Introduction -- 1. Background -- 2. The subsidy dependence index -- 3. How to avoid potential pitfalls in calculating the SDI -- The SDI's contribution to assessment of a DFI's Financial Performance -- Conclusion.

For several decades, international donors focused on creating and strengthening development finance institutions (DFIs). Many of these institutions, however, have encountered problems such as loan defaults, high operating costs, insolvency and subsidy dependence. Financial profitability ratios such as return on equity and return on assets have long been used to assess the performance of these institutions, but these measures have not proven useful in explaining the cost of maintaining their continued operations. This paper claims that much of the subsidization to keep DFIs afloat has not been captured by conventional accounting procedures, which, among other things, were not designed for this purpose, and that past DFI profitability measures have provided governments, donors and DFI managers with an inadequate picture of the actual cost of DFI operations. The Subsidy Dependence Index (SDI), suggested in the paper, is a user friendly tool aimed at providing a more comprehensive public interest analysis and measurement of DFI financial performance and subsidy dependence. The SDI complements conventional financial analysis and improves the evaluation of financial institutions that are subsidy recipients. The SDI also addresses the need to improve the measurement of progress made toward the phasing out of credit subsidies as required by the " World Bank Policies Guiding Financial Sector Operations.