It has been increasingly acknowledged that economic growth strongly depends on the performance of the financial sector. In our services we are therefore committed to the development of financial systems. LFS' approach to development finance can be characterised by statements which all stress the importance of sustainable and efficient institutions for lasting economic progress:

Lending to difficult target groups can be profitable in almost all circumstances

Most financial sector projects aim at improving access to financial services for certain target groups like micro, small and medium sized (SME) enterprises, farmers and low income households. Experience has shown that a careful project design, sound incentive structures and the right lending technology can make lending to these target groups profitable even under difficult economic conditions.

Each financial sector project must contribute to the strengthening of the financial system

Financial sector projects can only be successful in the long run if they are implemented in sustainable financial institutions. The most important aspects of institutional sustainability are profitability as well as adequate ownership and governance structures. Therefore, the creation and consolidation of sustainable financial institutions should be an important objective of any financial sector project. Moreover, financial institutions must not be misused to channel capital to target groups at conditions that lead to market distortions. Credit should not be mixed with donations, and therefore cannot be a direct instrument of social policy.

Both microfinance and capital investments are important

At the end of the seventies, development finance switched its focus from big investment projects and companies to small projects and microfinance. Notwithstanding this correct decision, the future of many economies strongly depends on the capacity of the financial system to finance investments and private medium sized companies, especially in the production and service sectors. This is particularly true for the Eastern transition economies with enterprises in the process of privatisation and with relatively well-trained workforces. Therefore, microfinance and capital investment projects should be seen as complementary to each other.

Good financial sector projects reduce incentive and information problems

Financial markets are predominantly characterised by information and incentive problems. Therefore, in order to develop financial markets, organisations, credit contracts and other institutional arrangements have to be tailored in such a way that these problems are mitigated. This reduces the costs and risks of financial transactions and, as a consequence, leads to the deepening and broadening of the financial sector.