessing the impact of the EIB’s intermediated lending to SMEs during funding shocks. Small Business Economics, 60(3), 975-1007.
• Aydin, H. I., Bircan, C., & De Haas, R. (2024). Blended finance and female entrepreneurship. CEPR Discussion Paper, 18761, 1-69.
• Léon, F. (2025). Blended bonds: How DFIs' support programs stifle bank lending in Africa. World Development, 191, 106998.

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About the Author:

Florian LEON is a senior economist at FERDI, specializing in the private sector and finance in Africa. At the FERDI, he is the scientific coordinator of the Development Banks Program and the Impact Investing Chair. Florian holds a doctorate from Université Clermont Auvergne and is an associate researcher at CERDI-UCA.