Remarks by Judith Karl, UNCDF Executive Secretary, at the Concessional finance and UNCDF’s toolbox event

  • September 09, 2016

  • New York, USA

Distinguished delegates,

Welcome and thank you very much for attending today’s briefing on the role of concessional finance in UNCDF’s portfolio.

Today we would like to discuss our continuing efforts to make our financial toolbox fit-for-purpose for the Least Developed Countries by making better use of grants and loans in our programmes and fine tuning the balance between the two.

Specifically, we would like to address following main questions:

  1. How are we optimizing grants and loans to support last mile development in LDCs?
  2. How does the application of grants and loans provide demonstration value and leverage other resources for the last mile in LDCs?
  3. What do we see as the specific applications of grants and loans across UNCDF’s two practices, financial inclusion and local development finance?

Let me make three points in this regard:

First, the financing for development landscape is evolving rapidly, and LDCs and their growing private enterprises are well-placed to benefit from these shifts. Even as ODA will continue to be key in financing development, there’s a need to mobilize significant additional resources to meet the SDGs in LDCs. This means we all need to think about how we can better leverage the ODA we have. For UNCDF, this includes enhancing our lending capacity and optimizing how we use grants and loans to help LDCs achieve their development goals.

UNCDF operates where there is a significant gap that is not being filled by other development finance actors in LDCs.

Many reasons make it difficult to raise the resources needed, and to channel them to the “last mile” in LDC. These include perceptions of risk, lack of market

knowledge, the small size of some projects, and challenging regulatory frameworks.

Important projects and programmes in LDCs are therefore not being funded by commercial or development finance institutions. Many of these potential investments are found where UNCDF has been active for many years, and has gained considerable experience. They range from supporting government local infrastructure investments to financial service providers that are reaching out to a new segment of borrowers. The result is that poor people, places, and small enterprises are underserved and excluded.

In response, UNCDF deploys public resources to reveal new markets and create incentives to attract private capital. This shifts the dynamic of how resources are allocated and can make an investment’s risk-return profile more positive.

We target projects that address critical gaps in development and that can be scaled up to yield significant benefits beyond the original undertaking.

Over the last 18 months we have shared with you many examples of how we do this, from supporting local infrastructure in Tanzania to empowering women and young people with access to financial services and helping local authorities in Africa and Asia adapt to climate risks.

Now, to continue providing maximum demonstration value in the last mile in LDCs, we are rebalancing our use of grants with loans. This will give our various partners access to a fuller range of finance options and help leverage more resources where they are needed most.

Second, optimizing our grants and loans is a utilization of our mandate and existing work. UN General Assembly Resolution 2186 of 13 December 1966 gives UNCDF the mandate to provide “grants and loans, particularly long term loans made free of interest or at low interest rates”.

To date, our experience with lending has been primarily on the financial inclusion side, to private sector financial service providers. Henri will tell you more about this, and how our existing loan portfolio has expanded financial inclusion for low- income households and small businesses.

We have learned from managing these loans the importance of sound credit analysis, due diligence, robust monitoring, and careful risk management.

Our financial inclusion practice is increasingly dealing with loan-ready private sector actors beyond financial service providers, such as those expanding access to clean energy and mobile money, supporting SME growth, and building agricultural value chains. Our local development finance practice has evolved in recent years to combine its two decade long experience in local economic development with blended finance tools such as structured project finance, municipal finance, and local climate resilience investments where many of our beneficiaries are also increasingly loan-ready and could benefit from developing sound credit history.

Across both our practices, there are more and more cases and more and more partners where loans can be the most appropriate tool to create the market incentives that leverage other resources and to nurture the local private sector.

Many of these opportunities are beneath the radar of multilateral development banks or impact and other investors. Often the risk may be too high for the return offered, or the loan size too small. Through concessional loans, financial service providers and other local private sector actors could access finance that they might not otherwise get or afford through the market. We will also provide loans to subnational governments where the appropriate frameworks are in place, where such demand exists, and where our experts assess that lending is appropriate.

The concessional terms we offer may include lower interest rates, subsidized principal, grace periods, or offering longer tenures compared with other financial institutions.

Overall, we will expect to deploy concessional loans in very specific cases: where we assess that the recipient has the capacity to make productive use of loans to ensure repayment; where the loan has the potential to mobilize additional capital flows; and where there is scope to achieve significant development results.

Crowding in will be a key component of our lending. UNCDF loans will normally amount to less than 20% of the total value of the financial package. This de- risking will create confidence to unlock the balance required from domestic banks and other concessional lenders, such as larger international development banks.

We are looking to support productive investments that are financially viable in the long run, and to help create credit data, and hence credit worthiness for borrowers over time. This way they can access commercial capital more easily.

For LDCs and other partners, a well-functioning portfolio would have loans being repaid and those reflows on-lent to new borrowers. This could support a bigger pipeline of bankable initiatives and help them access more resources than would be the case through grants alone. In this way, UNCDF can make more effective use of scarce resources as it helps LDCs achieve the SDGs.

Let me stress that we will continue to make many investments through grants. Grants will remain a cornerstone of our work building local capacities, de-risking markets, and crowding-in resources to the last mile. Many of our beneficiaries are not loan-ready, and it is through grants we can help build investable projects. We will likely also offer grants in combination with loans. There will continue to be many cases where grants alone are effective.

Third, we are building up our loan portfolio and its management.

We revised our loan policy last year. Now we are significantly reinforcing our internal capacity with professional lending skills and expertise.

We are currently reviewing our portfolio to identify those projects that are better suited to lending instruments. We will ensure that our work is complementary to that of other lenders, and operate where no other institution is in a position to finance the project.

The pipeline of potential borrowers will largely emerge from the work of our two practices - financial inclusion and local development finance – so that loans are in line with our already agreed development programmes and policy objectives of LDCs.

We have established a separate unit to provide and manage our loans, and are instituting new back office processes to ensure tough due diligence and ongoing performance monitoring. This unit will be accountable for approving concessional loans and for securing corporate fiduciary standards and underwriting.

As we advance, we will work in an iterative manner. We are emphasizing 5 learning, and we will monitor closely, assess, and refine the performance of our loans.

Now, my colleagues Henri and David will explain how we see concessional lending as benefitting our programmes and beneficiaries.

Following those presentations, we are available to answer your questions. I look forward to engaging with you on this exciting topic as we ensure that UNCDF is best placed to help LDCs meet their development goals.