Strengthening the Local Dimension of Blended Finance

A review of the local approaches and instruments employed by Development Finance Organizations (DFOs)

The African Center for Economic Transformation (ACET) is supporting the Group of 20 (G20) Compact with Africa (CwA) through a series of peer-to-peer learning engagements. The primary theme of this year’s peer learning is blended finance and a number of events are planned to share and learn from good regional and global practice. This note has been prepared as a background knowledge document to inform the peer-to-peer learning events in collaboration with the Organization for Economic Cooperation and Development (OECD), after which it may be published as a research report or technical briefing and will be used for further CwA-related activities.

In the development finance community, blended finance has emerged as a tool to more effectively mobilize commercial capital towards achieving the sustainable development goals (SDGs). This can stimulate impactful investment, quality jobs creation and inclusive economic growth. With a view to promote better practices, the OECD DAC has endorsed key blended finance principles for unlocking commercial finance for the SDGs. One of the five OECD/DAC Principles for Blended Finance (OECD 2018c) relates to the need to anchor blended finance for development to local contexts. In particular, this principle indicates that development finance should be deployed to ensure that blended finance supports local development needs, priorities and capacities, in a way that is consistent with, and where possible, contributes to local financial market development. In particular, blended finance should support local development priorities; ensure consistency of blended finance with the aim of local financial markets development and should be used alongside efforts to promote a sound enabling environment. If these principles are used to guide development finance organizations’ (DFO) engagement in client countries there is a greater likelihood of significant additionality and development impact.

What is Blended Finance?

Blended finance is the strategic use of development finance for the mobilization of additional finance towards sustainable development in developing countries (OECD 2018). It serves to reduce perceived risks and/or improve returns, while responding to the increasing importance of working with the private sector to achieve sustainable development. Generally, it aims to mobilize additional finance primarily from commercial sources in order to increase the total volume of finance available for sustainable development, including poverty reduction, reduced inequalities, and climate action.

Recommendations

The research identified numerous areas where DFOs can do more to provide financing in developing countries, particularly taking into account local contexts and conditions. These recommendations are not exhaustive but point
to areas where enhanced efforts can lead to greater development impact.

Organizational Insights
  • If not already in place, DFOs should make policy on local context explicit and intentional, following from good global practice.
  • If not already the norm, DFOs should develop country or sub-regional strategies that are aligned to national development strategies and avoid adhoc investment choices.

Insights on Partnering with Local Actors

  • DFOs should deepen partnering arrangements with local DFIs, national development banks, Sovereign Investment Funds (SIFs) and local pension funds to better scale-up activities and tailor to the local context. Additional country-specific research is needed on the extent that local investors, institutional investors, financial institutions are being crowded in to blended finance operations.
  • Where local DFIs or development banks do not exist, DFOs should explore options for providing technical know-how and financial support to create new local institutions.

Blended Financing Insights

  • There is a clear need to increase the gross and proportional amount of finance in local currency. Efforts to improve the capacity of issuing local currency securities have shown results, yet the demand for cost-effective foreign exchange (FX) solutions to mitigate foreign currency risk for international investors far exceeds the supply. More research is needed on what instruments are best suited to local approaches or which instruments are most effective at crowding in capital in local currency.

 

Strengthening the Local Dimension
of Blended Finance

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