Conventional finance providers are not always equipped to finance inclusive businesses, and often consider risk-adjusted returns too low to merit credit or investment. Financial products are often not adapted to the needs of inclusive business. Despite the growth of the microfinance and SME industry, access to credit and other financial resources for the BOP are still scarce and are usually limited to small sums. Equity finance is also difficult to access. For example, smallholder farmers aiming to invest in equipment or distributors with a need for working capital must often rely on their own resources.

Factoring, Finance, Leasing, Equity Financing

Description

Additional finance instruments yet to be broadly applied to inclusive business, include factoring of accounts receivables, leasing for equipment and vehicles, and equity financing. Leasing, for example, is an increasingly important complementary source of investment finance, particularly in countries where the information infrastructure is weak. A potential advantage of leasing lies in the fact that it focuses on the ability to generate cash flows from operations to make the leasing payments, rather than on credit history or ability to pledge collateral. Factoring, a complementing instrument, has the advantage that its underwriting is based on the buyer’s risk, rather than the risk of the seller.

Policy Instruments:

Credit guarantees

Description

Guarantees – a type of “insurance policy” protecting banks and investors from the risks of non-payment – have been a mainstay of financial markets globally for many years. They play an important role in helping the private sector make investments that promote growth and create jobs.

Developmental guarantees are a special category of official guarantees backing projects that promote the development. These guarantees can provide the measure of security needed to bring on board more private risk capital and are a valuable instrument for mobilizing private resources from private companies, banks, individuals, NGOs, self-help groups, or investment funds.

Credit guarantees can be used in a myriad of ways, such as i) backstopping financing for large-scale, multi-year infrastructure projects, ii) lengthening the maturities of loans to small enterprises, iii) refinancing municipal utilities, iv) enabling local banks to enter new markets such as mortgage or microenterprise lending, or v) deepening capital markets by facilitating local-currency bond issues.

Guarantees for development supported a total of $15 billion from private sector actors for investments in the developing world from 2009 to 2011 with volumes doubling from $3 billion to $6 billion. The OECD’s Development Assistance Committee is exploring the scope for a new database that could help the development cooperation community understand where resources are being mobilized by guarantees, what types of guarantee instruments are being used, and whether additional resources are being catalyzed by these flows.

Policy Instruments: Topics:

Priority lending programs

Description

By encouraging financial intermediaries to carry out targeted lending programs, governments can promote access to finance for inclusive businesses. Priority lending programs can allocate a certain portion of a country’s total lending budget to a few key sectors or regions where inclusive businesses tend to be most active, such as agriculture, health, education, energy, water, and sanitation. 

Additionally, governments can increase access to finance for inclusive businesses by encouraging banks to directly support these businesses in specific regions or communities and by attracting banks and other mainstream institutions to invest in funds that finance them. It is important to note that improvements in access to finance for inclusive businesses are not dependent on banks alone, but there is also a growing group of non-bank financial institutions (NBFIs) funding these businesses.

Policy Instruments: Countries: Topics:

Public procurement

Description

Public procurement can represent up 20-30 percent of gross domestic product (GDP) of less developed economies. Sustainable public procurement (SPP) can provide a powerful tool to drive demand for goods and services that benefit BOP.[1]

SPP considers value for money as set by public authorities along economic, environmental, and social dimensions.[2] It can generate growth, reduce costs over a product’s life cycle, support the transfer of skills and technology, and encourage innovation. From the social perspective, SPP can create employment, improve equity and diversity, respect core labor standards and human rights, as well as contribute to poverty alleviation and inclusion of disadvantaged communities. Thus, SPP can be a driver of inclusive business strategies for companies that aim to sell to government.  

In the past decade, multilateral development institutions such as the World Bank, the United Nations, and the Asian Development Bank have revised their procurement policies committing to purchasing products that promote social and environmental sustainability.[3] The World Food Program, for example, procures agricultural products from smallholders under its “Purchase for Progress” program thereby enhancing their access to markets and strengthening value chains.

Policy Instruments: Countries:

Challenge funds and matching grants

Description

Enterprise challenge funds award grants or subsidies through a competitive process to private sector organizations that submit solutions with an explicit public purpose. Companies working within a specific sector are invited to submit project proposals for inclusive businesses that aim to solve a stated development problem and generate high pro-poor impact. Challenge funds can trigger new ideas and innovative solutions or promote the scale-up or growth of existing solutions. Proposals are assessed against transparent and pre-determined criteria.[1] Successful applicants must often match a certain percentage of the grant with own financing and/or in-kind contributions.

The number and volume of funds has grown rapidly since the 1900s. Funds ranges from approximately $1.5 million or less up to $207 million and can address a variety of issues, sectors, or countries or on just one sector or country. Companies are attracted to challenge funds due to their risk-willing capital, rather than the access to subsidies.[2]

Points to consider

  • Management requirements:  Enterprise challenge funds tend to be administratively demanding with management costs accounting for approximately 20-50 percent of total budget allocation. The delegation of fund management to an independent organization is an option.
  • Evaluation requirements:  Enterprise challenge funds lack adequate impact measurement systems. Critics point out that there are still very few evaluations of challenge funds to date. Furthermore, those evaluations seem to be focused too much on management issues and not enough on the evidence for the additionality of the funding and on the systemic pro-poor impact.[3]
Policy Instruments: Countries: Topics:

Credit facilities

Description

Microfinance extends microcredit and financial services to the estimated 2 billion working-age people at the BOP who are unbanked or who have no credit history.[1] Affordable credit opportunities offer low-risk microloans that can be combined with support from trusted loan advisors to enable the BOP to make informed financial decisions. Such programs make financial products and services more affordable for the BOP and help consumers build credit history. They can also empower BOP entrepreneurs, smallholder farmers, and producers by providing them with the financial services necessary to run a successful business.

Governments can encourage responsible microfinance programs and services by involving the private sector in the process of developing poverty reduction strategies, maintaining macroeconomic stability, and aligning the regulatory framework. The impact of these interventions will indeed depend on country-specific factors, such as market structure and maturity, governmental capacity, customer demand, and supervisory committees.  It is critical that the BOP’s financing needs are properly understood and that existing market penetration is effectively measured. Governments can leverage the existing network of regulatory agencies to expand coverage to low-income markets and to provide a more comprehensive assessment of the market and its risks. This can help policymakers avoid duplicative regulations and increase interoperability among market actors.

Policy Instruments: Countries: Topics:

Insurance Programs

Description

Insurance programs for the BOP empower them to participate in markets by protecting them against risks, such as illness, injury, damage, or loss. The BOP are often more vulnerable to such risks because they are less able to cope with the financial burden caused by unexpected occurrences. Despite this, the BOP are typically ignored by mainstream commercial insurers.

Governments can share the risk of covering BOP communities by:  providing fully or partially subsidized coverage for specific services; or paying customers’ premiums and entrusting private sector insurers with the operation of the scheme.

Policy Instruments: Countries: Topics:

End-user subsidies

Description

Subsidies are typically provided to stimulate demand for products that have socially desirable outcomes. In the past, subsidies on goods have often been provided to the companies that produce them. Governments are increasingly seeking to bolster market forces and stimulate competition among firms by providing subsidies directly to the products’ users. These kinds of subsidies may also drive user-oriented innovation and efficiency gains. Subsidies can also play an important role when users need some initial experience in order to grasp a product’s benefits or where positive external effects exist. As consumers adapt to the new product, subsidies can be rolled back or discontinued.

Vouchers are one method by which to administer “smart” subsidies to end customers. Vouchers have the advantage as compared to cash transfers that their use is predefined, thus directing expenditure towards the specific products or services with the desired social benefits. Moreover, voucher schemes can represent a partial subsidy, which – unlike giving out products for free – allows firms to gauge user demand and willingness to pay. The level of the subsidy can subsequently be reduced over time as customers start to recognize the value of the products.

Policy Instruments: Countries: Topics:

Event: Alleviating Poverty through Inclusive Business – Berlin, Germany – May 5, 2017

Alleviating Poverty through Inclusive Business: Policy Dialogue on Building an Enabling Environment for Inclusive Business through Public Private Collaboration

Policy Instruments: Sectors: