Building Inclusive Economies With a Blended Finance Approach

Blockchain, FinTech, News, Opinion | June 1, 2021 By:

The current approach to business and investment doesn’t work for everyone. The pace of growth is often unsustainable, unstable and focused on short-term projects rather than long-term investments. Many are also left behind  — like refugees and people in developing countries. 

The shortcomings of traditional financial approaches have led to new investment strategies — like blended finance — to use private funds to drive more sustainable development.

These new strategies, along with technology like crypto and the blockchain, may help investors around the world build inclusive economies.

What Is Blended Finance?

Blended finance is the use of development funds to mobilize additional capital toward sustainable projects in emerging markets. Its function is to encourage commercial investors to contribute to sustainable developments while also providing them with financial returns. This is often accomplished with incentives that lessen risk posed by a long break-even, low potential margin or poor growth.

The “blended” in blended finance refers to the source and function of capital being invested. For example, money for one project may come from a combination of philanthropic funds and crowdfunding, given without expectation for remuneration or profit. It may also come from debt or equity provided with the expectation of eventual returns or repayment.

Additional funding may come from government sources — like the financial relief that the CARES act provided for nonprofits and similar organizations.

This money may be organized or gathered through the use of emerging technology, like the blockchain.  As the project develops and the apparent risk decreases, additional and more conservative investors may be brought on, helping make the project more viable.

Building an Inclusive Economy

In practice, the blended finance approach is often seen as an important step toward an inclusive economy — one in which growth is primarily additive rather than extractive. 

The products of an inclusive economy may look like projects that restore the environment, encourage full participation in economic life and provide stable, sustainable growth. This growth is typically distributed equitably, ensuring that a wide range of people can access the benefits of new development and investments.

Egypt partially credits the use of blended finance for the country’s relative success during the COVID-19 pandemic. The government regards public-private partnerships, small businesses, and international cooperation as essential to the country’s future. Officials there hope these organizations will enable the growth of a more inclusive economy.

The European Bank for Reconstruction and Development has also made the creation of an inclusive economy an organizational focus. The EBRD’s Economic Inclusion Strategy (2017 – 2021) outlines how the bank plans to do this. Tactics include programs that provide young people with better access to skills needed to succeed in the modern world, initiatives that improve entrepreneurs’ access to financing and new services that enhance existing economic activities.

Emerging tech may also help create more inclusive economies around the world. Some have suggested that blockchain and cryptocurrency may help keep investors and the global economy at large accountable to the average person. This would provide a strong incentive for equitable, sustainable and inclusive growth.

Julie Maupin, former senior fellow at the Centre for International Governance Innovation (CIGI), wrote in a 2017 article that blockchain technology might “hold the key to building an inclusive global digital economy that is auditably secure and transparently accountable to the world’s citizens.”

Maupin notes that at a time when public faith in a cross-border economy is low, the use of technologies like blockchain can rebuild trust between individuals and transnational institutions. The transparency that blockchain offers may help restore the public’s faith in the idea of a global economy.

How Blended Finance Can Create a More Sustainable Economy 

As the economy recovers from the COVID-19 pandemic, many investors and ordinary people are asking deep questions about the economy — including how we can invest to drive growth that’s both sustainable and accessible to everyone. These discussions have created an opportunity to explore new financial strategies, like the use of blended finance and the blockchain.

Building an economy that is sustainable and inclusive will likely be a challenge — but there’s already evidence that it’s possible with the right incentives. Success here could be essential if we want to solve some of the largest challenges of the 21st century — like declining faith in a global economy, climate change and sustainable development without environmental damage.