By: Peter Vincze
During Panel 1 of the LIDS 2017 Symposium, Kevin Saunders, Lizzie Merrill, and Eric Solomonson shared their insights on diverse initiatives and approaches of four companies with the common objective of alleviating poverty. Accion International is a non-profit organization that aids microfinance institutions rendering financial services to low-income clients all across the globe. Ignitia and SeKAF are two Ghana-based NGOs that produce hyper-local, high-precision tropical weather forecasts and shea-based products through environmentally friendly and socially inclusive methods, respectively. One Acre Fund offers asset-based loans and agricultural trainings to eradicate poverty through the support of small-scale farmers in East Africa.
One of the most memorable points of the hour-long discussion that Kevin Saunders raised and Lizzie Merrill and Eric Solomonson echoed elaborated on the triple challenge (capital, channels, and data) lending institutions face in the international development arena.
The capital challenge stems from the fact that the level of demand for capital influx at the community level hardly ever equals the niveau of capital supply provided by lending institutions. The shortage of supply chiefly attributes to the fact that aid agencies themselves often struggle with obtaining and maintaining a constant influx of capital to their reservoirs that can later be allocated to their clients. Steady investment and working capital are however indispensable, especially for microenterprises and SMEs, to establish and/or expand their business activities, leading to a gargantuan demand for capital. As the traditional way to satiate this need through the philanthropic community is no longer satisfactory on its own, alternative, concerted ways need to be sought to ascertain proper funding for lending institutions.
The challenge of channels refers to difficulties of aid agencies in reaching individuals and businesses in developing economies that strive for access to financial services. Financial services are unavailable in many rural and even urban areas and, even if they are present, associated costs hinder accessibility. Main obstacles for lending institutions in these contexts are enhanced transaction costs, paucity of traditional collateral and basic requirements for financing, as well as geographic vicinity. Dearth of access to financial resources is a key impediment for entrepreneurs who possess the ability and required skills, as they cannot translate their deftness into sustainable outcomes. They are prone to resort to non-formal financing like moneylenders (“loan sharks”), traders, or even relatives and friends, and other high-risk financing mechanisms that further inhibit the operation of aid agencies. Cell phones and other technological developments can eventually mitigate challenges; access to these technologies is however also scarce, leading to a vicious cycle.
Accurate and comprehensive data is the sine qua non to evidence-based, responsible decision-making. Access to veracious and actionable data is particularly challenging in the development arena where data collection and reporting face numerous obstacles and can easily be hijacked for economic and political gambits. Among the numerous factors that impede or constrain data collection In developing contexts are low propensity of respondents, low standards in bookkeeping, deficiencies in law and order, rapid institutional alterations, size of informal sectors, and cultural constraints. Even in the unlikely scenario that data is reported accurately and fully, access to statistics, especially for non-public entities, be it large or small in size, is laborious and costly if not impossible. Asymmetrical and/or incomplete information poses risks, as institutions are unable to make optimal decisions vis-à-vis credit, inventories, clients, etc. Technology, through the collection of mobile and satellite data, again has the potential to yield a breakthrough; however, dearth of access to such, in this context as well, perpetuates the issue.
While smaller donor agencies are more prone to the above-mentioned challenges, no lending institution is exempt from them, regardless of size or prevalence. My personal experience draws me to the World Bank, which constantly seeks solutions for all three issues. The Bank’s coquetry with blockchain technology is one emerging approach to find remedies to the channels challenge. The recently launched Development Data Hub with provision of easily accessible and accurate development statistics aims to mitigate data challenge. The Bank also endeavors to tackle the challenge of capital, which, I would aver, is the most alarming in the current development policy landscape, with alternative ways of financing. Let me elaborate.
Funding of the World Bank (IBRD and IDA) relies on direct contributions of member countries. Every member state renders a certain amount of initial capital to the institution upon accession that can later be expanded. Voting power of member states depends on the amount of contribution the country has made. Share allocation as well as voting power differs in IBRD and IDA.
In addition to bond issuance on international capital markets, IBRD relies on contributions from its 189 member states. IBRD’s capital stock has to be intermittently expanded through capital increases to replenish accounts drained by accelerated disbursements and/or to expand operations. A roadmap for the most recent general capital increase was assented to during the 2015 Annual Meetings in Lima with a decision to be made during the 2017 Annual Meetings. Owing to the change of the U.S. political landscape, the kismet of the general capital increase is however currently uncertain. During the 2017 Annual Meetings, U.S. Treasury Secretary Steven Mnuchin, representing the largest shareholder of the World Bank, rejected the idea. Instead, he urged the institution to transform its operations to effectively reallocate its existing capital and gestate a framework that would allow a financially self-sustaining Bank.
IDA capital replenishment occurs triennially. Within the framework of the past IDA replenishment, IDA 18, member states have made the most ambitious set of commitments to date with a historic $75 billion replenishment package that transforms IDA’s financial model. Despite the unprecedented pledge, IDA’s future is currently irresolute, as the Trump Administration is rolling back several Obama-era commitments. In an effort to secure IDA finances, the institution has commenced penetrating capital markets through bond issuance for the first time in its history despite lingering criticism.
The future seems to be brighter though than one would think. Even if traditional financing sources are reconsidered, new emerging international development actors seem to be willing and able to step in to finance lending institutions as well as development projects directly. China, India, Russia, South Africa, Turkey, the Arab donors inter alia have for years been enhancing their efforts to fill potentials vacuums through unilateral, bilateral, and multilateral initiatives. China, for instance, has recently increased its contribution to the Bank from 2.77 percent to 4.42 percent to become its third largest shareholder. In addition to state actors, the burgeoning of a heterogeneous smorgasbord of non-state actors can also be witnessed in international development circles ranging from philanthropic foundations (e.g. Bill & Melinda Gates Foundation), to global funds (e.g. The Global Fund to Fight AIDS, Tuberculosis, and Malaria) and enterprises engaging in corporate social responsibility. These private actors not only bring a new set of perspectives to the table, but may also be financial heavyweights in particular sectors or regions. In this context, the work of organizations such as Accion International, Ignitia, SeKAF, and One Acre Fund is more salient than ever. Not only do they work to persuade the commercial world to penetrate the development arena, but also they seek to foster social inclusion, impact investing, the provision of management services and technical assistance, inter alia that will all assuage the triple challenge of capital, channels, and data.
 The term ‘World Bank’ refers to the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The World Bank Group comprises of five institutions: International Bank for Reconstruction and Development (IBRD), International Development Association (IDA), International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), and International Centre for Settlement of Investment Disputes (ICSID). This analysis merely focuses on the World Bank.
About the blogger: Peter Vincze is a consultant on corporate governance-related topics at the World Bank. He aims to pursue further academic training in international development law.