Blended finance and the post-COVID economy (Part 2)

Check out our primer blog on Blended finance and post-COVID economy part 1 here

Banks have a crucial role to play

To fund projects in South and Southeast Asia concerning water sanitation, Bank of America provided $5 million of interest-free capital into a fund that proceeded to attract $45 million in additional private capital. The goal was to boost the economy by creating healthier and therefore more productive citizens by making sure the water consumed was hygienic and safe.

The Organization for Economic Co-operation and Development (OECD) released a few guiding principles to ensure that blended finance is implemented in the right way. One of the more important principles was to account for the local context. It is banks and financial institutions who know the true nature of our country’s financial state of being, and it is them who need to act.

Way forward

A bank would want to lend money to projects which offer the most return, but most development projects remain to be very high risk. On the other hand, grant-makers want to make the most impact, and do not mind investing money in high risk projects. A blended finance structure offers a neat balance between the two, according to Christoph Kuhn from European Investment Bank.

To succeed, blended finance must overcome certain factors of resistance. First comes the ideological differences between public and private enterprises. Secondly, both sides need to chalk better strategies to handle failure. Thirdly, risk handling should be better, that needs public investors to come forward and take higher risks upon themselves to increase confidence and conviction from the private side. Fourthly, there should be better monitoring of funds usage, with robust auditing and control.

Lastly, there should be ways to address everyday money management, with clarity on future payments, that tend to be prohibited in ‘use it or lose it’ policies followed by certain public agencies.