16/10/2013 08:57 BST | Updated 23/01/2014 18:58 GMT

No Aid for Loans - Yet

No plans yet for a British development bank. That was the response from Justine Greening, International Development Secretary, to the International Development Select Committee last week. It's a welcome answer and one that will reassure many of us in the development community who have been questioning the rationale for the UK getting into the bank business.

But Greening, conspicuously, did not rule out a change in policy and, while she outlined some of the challenges to setting up a bank or increasing the amount of UK aid spent as loans, this raises the distinct possibility of a UK development bank sometime in the future. And that is a decision which will require careful analysis of the potential benefits and problems - so Greening's measured approach and response was again welcome.

There is a case to be made for loans. Aid in the form of loans can theoretically be 'recycled' to increase the impact of each pound of aid and off-book loans can reduce net public spending in donor countries. They can hypothetically help countries to transition more gradually off traditional grants towards independence from aid.

And here's the key one from a development perspective - loans are supposed help stimulate the growth and development of local financial markets and the 'missing middle' of the of the business world in developing countries - medium sized enterprises that can't access international markets but are too large for microfinance - leading to more jobs and thus poverty reduction.

But, looking at the evidence of what impact development finance institutions (DFIs) have had in practice, this case starts to look substantially weaker. Most importantly, there is already a boom in lending to DFID priority countries and it's the least preferred form of finance for developing countries. Loans necessarily mean that there is a debt incurred and, as our experience as NGOs working and campaigning on debt relief has shown us, that debt can undo some of the good done by other aid and development work. This should be a real concern for the UK - not least because half of DFID target countries are already in default on their debt.

The central objective of UK aid is the reduction of poverty and, legally as well as morally, aid must be spent to promote sustainable development. Economic growth - even assuming that UK loans would necessarily produce that growth in developing countries - is not a proxy for development or poverty reduction. Too often, increased economic growth has instead led to increased inequality and, in some places, increased poverty.

And the evidence from other DFIs isn't that encouraging either. Priorities and performance measures are actually more often weighted towards financial return and growth rather than the reduction of poverty and inequality. A frequent lack of coordination and joined up working between donors' development and loan institutions also seriously undermines the potential for good development outcomes and creates new administrative costs and burdens for donors. As NGOs working with these organisations and their intended beneficiaries we have also too frequently been concerned by a dismal record on human rights and environmental, social and gender impacts.

Fundamentally, there isn't currently the evidence to support the idea that the existing range of development cooperation tools provided by the UK are insufficient to meet developing country needs.

Greening also rightly said that any decision to create a UK development bank would have to be based on evidence that it would be better value for money and add to the work of existing UK aid modalities and other DFIs. I hope she will continue to hold to that position because, based on the evidence, no more aid for loans is the right call.