Investing in Fragile and Conflict-Affected Situations (FCAS) presents very particular risks for Development Financial Institutions (DFIs). These risks have traditionally been managed, in part, by focusing investments on financial intermediaries (FIs), which, in turn, invest in or have client relationships with Micro, Small and Medium Enterprises (M/SMEs). The focus on FIs has tended to follow a three-pronged rationale: i) overcome the ‘transaction cost challenge’ i.e. the transaction costs associated with investing directly in hundreds or thousands of small businesses in a given context; ii) enable DFIs to reach small businesses and entrepreneurs which are prevalent in FCAS; and, iii) FIs tend to be perceived as lower risk investments for DFIs in FCAS relative to other sectors, as they are often highly regulated.

In recent years, however, there has been growing recognition that investing in FIs in FCAS is not without risk. In such contexts, there is a heightened risk that investments in FIs may inadvertently cause, exacerbate or sustain violent conflict – creating significant legal, reputational and financial risks for DFIs while undermining the positive developments impacts underpinning the rationale for such investments in the first place. This Brief forms part of TrustWorks ‘Responsible and Effective Investing in FCAS’ publication series and is coauthored with our strategic partner, Shuraako Capital.

The Brief is organised in four parts:

• Part one explores the role of DFIs, financial intermediaries and private companies in FCAS respectively;
• Part two explores the laws, regulations, norms and standards associated with responsible business in FCAS, their applicability to DFIs and the challenges that DFIs tend to face in meeting these standards.
• Part three details a case study on Shuraako Capital’s own orientation towards a more conflict-sensitive approach to investing by means of illustrative example of the ‘how’.
• Part four then summarises our key insights on what it means to invest responsibly in FCAS and how DFIs might explore scaling up their responsible investments in financial intermediaries.