The potential impact a blended finance structure could have on mobilising funds to address the most pressing issues, including eradicating extreme poverty, combating climate change, enhancing the healthcare system, and many others, are the ones we often hear about. Unfortunately, despite its ability to improve standards at many levels, only a little progress has been made, and it is now time to walk the talk.
The concept of blended finance is being used as a means to reform society by providing access to capital to those who have historically been left out or have limited access to financial resources. It combines public and private funds to support projects, ventures, and investments in the public interest, creating the prospect to create a lasting impact and build a more equitable and sustainable world.
Why is blended finance needed?
The need for blended finance is to provide a mechanism to combine public and private resources to enable projects with development outcomes. It helps to bridge the gap between private sector returns and social returns. This is especially useful in times of economic turbulence as it provides an extra layer of resilience.
Stakeholders must adopt a collaborative strategy in order to fully harness the power of blended finance and realise its competence to significantly enhance the lives of the masses. Through this, we may achieve great success in transforming society and improving population outcomes by making wise investments.
Its demand has become evident as development aid and philanthropy fall short in fulfilling the immense requirements of social and economic revolution across the globe.
Understanding the need for cutting-edge financing strategies like blended finance, FinX Investments, a leading investment banking firm for more than a decade, serves as a catalyst and plays a crucial role in locating the right lenders for the right borrowers. In addition to looking at private sector lenders as a potential source of additional funding, it evaluates their contribution to building and executing creative business solutions.
Opportunities, risks, and challenges
A wide range of private entities, from corporate to philanthropic investors, are also involved in blended finance. Institutional investors, such as sovereign wealth funds or pension funds, typically have access to enormous amounts of capital, and as a result, their investment strategies have a substantial impact on the market. Under the scope of blended finance, banks can offer debt funding. Corporations can contribute to it by making investments, for instance expanding their infrastructure, education, or health services via equity financing, as well as by creating new products and services that deal with concerns related to sustainable development. Due to their relative lack of risk aversion and readiness to invest in cutting-edge company ideas and financing strategies, private philanthropy also contributes to development finance.
However, there are certain risks that must be assessed when engaging in a blended finance project. These include the risk of overextending resources, the risk of political interference, and the risk of misallocating resources. As such, it is important to assess these risks and ensure that they are managed to the best of the investor’s ability.
Despite going beyond finance and providing more than just capital, it has been challenging to achieve the necessary scale and desired impact that blended finance offers to support the fulfilment of the SDGs due to the lack of a widely accepted definition of the term and its key concepts, as well as a prevalent and integrated outcomes structure, monitoring and evaluation, quality standards, and data analysis.
Blended finance: Making it work for the SDGs
It is generally agreed that public resources won’t be enough to close the investment gap needed to meet Sustainable Development Goals (SDGs). According to the United Nations Trade and Development Report 2022, forty-six developing countries are subjected to severe financial pressures because of the high cost of food, fuel, and borrowing; more than twice that number are vulnerable to at least one of those threats. The probability of a widespread developing country debt crisis, and a potentially lost decade, therefore, is very real, as is the risk of not meeting the SDGs by the end of the decade.
Blended finance, which is becoming more comprehensively accepted by the international community as a way to help close the funding gap, for the SDGs, aims to improve the quality of the partnership between the governments and the business sector by amplifying mutual benefits while establishing precise impact goals for sustainable development.
It helps extend the reach and effectiveness of development financial institution (DFI) investment by opening the door for engagement in initiatives that are fundamentally too volatile for more commercial capital to consider, thereby boosting development impact and speeding up progress towards the SDGs. Because the impression of risk does not match the reality of risk, a demonstration is necessary when blended finance is involved.
Mobilisation efforts should concentrate on utilising financial resources that have not yet been allocated to development objectives to achieve the SDGs. While most blended finance today has this as its main objective, there is a need for more institutional investors to get involved.
One of the case studies of blended finance at the project level includes that of the infrastructure sector in India which is ‘Enabling municipalities to tap capital markets to fund infrastructure development’. The financing sources from development finance involved Kreditanstalt für Wiederaufbau (KfW: a German state-owned investment and development bank) and the government of Tamil Nadu while on the commercial finance side, it comprised private bond investors. The financing structure and the instruments used included concessional loans and equity backing a bond issuance. This project had the potential impact of increased access to finance for municipal infrastructure projects.
Despite the challenges and risks, blended finance provides a much-needed opportunity to leverage resources, reduce the cost of capital and increase the impact of development initiatives. Being a promising approach to tackling global issues while creating economic value for impacted communities, blended finance is a cause worth investing in.