Elbow to elbow: convening donors and practitioners to optimize blended finance

Nairobi, Kenya. November 2019. Eight faces silently study the projector screen in the conference room. Donors have gathered to hear findings generated by Aceli and our data partner, Dalberg Advisors, on the (un)profitability of lending to agricultural small and medium enterprises (SMEs) in Africa, and to discuss Aceli’s proposed solutions. Someone crunches a cookie; another pours more pineapple juice. For a time, nobody speaks.

Finally, one donor says: “I understand why subsidies are needed to get the market moving, but the optics of paying banks to make loans are complicated.” Another adds: “How do we know the difference between systemic market dysfunction that we should be addressing and bad lending?”

Photo: Aceli Africa

Hours later, my Aceli colleague Etienne Ndatimana makes the same presentation, this time with the donors crowded elbow-to-elbow with representatives from commercial banks in Uganda and Kenya, state agricultural banks in Rwanda and Tanzania, specialist lenders focused on equipment leasing and factoring, and international social impact lenders. Their institutions had collectively shared data on over 9,000 loans totaling US$3.7 billion, enabling the first-of-its-kind quantitative analysis on the economics of agri-SME lending that we were presenting.

A Ugandan banker speaks first: “The 50% loan guarantees we’ve been offered in the past aren’t high enough to cover the risks of lending in agri.” A Tanzanian lender follows: “The returns on smaller loans don’t cover the transaction costs when you have to drive seven hours just to meet the client.”

For the three years we were gathering data and designing Aceli, my colleagues and I ping-ponged between these perspectives. On the one hand, we encountered donors who wanted to get more capital flowing to African agricultural SMEs but who were hesitant to fund the kind of subsidies for agricultural and small business lending that are established policy in their own countries. And on the other hand, we heard from lenders who wanted to serve this market but knew from experience or intuition that the economics didn’t work.

The limitations of blended finance

The challenges we faced in bridging the perspectives of donors and private capital providers are common across the development sector, and they extend beyond agriculture. In recent years, the development community has sized up the US$2.5 trillion annual financing gap needed to achieve the SDGs by 2030 and concluded that the roughly US$160 billion in official development assistance won’t get the job done.

Enter blended finance, which is premised on the belief (or perhaps the hope) that a bit of public or philanthropic funding plus a lot of commercial capital equals sustainable development. Convergence estimates that blended finance has mobilized US$4 in commercial capital for every US$1 of concessional capital, but qualifies that the majority of this “commercial” capital comes from public development finance institutions (DFIs) as opposed to private sector investment. These capital leverage ratios pale in comparison to the need, and blended finance vehicles still often fall short of achieving the type or depth of impact they’re targeting.

OECD, IFC, Convergence and others have produced a growing body of principles and reports on blended finance. Yet this relatively nascent practice tends to produce bespoke deals and funds as opposed to the sort of systemic solutions that could truly move the needle in sectors like agricultural finance. There are a few reasons for these limitations:

  1. Creative deal-making prevails: The actors financing a deal tend to secure as much concessional funding as they can — a reasonable approach in the absence of more objective standards defining appropriate levels of subsidy based on the sector, geography and impact they are targeting.

  2. Risk-return hurdles drive investment decisions: Though impact is emphasized in marketing these transactions, there is minimal accountability when it comes to capital additionality or impact in the actual design or implementation of most blended finance vehicles.

  3. Blending is done at the level of individual transactions or funds: That means that individual actors compete on an uneven playing field based on which are best at fundraising, as opposed to which can deliver impact most efficiently in a competitive marketplace.