Local Development Finance
UNCDF designs, pilots and tests innovative financing mechanisms that encourage domestic fiscal resources and capital markets to invest in local governments and local economies to drive economic growth, empower women and build resilience.
UNCDF has evolved its approach over the course of the strategic framework. In line with the New Urban Agenda, it is now working with municipalities to leverage funding through public-private partnerships, bonds, eco-bonds and own-source revenues.
UNCDF has also introduced innovative structured project finance, SME finance and blended finance approaches to support local public- and private-sector actors to de-risk, build and unlock private finance for pipelines of investable projects with strong development impact.
UNCDF also develops mechanisms for local governments to access climate finance, using established fiscal decentralization channels. This means supporting ministries of finance and ministries of local government to secure accreditation to climate funds, such as the Green Climate Fund, and channelling performance-based grants to local governments through intergovernmental fiscal transfer mechanisms.
Finally, UNCDF unlocks domestic capital for gender-sensitive investments that emerge from local government strategies for women’s economic empowerment.
In focus: Unlocking financing for local development
In Guinea, UNCDF investments have been helping to influence broader local development financing decisions. For example, the construction of a public market and bus terminal in Boffa district increased the revenues of the local government by 200 percent between 2014 and 2017. This has supported follow-on investments, enabling the local government to better absorb an influx of migrants attracted by a mining investment. The demonstration effect of this project led to an agreement in 2017 between the government and the Chamber of Mines to channel 0.5 percent of mining royalties to a local government fund for similar types of investments. In 2018, UNCDF is planning to co-finance similar revenue-generating local infrastructure in Guinea with the local government, the French Development Agency, local banks and local developers.
In Bangladesh, bank credit disbursals doubled in districts implementing the local development fund which UNCDF helped set up, while local fiscal space expanded by 27 percent between 2013 and 2017. The lessons learned from the UNCDF programme informed a government decision to scale up the programme to all subdistrict governments across Bangladesh. In 2017, UNCDF also facilitated and financed the establishment of a credit guarantee facility by the Bangladesh Bank, which will potentially unlock nearly $1million of local bank financing for women entrepreneurs in sectors selected for their catalytic impact on the local economy. This is expected to increase the collective turnover of the targeted entrepreneurs over the next five years. Furthermore, on the back of the UNCDF involvement, the International Finance Cooperation has injected an additional $750,000 to support the credit guarantee facility.
UNCDF incentivizes financial services providers to design and deliver client-centric product innovations using alternative delivery channels to reach underserved populations, especially women, youth, smallholder farmers and agriculture value chain actors.
UNCDF also uses data-driven diagnostics to help governments develop financial inclusion strategies.
Digital innovations are a core feature across its work. UNCDF is increasingly working with new actors, such as fintech, mobile network operators and new technologies, especially digital financial services.
On clean energy finance, UNCDF works with energy service companies to expand access to efficient cookstoves and solar home systems through ‘pay-as-you-go’ models.
UNCDF is also working with governments and service providers to formalize remittance channels, leveraging digital and fintech solutions to lower costs and link remittances to a wider range of financial services.
UNCDF hosts the secretariat of the Better Than Cash Alliance.
In focus: The enormous positive impact of digital financial services
By building digital ecosystems, UNCDF has contributed to an increase of 6.7 million adults with an active digital financial services account in eight countries. In Zambia, for instance, UNCDF has contributed to a sharp increase in active users of digital financial services, from 2 percent of the adult population in 2014 to 18 percent in 2017. In 2017, the roll-out of an e-wallet called ‘Sunga’, developed with UNCDF support, has gained traction, with active account usage reaching 136,000. UNCDF also focused on expanding access to the most vulnerable and excluded populations, including families in rural areas and refugees. Working with the Office of the United Nations High Commissioner for Refugees (UNHCR), UNCDF has been instrumental in requesting the Zambian government to allow the use of refugee identification when opening a mobile money account. Currently, research is being conducted to identify how digital financial services can help mothers address specific challenges they face and to develop the business case for service providers to deliver products that meet their needs.
Together with UNDP, UNCDF has made a significant contribution to increasing access to finance in the South Pacific, supporting the enrolment of 1.7 million people for savings, loans, mobile wallets, micro-insurance or remittances using primarily digital channels. This represents 29 percent of the total adult population in that market. UNCDF has contributed significantly to the financial inclusion of women, resulting in some 800,000 women becoming formally banked since 2008. In 2017 alone, some 170,000 women were reached through the various financial products and services supported by UNCDF.
In Nepal, UNCDF helped financial service providers reach 48,000 new clients by establishing 11 rural branches, setting up 405 mobile and agent banking points and designing 7 new financial products specifically catering to the large agribusiness value chains. Under a challenge fund mechanism, UNCDF supported the LienVietPostBank ‘Vi Viet’ e-wallet to reach 1.5 million clients in Vietnam.
LDC Investment Platform
UNCDF is playing an increasingly active role in mobilizing investments in local economies through the application of loans, guarantees and reimbursable grants that mitigate the risks for public and private investors. The home for this third pillar of work is the LDC Investment Platform, which is creating new opportunities for UNCDF to expand its support for local infrastructure and businesses in the last mile.
The LDC investment platform seeks to use financial instruments such as loans and guarantees for direct investment and to absorb risks to mobilize more commercial investments into a growing pipeline of projects in LDCs (e.g. in local infrastructure, SMEs, agriculture value chains, financial service providers, fintechs). It rests on the UNCDF loans and guarantees policies and a strengthened due diligence process including financial modelling, credit scoring and structuring. UNCDF has dedicated capacity to manage and oversee non-grant capital investments as a portfolio and ensure robust accountability.
While it currently focuses on providing guarantees and loans to projects supported by UNCDF, if funded and requested to do so, this platform could be put in service to UNDP and the wider UN system as part of UNDP’s ‘integrator’ approach.
In focus: The diversification of the UNCDF grant portfolio
Compared to its focus on promoting microfinance and local public finance in 2010–2013, UNCDF has evolved its focus, tools and approaches over the last four years to target more clearly last-mile populations, SMEs and local governments. The figure below compares the change in UNCDF investments between 2012-2013 and 2016-2017. The figures show a striking evolution in the composition of UNCDF investee partners that follows the changes in its programmatic approach. In 2012 and 2013, over 98 percent of UNCDF investments were made to financial services providers, mainly microfinance institutions and commercial banks, and to local governments. While these two sectors remain vital partners, UNCDF investments have expanded significantly to mobile network operations, fintech firms, energy services providers and SMEs in both sectors.