Development finance unlocked some $81 billion in private capital for global development between 2012 and 2015. Only $5.5 billion, or less than 7% of the total, ended up in one of the world’s 47 least developed countries. The United Nations Capital Development Fund lays out how to attract more private capital to the poorest countries. Obstacles to be overcome: real and perceived risks, shortage of investment opportunities and weak policy frameworks.
- What works. Credit and risk guarantees – led by the World Bank – helped attract more than 70% of the $5.5 billion. Angola (more than $1 billion), Senegal and Zambia (each more than $500 million) attracted the largest share. Most went to mining and construction, energy, and banking and financial services.
- Risk aversion. XSML’s Central Africa SME Fund in 2010 attracted $12.5 million from the International Finance Corp. and $1.3 million in grant capital for technical assistance. Yet it failed to attract commercial investors. The fund backed 32 businesses in the Democratic Republic of Congo and Central African Republic, creating more than 500 jobs. The fund has realized four exits and returned half of investors’ capital. XSML’s second fund raised $50 million from European development finance institutions and foundations – but still no commercial investors.
- Currency hedges. A blended facility in Myanmar had better luck attracting international investors. The Currency Exchange Fund, which provides currency-risk protection in frontier markets, and The Livelihoods and Food Security Fund, a $400 million fund in Myanmar, joined forces to allow international investors to lend in Myanmar’s kyat while realizing their returns in US dollars. The $10 million hedged $86 million in loans from a dozen international lenders, allowing local microfinance institutions to serve more than 337,000 clients, most of them women in rural areas.
The development community, says the UNDP’s Achim Steiner, “needs to move out of our comfort zone, take more risks and adopt more flexible approaches to get finance going to where it’s most needed.” Patricia Ojangole of the Uganda Development Bank says local financial institutions can help, “attract private finance and mobilize resources in a way that is sensitive to local needs and aspirations by bringing together government, donors and the private sector.”