It used to be that when a development organisation invested $1 in a program, they expected $1 worth of impact. Now, the question is: how can we unlock a further $100 from that $1? Inclusive and catalytic finance is the answer, and both development agencies and donor organisations have an interesting and increasingly important role to play. As we approach 2030 and face the lack of progress made in achieving the Sustainable Development Goals (SDGs), we have to redouble our efforts.

We know that the finance gap to achieve the SDGs is absolutely enormous. We also know that there isn’t enough development finance or donor funding alone out there to close that gap. But it doesn’t mean that getting there is impossible. In fact, we’ve seen the impact of catalytic capital time and time again through our projects and programs around the world, many of them actually seeded by USAID and other development agencies.

The intentional use of finance and investment to promote sustainable development is paramount to achieving the SDGs. And I say paramount intentionally, because we have to lead with inclusive growth and financing in mind if we’re going to be sustainable.

This responsibility doesn’t only fall on development agencies. It’s a whole-of-ecosystem effort, including development agencies, donor organisations, and development finance institutions aligning their tools, to create enabling environments for sustainable financing. What we’re seeing unfold is that these agencies are 1) refining their understanding what effective roles they can play and 2) supporting innovative financing approaches that leverage their grant or debt funding to be inclusive and catalytic.

My belief is that the right finance and investment tools will lead to good, sustainable development- not always the other way around- and we’re seeing firsthand the impact in our work at Palladium.

Catalytic Finance at Work

In Burkina Faso, where nearly 86% of the working population in the country’s rural areas derive all or part of their income from livestock, there’s an excellent business opportunity for feed sellers. For small business owners within the livestock ecosystem, particularly women, securing finance from banks to bolster their businesses is near impossible. Compounded by the fact that the country is in turmoil, traditional investors see risk in a tough environment, rather than an opportunity to help build a thriving, sustainable economy.

Through the USAID-funded CATALYZE’s Finance for Resilience project, which has been working in the country since 2020 and which has already assisted 316 enterprises, small business owners in the agriculture sector can receive loans that they otherwise would have been refused. By partnering with local finance institutions, CATALYZE provides incentives for loans offered to young entrepreneurs and agricultural sector actors working in target value chains such as cowpeas, small livestock, and poultry.

The goal is to motivate financial institutions and banks to participate in agricultural financing by leveraging various incentive mechanisms to increase the appeal or reduce the risk of lending to entrepreneurs and farmers. Ultimately, the work builds sustainable financing resources beyond the incentives and the life of the project itself, showing that a targeted intervention can spark a whole of ecosystem transformation.

In Kenya, the Kenya Investment Mechanism (KIM) built up the capacity of local financial institutions and business advisory service providers through training and technical assistance to better facilitate private finance and investment for the working capital needs of smallholder farmers and micro, small and medium enterprises, which were both vastly underfunded and largely ignored. Over the 5-year life of the project, the team successfully mobilized over $650 million of capital investments in small businesses from $35 million of USAID funding.

The capital raised across the Kenyan financial ecosystem, which was invested in more than 400 businesses across the country, prove that through smart incentives and demand-driven technical assistance, you can facilitate private finance and leverage investment to bolster whole sectors of an economy. The work didn’t go unnoticed. At last year’s AmCham Business Summit, Kenya’s President Ruto heralded the work KIM and other organisations have done to create an optimal operating environment for businesses across the country and acknowledged several KIM supported companies helping to boost agro-industrial productivity and food security.

The Keys to Greater Impact

Development agencies, through their support of innovative, inclusive financing approaches have shown that this is the right way to unlock sustainable development outcomes.

But now it’s time to double down.

The United Nations’ 2023 Sustainable Development Goals Report found that only 15% of the goals are on target to be achieved. The UN and world leaders alike have acknowledged that one of the transformative breakthroughs in achieving the SGD’s will be securing a surge in SDG financing and an enabling global environment for developing countries.

No, development agencies alone cannot achieve this.

But they do have the keys to unlock the box to greater sustainable impact. Whether it’s from the demand side in enabling local ecosystems through incentives to support small businesses, or helping financial institutions get past their fear of lending to so-called risky groups, development agencies must continue to be more deliberate and intentional about the use of finance and innovative mechanisms across all sectors of their work if they truly want to implement sustainable development.

I’ve seen it work and I’ve seen how the growing diversity in the skills of development professionals (and an appreciation for people with a finance backgrounds) is helping to modernise donor organisations around the world.
Now, that modernisation must continue at an even more accelerated pace.

For more information, contact info@thepalladiumgroup.com.