The Missing Link in EMDE Transition Finance: Lessons from Peru’s National Development Bank

Zik Coronado Digital Development and Sustainable Finance Consultant, World Bank and Researcher, Vlerick Business School

A legal reform that links funding and lending may be the missing ingredient for scalable small and medium-sized enterprise (SME) transition finance in emerging markets and developing economies (EMDEs).

SMEs represent most firms in EMDEs, yet thematic capital rarely reaches them. Policy debates tend to focus on taxonomies, disclosure and corporate transition plans, while the institutional mechanics that move capital to smaller firms receive far less attention. Peru offers a practical case. A recent reform of its national development bank reshaped the chain from funding to final lending, strengthened governance and created space for transition-aligned products. This article examines the SME financing gap, the limits of private and commercial credit, the effects of a legal decree, the mechanics of thematic funding, the role of microfinance institutions and the evidence from past programmes. Together, they point to a coherent architecture for SME transition finance in EMDEs.

1. An overlooked gap in the transition finance debate

SMEs in EMDEs face a structural problem. They need long-term capital to modernise, yet most financial systems are not designed to lend to them at scale. Transition finance is gaining attention across global markets, yet the discussion still centres on large corporates with access to international capital markets. SMEs remain in the shadows despite being responsible for most employment and production in emerging economies. Many face higher energy costs, inefficient equipment and outdated processes. They cannot absorb sudden shocks or finance long-term upgrades. If the real economy is expected to decarbonise, these firms need capital that matches their scale and risk profile. In many EMDEs, the median SME loan has a tenor of less than two years, which makes any modernisation process nearly impossible.

2. Why this matters for EMDEs

Emerging economies depend on SMEs for growth and social stability. Therefore, a transition pathway that excludes them will fall short of national climate targets and strain supply chains. Most SMEs rely on local lenders that face binding risk constraints. High interest rates, limited collateral and short loan tenors prevent firms from investing in cleaner technologies or efficiency improvements.

3. Peru as an instructive example

Peru illustrates this challenge. It has a dynamic SME sector, significant energy transition needs and one of the most active microfinance systems in Latin America. It has also experienced unusual political volatility. Peru has gone through intense political turnover during the past decade, yet the institutional reforms at Corporación Financiera de Desarrollo S.A. (COFIDE) have remained in place across successive administrations. This offers valuable insight for other EMDEs that face similar instability.

4. Who is COFIDE and why its evolution matters

Peru’s national development bank, COFIDE, was created to channel long-term financing into productive sectors and complement the work of commercial lenders. For many years, COFIDE operated mainly as a second-tier on-lending institution, channelling resources to intermediary financial institutions (IFIs). This helped expand credit but limited its ability to design new products or match funding sources with lending strategies. A recent institutional reform, enacted via legislative decree (DL 1692), broadened the bank’s mandate and gave it greater operational flexibility. This shift is central to understanding how national development banks can support SME transition finance.

What DL 1692 Actually Does

DL 1692 is the 2023 reform that modernised the legal and operational framework of Peru’s national development bank.

It introduced three essential changes that matter for transition finance:

It clarified COFIDE’s mandate and strengthened governance, reducing the effect of political turnover on long-term lending strategies.
It allowed the bank to take institutional deposits and co-finance directly with other lenders, which expands its funding base and lets it structure programmes that reach SMEs more effectively.
It aligned the bank with international development finance practices, including clearer rules for thematic lending and risk management.

Together, these changes allow COFIDE to build a more coherent, end-to-end sustainability architecture, from how it raises capital to how it channels it to SMEs.

This type of reform is still uncommon in many EMDEs. Peru’s experience shows that updating the legal mandate of a development bank can create the institutional stability that transition finance requires.

5. Why DL 1692 Matters for Institutional Investors and Development Finance Institutions

DL 1692 is not a minor governance update. It is the type of enabling reform that most emerging markets say they need but rarely deliver. For lenders, it changes the risk calculus in three practical ways. In practice, DL 1692 gives Peru a more complete architecture for sustainable lending, from the thematic bond investor at one end to the SME or rural household at the other. First, it gives COFIDE a cleaner and more flexible funding structure, which allows the bank to match the tenor and currency of its liabilities with the needs of SMEs. This alignment sounds technical, but it has direct consequences for pricing, liquidity, and portfolio stability. Second, the decree permits COFIDE to co-finance directly with private institutions rather than operating solely through IFIs. This creates a clearer legal route for blended transactions, co-lending structures, and future securitisations of SME portfolios. Third, it sets the foundations for a transition finance architecture that can carry both public and private objectives without adding unnecessary friction.

The result is clear. Investors seeking scalable exposure to SMEs in EMDEs often face legal uncertainty, weak intermediaries, and limited data. DL 1692 reduces those friction points. Together, these changes bring COFIDE closer to international development finance practices and offer a model other countries may adopt to unlock capital at scale.

6. A thematic funding architecture that provides clarity

Following the reform, COFIDE accelerated its use of thematic instruments. It entered international markets with a USD 300 million social bond in 2024 and a USD 400 million sustainable bond in 2025, followed by a PEN 120 million Blue Bond (about USD 36 million at current exchange rates) to finance water and sanitation upgrades through municipal microfinance institutions. The 4.5 percent pricing confirms strong investor confidence in COFIDE’s framework and expands the pipeline of targeted programmes that can later incorporate transition tags. Thematic instruments often lower the cost of capital compared with conventional funding, which strengthens COFIDE’s ability to design affordable SME programmes.

These operations show that COFIDE can now mobilise capital at scale under a credible sustainable framework. Each issuance follows recognised international principles. Eligible categories are defined. An exclusion list is applied. All thematic bonds are reviewed by independent Second Party Opinions (SPOs), which assess the credibility of the framework against international principles. Annual reports disclose allocations and impact. The framework covers SME finance, renewable energy, inclusion and essential infrastructure. For investors, this provides transparency and comparability. For domestic lenders, it creates a reliable source of funding for targeted programmes.

7. Channels that reach micro and small enterprises

Most SME lending flows through municipal microfinance institutions and rural banks. COFIDE provides funding to these institutions under simple eligibility rules. Borrowers must maintain a Normal or CPP (with potential problems) credit classification, which indicates that the loan shows no material repayment concerns, and avoid activities included in the exclusion list. The placement targets suggest meaningful reach. The bank expects to channel around PEN 3,000 million (about USD 900 million at current exchange rates) to roughly 200,000 micro and small enterprises during 2025 and 2026. This structure can be adapted to transition finance by adding basic sector screens or efficiency criteria without changing operational processes.

8. A countercyclical role that commercial lenders and private credit cannot replicate

The country’s experience during the pandemic showed the value of a strong development bank. Under the Reactiva Perú programme, COFIDE helped maintain credit flows to SMEs at a time when commercial lenders were retrenching. Government guarantees and central bank support allowed the bank to act as a stabilising anchor. Evaluations show that the programme preserved jobs and supported payment chains. Repayment performance remained manageable despite the scale.

Commercial lenders and private credit funds behave differently under stress. When volatility rises, both tend to widen pricing or slow disbursements, which creates a credit gap that national development banks must fill. This countercyclical capacity rests on a public mandate, a longer planning horizon and the operational ability to support smaller and riskier firms.

Private credit has expanded in EMDEs, yet most funds remain focused on mid-market corporates with predictable cash flows, strong collateral and stable legal environments. SMEs in emerging markets offer none of these features. This is why national development banks, rather than private credit funds or commercial lenders, remain central to any credible transition finance strategy.

9. Signals of energy transition readiness

COFIDE has not yet launched a dedicated SME transition loan, but many of the necessary components are already in place. Thematic frameworks and operational guidelines provide investors with confidence. Regulated microfinance institutions and rural banks can apply simple eligibility tags. Environmental and social criteria embedded in multilateral lines can be adapted to transition objectives. The bank already reports allocations and impacts through sustainability disclosures.

Earlier experience already exists. Peru’s rural solar electrification programme illustrates COFIDE’s ability to structure transition-aligned investments. Through a rural solar electrification concession, COFIDE helped finance around 170,000 solar home systems that now serve close to one million people in off-grid areas. Before the programme, many households relied on kerosene lamps, candles and biomass used for indoor cooking. These fuels are expensive and generate significant indoor air pollution. The project replaced those sources with solar power, reduced respiratory risks, and improved daily living conditions in remote communities. This track record shows that the institution has the operational base to support SME transition finance once eligibility and transition criteria are defined within the existing thematic framework.

10. What this means for loan markets

If SMEs are expected to adopt cleaner technologies, upgrade equipment and reduce emissions, they will need products that match their size and risk profile. Private credit alone cannot fill this gap. National development banks with thematic funding platforms, local distribution networks and stable mandates will play a central role. Peru’s experience shows that transition finance for SMEs is not a mystery. It is an institutional design problem.