When protracted crises cause complex humanitarian challenges, long term donors and host governments often face financial strain as they struggle to find permanent solutions. Blended finance is one answer to the appeal for a new paradigm in the humanitarian sector.
For this approach, first, immediate needs must have been met by traditional aid and a level of stabilization must have been achieved. Under these conditions, blended finance can shift attitudes in the humanitarian and development sectors from regarding aid recipients as victims of circumstance to active economic actors. As a structuring approach, blended finance can facilitate long-term solutions through tri-sector partnerships that support the resiliency, resourcefulness and entrepreneurial ambitions of vulnerable beneficiaries and communities.
Local Financial Market Development
In fragile contexts, blended finance approaches can bolster financial inclusion and strengthen local capital markets. Concessional capital providers can deploy funds to de-risk local financial institutions and unlock lending to the unbanked, traditionally deemed too risky. An example of this approach is Nasira, a risk-sharing facility managed by the Dutch Development Bank (FMO) and the European Union Commission supporting local financial institutions to increase their lending to underserved segments such as women, youth and migrant business-owners. Nasira enters into revolving guarantee agreements with local financial institutions and takes on 95% of the default risk of an entire loan portfolio. By limiting the risk exposure of the domestic banks, this facility narrows the financing gap for the underserved market and stimulates market activity through their support of local entrepreneurs.
Another example of a blended finance mechanism in support of credit access for vulnerable populations is the Revolving Credit Fund being set up by the Near East Foundation, a non-profit organization with operations based across the Middle East/North Africa (MENA) region. The Fund will supply microloans and larger development loans to Syrian refugees in Jordan to support business growth, job creation, and local economy recovery. The Revolving Credit Fund includes a first-loss tranche, with a variety of impact-first investors supplying the senior tranche. The structure also includes sleeves for grant capital dedicated to technical assistance, impact measurement and capital and operational expenditures to support the borrowers’ capacity-building in financial literacy and business development. Further, the KOIS Refugee Development Impact Bond, supported at its conceptual stages by a design grant funding from Convergence and later implemented by the Near East Foundation, is a 4-year microenterprise training and grants program focused on businesses for refugees in Jordan and Lebanon tied to tangible impact outcomes-based returns.
Beyond credit access, Developing World Markets, a New York-based emerging markets fund manager, manages the Displaced Communities Fund which deploys private equity investments into inclusive financial institutions and businesses serving displaced communities and vulnerable populations across Africa.
Implicit in the blended approach are strong and impactful partnerships amongst the public, private and philanthropic sectors. Aid agencies and non-governmental organizations, with deep knowledge of the local context, contribute to building local capacity and creating the enabling environment for a critical infrastructure project. Development bank capital can then be leveraged alongside local government commitment to adjust the risk/return profile of the projects to attract private sector interest. Investments into significant infrastructure such as energy, telecom or water and sanitation benefit from the efficiency and expertise of the private sector, creating important economic impact. For example, the World Health Organization (WHO) estimates that investments in water supply and sanitation generate up to USD4.30 for every USD1.00 spent.
The International Committee of the Red Cross (ICRC) is designing innovative approaches in fragile states in the water sector with the Goma West Water Resilience Project in the Democratic Republic of the Congo. For this project, the ICRC is partnering across sectors and blending grants with development finance and private sector intervention. The first stage of the multi-year project completed long-term feasibility and shorter-term emergency work, and prepared the groundwork for the design-build-operate phase to be financed by Multilateral Development Banks (MDBs) and Development Finance Institutions (DFIs) active in the region, alongside private sector operators. The goal is to implement a fee-for-service model to be managed by private water companies. Half a million people, amongst the most vulnerable in Goma, stand to benefit. The ICRC has been investing to replicate this Goma model in other fragile contexts in Africa and the Middle East.
Another example in the water sector is Incofin’s Water Access Acceleration Fund, an impact-first equity fund that will invest in small and medium-sized enterprises (SMEs) contributing to safe drinking water for last-mile customers across Africa, Asia and Latin America. Incofin’s aim is to invest in decentralizing water access and scaling local businesses for financial sustainability.
We can also look to the Urban Resilience Fund, a private equity fund targeting public and private infrastructure in urban areas across Sub-Saharan Africa and the MENA region. Set up by the United Nations Capital Development Fund (UNCDF) and managed by Meridiam, the fund structure contains a first-loss equity tranche supplied by donors to protect senior investors including several DFIs and private sector entities. In addition, the structure includes a technical assistance grant and leveraged a design-stage grant to set up the fund. As climate change-induced mass migration stretches urban centers to their limits, this fund targets sustainable urban mobility, renewable energy, microgrids and improved waste management systems, amongst other critical infrastructure.
In frontier and fragile markets, any significant or permanent resolution to mounting challenges is far too complex, nuanced and financially burdensome for any one organisation, government body or sector. As the call for new partnering and financing models for humanitarian assistance becomes louder, a blended financial structuring approach, enabled and enhanced by humanitarian capacity on the ground, applies sustainable, market-based solutions with local context to mobilize public and private capital and reduce the risk for investors seeking commercial returns. While blended finance is not a panacea, this approach can support the development and strengthening of viable local financial markets and critical infrastructure, which supplements and enhances finite donor resources to scale up much needed capital into fragile states and refugee populations.