Innovative Finance For The Development SectorAnil Birla | February 24, 2020
Innovative finance for the development sector
International development is primarily based on two major shifts in the world today. The first being the increase in collaboration between the public and the private sector, and a need to focus on developmental programs to achieve the United Nations – Sustainable Development Goals (SDG).
The diverse frameworks for innovative finance are designed to aid the traditional international flow of resources like funds, foreign direct investments and remittances, to name a few. The macro layer of goals is to de-risk human lives & environment by raising living standards, protect the environment and eliminate poverty.
Innovative finance is about defining standards and establishing different mechanisms to increase participation in the sector. There are a variety of financial instruments and assets like securities, derivatives, results-based financing, voluntary or compulsory contributions. The idea is to create ways in which different sectors can contribute with an increased purpose.
A successful innovative financing system can help mitigate risks related to market failures, create political momentum to generate more revenue and resources for the development sector. The allocation of risks goes to institutions that are better equipped to bear those. Apart from mobilization of resources, innovative fundraising approaches are also appearing to align with the current goals of innovative finance.
Following are the core drivers of growth in the sector:
1. Increase in use of established financial instruments
Instruments and existing risk frameworks like green bonds will help attract new participants like pension funds and institutional investors. The proceeds of these towards development goals will create a new approach in understanding more effective and impactful use of these funds.
2. Expansion into new markets through replicity
Replicable approaches to expand into new markets will lead to improving the scale of innovative finance. For instance, the International development community has been experimenting with performance-based contracts. While these kinds of approaches at present don’t attract institutional investors, they are however potential opportunities for them to adopt to as these start to show success.
3. Creation of new financing products
Introducing new financing products is critical for evolving the methods and the process. While it won’t create momentum for a large term in the beginning, but opportunities for the early adopters in the process, validating the products that are successful. These can be then taken forward to continue and mature into imperative assets in the future.
As we see the world gearing up towards the United Nations Sustainable Development Goals (SDGs), these drivers of growth will be even more useful. While at one end, there is political uprising across the globe towards nationalistic values, on the other hand, there is an equally critical voice against it. This sure has created a disturbance in the equilibrium in the world, where the idea of sustainability comes in to establish balance, with an equal passion.
In the coming years, business and governments are forcefully working towards harnessing all possible sources of financing to address economic, social, and environmental challenges. While this requires immense financial resources, it also needs smart approaches to allow collaborations with all kinds of stakeholders involved. This would help in creating solutions that solve problems for everyone in the chain.