Effective instruments for pro-poor finance
•Download as PPTX, PDF•
0 likes•731 views
International processes to agree universal Sustainable Development Goals and implement a global deal on climate change highlight an urgent need for finance to flow to low-income groups, who will bear the main costs of adapting to climate change and who have the greatest need for financial security. Poor households and businesses need finance to improve their resilience to climate-related shocks, to access services such as health and education and to invest in income-generating activities that improve productivity and add value. But how can we get this vital finance to them? This presentation showcases real examples of instruments that can get finance to those who need it most. This presentation is based on the briefing 'Beyond loans: instruments to ensure the poor access climate and development finance' --> http://pubs.iied.org/17318IIED.html.
Recommended
More Related Content
What's hot
What's hot (18)
Viewers also liked
Viewers also liked (16)
Similar to Effective instruments for pro-poor finance
Similar to Effective instruments for pro-poor finance (20)
More from IIED
More from IIED (20)
Recently uploaded
Recently uploaded (20)
Effective instruments for pro-poor finance
- 1. 1 November 2015 Proven instruments for pro-poor finance Author name Date November 2015 Showcasing real examples of instruments that can get finance to those who need it most Effective instruments for pro-poor finance
- 2. 2 November 2015 Proven instruments for pro-poor finance Why finance for the poor? Build resilience Access services Improve productivity and add value Escape poverty Manage risks
- 3. 3 November 2015 Proven instruments for pro-poor finance Pro-poor instruments Four alternative pro-poor instruments Grants Concessional loans Risk-sharing instruments Social protection
- 4. 4 November 2015 Proven instruments for pro-poor finance Grants • For early development of pro-poor markets o Feasibility research o Product development o Reduce upfront costs o Incentivise small and medium enterprises Subsidies Technical assistance Bundled with loans
- 5. 5 November 2015 Proven instruments for pro-poor finance Grants: Bangladesh IDCOL grants for solar home systems • A higher proportion to poor households • Conditional payments • Parallel grants to installation and service organisations
- 6. 6 November 2015 Proven instruments for pro-poor finance AEPC grants for renewable energy • Targeted subsidies • Approx. US$68 million in total • Cover 30–50% of buying and installing costs Grants: Nepal
- 7. 7 November 2015 Proven instruments for pro-poor finance Grants for participating in REDD+ • £900,000 investment package • Training, equipment and technical assistance • For local farmers and small-scale entrepreneurs Grants: Mozambique
- 8. 8 November 2015 Proven instruments for pro-poor finance Concessional loans • Unlocks affordable, scaled-up, long-term finance o Grant element softens loan for low-income groups o National banks may also offer credit guarantees Lower interest rates Longer repayment times Lower bars for qualification
- 9. 9 November 2015 Proven instruments for pro-poor finance Loans: Bangladesh Central Bank/IDCOL loans • To commercial banks or microfinance providers… • …at interest rates of 5% and 6% respectively • Households pay 9% interest
- 10. 10 November 2015 Proven instruments for pro-poor finance Loans: Ethiopia Development Bank of Ethiopia • To microfinance providers at 6% interest • 10 year repayment period • Incentive for lending onward to poor borrowers and rural households
- 11. 11 November 2015 Proven instruments for pro-poor finance De-risking • Lower risks of investing in pro-poor projects o Guarantees cover losses if borrowers default o Incentivises lending to low-income groups that cannot provide collateral for loans Guarantees Lower capital costs
- 12. 12 November 2015 Proven instruments for pro-poor finance De-risking: Ethiopia Risk-sharing facility • International Finance Corporation and International Bank of Ethiopia • Finance for farmers • Encourages private banks to engage with SMEs
- 13. 13 November 2015 Proven instruments for pro-poor finance Social protection • Only way to reach the poorest of the poor o Recognised as critical by SDGs o Schemes vary widely in shape and size o Originally aimed at ending poverty, many now also target climate resilience and ecosystem management Cash payments Food for labour Guaranteed paid work
- 14. 14 November 2015 Proven instruments for pro-poor finance Safety nets: India The Mahatma Gandhi National Rural Employment Guarantee Scheme • Legal right to work • Supports tens of millions of people with 100 days of paid labour each year • US$25 billion distributed since 2006
- 15. 15 November 2015 Proven instruments for pro-poor finance Safety nets: Brazil The Bolsa Verde programme • Cash for conserving natural resources • Reaches more than 69,000 poor families • US$40 million distributed each year
- 16. 16 November 2015 Proven instruments for pro-poor finance Safety nets: Ethiopia The Productive Safety Net Project • Targets 7 million food insecure people • Offers cash or food for labour on projects such as tree planting • Helps people resist shocks, accumulate assets and feed themselves
- 17. 17 November 2015 Proven instruments for pro-poor finance Conclusions • Experience shows it is possible to choose or develop pro-poor financial instruments • These should be used in different combinations depending on their comparative advantage • All should be combined with the right set of intermediaries, planning and budgeting systems
- 18. 18 November 2015 Proven instruments for pro-poor finance Find out more See www.iied.org Follow us on social media: Contact: Neha Rai Neha.Rai@iied.org This presentation is based on the briefing Beyond loans: instruments to ensure the poor access climate and development finance (http://pubs.iied.org/17318IIED.html ) @iied theIIED iied
Editor's Notes
- International processes to agree universal Sustainable Development Goals and implement a global deal on climate change highlight an urgent need for finance to flow to low-income groups, who will bear the main costs of adapting to climate change and who have the greatest need for financial security. Poor households and businesses need finance to improve their resilience to climate-related shocks, to access services such as health and education and to invest in income-generating activities that improve productivity and add value. But how can we get this vital finance to them?
- Appropriate financial instruments are key. Mainstream financial institutions rely on instruments such as high interest loans, that tend to exclude poorer groups because of high transaction costs, low profit margins and limited credit worthiness. Our experience points to 4 alternative instruments that, if used appropriately, can help low-income groups to access affordable finance, manage risks and escape poverty. These are: concessional loans; risk-sharing instruments; grants; and social protection schemes. Across the world, these instruments have already been used to enable low-income groups to limit risks from climate change, access affordable energy and develop sustainable businesses.
- Grants can be important alternative sources of finance for activities that do not generate profits but which are essential in early stages of developing pro-poor markets. Flexible grant funding is needed to cover initial stages of feasibility research, product development, or technical assistance for capacity building to help new enter a market. Grants can also be used to subsidise high interest loans, reduce upfront costs for end users or create market incentives for small and medium enterprises. Three types of grants are commonly used in both development and climate finance: 1. Direct grants in the form of subsidies 2. Technical assistance grants providing expertise at no cost 3. Grants bundled with loans to reduce the cost of borrowing
- In Bangladesh, the state-owned Infrastructure Development Company Limited (IDCOL) provides a grant to help households buy solar home systems. While the grant is available to all, IDCOL gives a higher proportion of subsidies to poorer households which tend to need smaller systems. The company has also provided grants to develop the capacity of partner organisations that install and service the solar power systems. IDCOL’s grants are given out only when certain outputs are delivered. This shifts the purchasing power to the poor, and performance risk to the private investors. Photo credit: ILO in Asia and the Pacific, Creative Commons, via Flickr
- In Nepal, the Alternative Energy Promotion Centre (AEPC) uses a targeted subsidy model to enable vulnerable households to adopt renewable energy technologies, such as biogas, solar home systems and micro-hydropower. Grants make up 40% of its National Rural Renewable Energy Programme’s US$170 million budget (=US$68 million). These grants cover 30–50% of the cost of buying and installing renewable energy technology, with the rest coming from concessional loans. Photo credit: Om Astha Rai, Climate News Network
- In Mozambique, an IIED initiative is using a £900,000 investment package to enable local farmers and small-scale entrepreneurs to participate in REDD+ activities that conserve, manage sustainably or enhance forest stocks. The grant finances training, equipment and technical assistance for farmers to adopt sustainable agriculture and for small businesses to invest in sustainable timber, charcoal and honey production. IIED and partners are using the grant to mobilise more of this flexible funding from international donors, impact investors and national microfinance providers. Photo credit: CIF Action, Creative Commons, via Flickr
- Debt instruments include bonds, direct loans, credit lines and syndicated loans. But concessional loans are better suited to low-income groups as they are often softened with a grant element. Concessional loans to small businesses or microfinance providers can help unlock affordable, scaled-up and long-term finance. The concessionary terms can include reduced interest rates, longer repayment periods and lower bars for qualification, such as no need for collateral. Lenders such as national development banks may also offer credit guarantees to enable investors to raise capital for projects commercial banks would consider too risky.
- In Bangladesh, The Central Bank of Bangladesh and Bangladesh’s Infrastructure Development Company Limited (IDCOL) offer loans to commercial banks or microfinance providers at interest rates of 5% and 6-9%, respectively. The borrowers lend this to households or investors and charge 9% or 12-15% interest, respectively. IDCOL absorb the risk of lending to microfinance providers, requiring no collateral from them Photo credit: Neha Rai/IIED
- In Ethiopia, The Development Bank of Ethiopia offers concessional loans to microfinance providers with a 6% interest rate. A 10-year repayment period creates an incentive for the microfinance providers to lend onward to low-income borrowers over shorter periods and revolve the repaid funds as new loans. Like IDCOL, the Ethiopian bank absorbs the risk of lending to microfinance providers, requiring no collateral. Photo credit: Rod Waddington, Creative Commons, via Flickr
- Risk mitigation instruments can lower the cost of capital for risky pro-poor projects. For example, development finance institutions often provide guarantees to national financial agencies by agreeing to cover losses if borrowers default on their repayments. Such guarantees incentivise lending to customers who cannot provide collateral for loans.
- In Ethiopia, The International Finance Corporation has a risk-sharing facility with International Bank of Ethiopia. It has unlocked finance for coffee cooperatives and other farmers and has incentivised private banks to engage with small or medium enterprises. Ethiopia will use a similar model to encourage investment in pro-poor renewable energy technologies such as improved cook stoves and solar home systems under its Scaling-up Renewable Energy Programme. Photo credit: Pete Lewis/Department for International Development, Creative Commons, via Flickr
- Concessionary loans and even microcredit are beyond the reach of the very poorest people. For this group, targeted social protection instruments and safety nets may be the best option. The SDGs recognise this, and call for all countries to implement social protection systems to help end poverty. Such schemes are already underway in Africa, Asia and Latin America. They may have often begun with the aim of reducing poverty, but some are now evolving to include climate resilience and ecosystem management.
- In India, the Mahatma Gandhi National Rural Employment Guarantee Scheme provides tens of millions of people with 100 days of paid manual work each year. The scheme creates a legal right to employment: anyone who applies and is not given work within 15 days is entitled to an unemployment allowance. Since 2006, when the scheme began, it has distributed about US$25 billion. Participants work on projects that benefit their local communities, such as creating infrastructure for water harvesting, drought relief and flood control. Photo credit: UN Women/Leena Patel, Creative Commons, via Flickr
- In Brazil, The national Bolsa Verde programme provides cash payments to low-income families who adopt practices that conserve trees, fish and other natural resources. The scheme targets people in extreme poverty, particularly forest-dependent communities in the Amazon region. It distributes more than US$40 million dollars each year among more than 69,000 families. The quarterly payment of 300 reais is nearly double the average quarterly income. Photo credit:, Creative Commons, via Flickr
- In Ethiopia, the Productive Safety Net Project gives seven million food insecure people a predictable cash or food transfer, in return for their working on schemes that benefit vulnerable communities– for example tree planting, water harvesting or building health centres. The project enables vulnerable people to resist shocks, accumulate assets and feed themselves. It aims to encourage households to engage in production and investment; and it promotes market development by increasing household purchasing power. Photo credit: Nena Terrell/USAID
- Experiences around the world show it is possible to choose or develop pro-poor financial instruments. Such instruments should be used in combination or sequentially, depending on how effective they are at reaching and targeting poor families with different income levels. Combined with the right set of financial intermediaries, planning and budgeting systems, pro-poor instruments can ensure that vulnerable women and men benefit from climate and development finance.