Q&A with the Executive Secretary of the UNCDF: Judith Karl

Executive Secretary: Judith Karl

How would you sum up in three single words what characterises your team at UNCDF?

• Innovative
• Nimble
• Trusted

What are you trying to accomplish?

We aim to make finance work for the poor.

In the current global financial ecosystem, finance flows are unequally distributed, and scarcest in the areas where sustainable development needs are the greatest. But this does not have to be an inevitability. There are built-in incentives and structural rigidities that can be changed to create more conducive financial pathways that work for those left behind. If we move from billions to trillions under the existing architecture, we will likely just perpetuate current inequalities with larger sums of money. So at UNCDF we look deeply at what localities, what populations, and what SDGs are most adversely affected by these asymmetries, and we design new financial pathways to show that financial eco-systems can be more inclusive, more accessible for a wider range of actors, and more SDG positive.

“UNCDF’s longest standing practice on local development finance works to expand the local fiscal space through inter-governmental fiscal transfer systems and mechanisms, as well as by addressing the legal and regulatory bottlenecks that limit fiscal resources from flowing to local economies.”

Our 2019 publication Blended Finance in the Least Developed Countries shows that of the private capital mobilised as a result of blending, only 6% landed in the LDCs. And that 6% is volatile, i.e., highly concentrated in a handful of countries, sectors, and transactions. Of course there are reasons that the investment climate is harder in LDCs and we don’t deny those. But we also know that perceived risk is sometimes higher than real risk; and that current pricing and incentive structures do not work for smaller ticket sizes, and harder to reach localities. This requires a stronger “handshake” between development agencies that provide TA, development finance entities that tend to work at the sovereign level and/or at big ticket sizes, and commercial investors/banks. UNCDF sits at the nexus – a hybrid development/finance agency with flexible capital. After all, it is in the real economy that sustainable development meets people’s lives; it is in the local markets, SMEs, local infrastructure, and local financial ecosystems that people find their opportunities, make their living, and determine the education, health, and development outcomes for their families.

By deploying innovative finance models that successfully crowd-in public and private finance, we can create the demonstration effects that develop and transform markets; shift the dynamics of financing towards the local level; and, ultimately, catalyse the system change that helps ensure we truly leave no one behind. In the process, we are working to ensure that the financial ecosystem can be a force for good and for the achievement of the 17 Sustainable Development Goals for all.

Is the hardest challenge deploying capital to the countries that need it the most?

Yes, we find that capital is often least likely to reach the people and places that need it most. This is not only true for least developed countries in general, but even more so for secondary cities and remote regions within these countries.

Since the global financial ecosystem is sovereign based, it substantially favors national governments when it comes to accessing capital. At present, countries, as well as large corporations can easily access capital markets, while even large cities in the developing world lack such direct access. National governments in many developing countries also possess a monopoly on taxation, which means that local governments are unable to raise or retain revenues at the local level. Municipalities in LDCs are often limited to the budgets they receive from the central government, which are insufficient for meeting the range of basic services expected by citizens, let alone investing in local economic development and catalytic infrastructure. Furthermore, the lack of flexibility in official development assistance and its distribution means that such resources are allocated to specific projects, with local governments unable to finance the most pressing local development needs.

UNCDF’s longest standing practice on local development finance works to expand the local fiscal space through inter-governmental fiscal transfer systems and mechanisms, as well as by addressing the legal and regulatory bottlenecks that limit fiscal resources from flowing to local economies. We also work with municipalities, domestic banks and the private sector to promote local economic development and SDG-responsive investments. By increasing local access to finance, primarily from domestic capital markets, we enable local catalytic investments in priority thematic areas. One of those priority thematic areas is women’s economic empowerment, which in turn positively impacts achievement of a range of other SDGs. Last year, 50% of UNCDF’s localised investments primarily targeted women, while 60% of the jobs created went to women.

Similarly, climate change is another priority area where increased local investment is needed in order to build resilience. Since we started working on climate resilience, UNCDF has mobilised approximately $75 million, which has supported 240 local governments in 14 countries, to mainstream climate adaptation and resilience into their budgeting and planning processes. Through increased climate finance and technical assistance, local governments in some of the most vulnerable regions have been able to design and implement over 600 local adaptation investments.

How can UNCDF catalyse more capital flows, including private investment capital, to go into the toughest markets and reach those who are currently left behind?

UNCDF recognises that in order to bring capital flows into LDCs at greater scale, changes to the ecosystem to support investments in the Least Developed Countries (LDCs) need to be found. UNCDF aims to create demonstration effects in this space by employing three broad approaches: Embed investment decisions in larger changes to markets that are supported by technical assistance and programming; Move beyond transaction by transaction approaches and develop a portfolio based approach to investment; Only engage when no other actor in the financial ecosystem is willing or able to do so, so we are addressing a real gap – if another investor is willing to finance, we are not needed.

As a hybrid development and finance institution, UNCDF can support market development while also identifying specific companies or transactions that merit support; UNCDF can provide business advisory and investment capital to suit the different needs of the company or project at every stage of its development. UNCDF’s approach to capital deployment is to leverage its concessional resources to crowd-in more commercial finance. This can be done through on balance-sheet direct investments and through third-party managed off balance-sheet investments.

The UNCDF LDC Investment Platform (LDC IP) serves as the organisation’s centre of excellence on structuring and deployment of investment finance. The LDC IP demonstrates to domestic and international investors that LDC markets can and do generate returns, provide opportunities for successful investment, and merit the attention of a wider range of investors. It also helps a number of companies advance to the next level of growth where more commercial funding will replace the concessional funding. At the same time, our programme areas (or other parts of the UN system) use those demonstration effects to support policy and regulatory improvements as well as scale-up of what works by other actors.

Through the LDC IP, UNCDF can directly provide loans or guarantees between $100,000 and $500,000. As the companies and projects grow, they can be passed to third-party managed off balance-sheet blended finance vehicles for growth capital between $250,000 and $2.5 million. When the companies or projects need more than $2.5 million, they should be healthy enough to gain financing from development finance institutions or fully commercial sources.

Why is women’s economic empowerment so important from the standpoint of finance?

We have to look at whether, how and when finance works for women. Women are drivers of inclusive prosperity. When women’s incomes rise, health and education outcomes improve for themselves, for their families, and for their communities.

For these outcomes to materialise, financial ecosystems need to be designed with women in mind. The current financial mainstream in most countries perpetuates barriers rather than clears them. Women make up the majority of the globally unbanked. They often lack access to financial tools and face social norms that discourage them from using these tools when they are available. And women face persistent challenges in bringing their economic activities into the formal financial sector, often paying higher interest rates, experiencing a higher loan rejection rate, and frequently being asked to provide more collateral than men — despite the fact that women are typically under-collateralised and less likely to own property. And local infrastructure endowments (roadways, markets, transportation options) are seldom designed with women’s movements, childcare needs, and safety in mind.

There are many proven models for redesigning how women can interact with, and make empowered decisions in, the financial ecosystem. It requires a change in the way the financial and infrastructure services are designed and promoted: we need more women engaged as architects of these services, while being understood in all of their economic roles – as consumers, decision-makers, income earners, and heads of households. Digital financial innovations constitute one promising frontier for positive change, but again – there is nothing inherently inclusive about digital solutions, unless they are designed to rethink financial pathways head on. Fortunately many of our digital innovators have the courage to disrupt, we just need more actors who share that vision.

In today’s economy, equality for women and women’s economic empowerment are one and the same. And women’s economic empowerment is a key driver of practically the entire SDG agenda. Finance needs to embrace this reality, and stand behind the investments that will bring it to scale.

What is the role of UNCDF with regard to all the 17 SDGs? How do you add value?

By strengthening how finance works for poor people at the household, small enterprise and municipal levels, UNCDF contributes to SDG 1 on eradicating poverty and SDG 17 on the means of implementation. UNCDF’s development focus also contributes to a number of other SDGs including SDG 5 (Gender Equality); SDG 7 (Clean Energy); SDG 9 (Industry, Innovation and Infrastructure); SDG 11 (Sustainable Cities and Communities) and SDG 13 (Climate Action).

When we look at the whole SDG agenda, we see a set of goals that provides an opportunity map for the world. These goals are our north star, where we all need to point to in order to achieve a sustainable, inclusive and prosperous world. So we see our greatest value in our demonstration effect, and in our ability to shift perceptions about what is possible, what is profitable, and what is sustainable when we translate “leaving no one behind” into reality. A lot of that effort is what SDG 17 is all about – transformation achieved through partnerships. We help define the problem, then ask market players and/or governments to work with us to design the solution, test what works, then bring it to scale. We learn together with policy makers and regulatory bodies, share knowledge, and show the solutions marketplace how innovation can change the sustainable development equation.

What is the importance of mobile handsets in frontier and pre-frontier markets e.g. in Africa?

Mobile technology is critically important in these markets. They are stretching the boundaries of financial services well beyond what brick-and-mortar institutions are capable of. But what we have also found is that a mobile wallet is only as good as the amount of capital in it, and the real life problems it can help poor people solve. To that point, financial inclusion is a means to an end. It is not an end in itself.

We also have a tendency to believe that digital economies are inherently inclusive. But the reality is that this is not a given. Findex data has shown how progress in digital financial inclusion may lead to a widening of the gender gap in some contexts.

This is precisely why we have launched our digital strategy, Leaving No One Behind in the Digital Era. It is a natural progression for our work in financial inclusion, which we are implementing in more than 20 LDCs. We focus on helping countries to make important decisions about digital infrastructure, innovation ecosystems and enabling policy frameworks that will result in national digital economies that are inclusive and sustainable. We work on innovation sandboxes with regulatory authorities and market players, and deploy a digital economy index to determine barriers to readiness and inclusion. The strategy sits on four workstreams: empowered customers, inclusive innovation, enabling policy and regulation, and an open digital payment ecosystem. As host to the Better Than Cash Alliance, we look at how the digitisation of payments in the public and private sectors can achieve critical mass to drive mobile wallet uptake and – critically – integration into the wider financial ecosystem. This is where transformation can really begin.

As we see it, meaningful digital financial inclusion has to provide the capability for the traditionally underserved—women, youth, MSMEs, smallholder farmers—to meet their daily needs, as well as to improve their marketability and competitiveness in the digital-economy age.

How has blended finance been successful?

Blended finance is one of many instruments the international community can use to help shift the flow of capital to investments and markets that are otherwise being ignored. But there are challenges, and no magic bullet. Having published two annual reports on blended finance in the LDCs with the OECD, we have found that a very small portion of commercial finance mobilised by official development finance reached the LDCs—6% as of our most recent edition. But we also highlighted several case studies that provide clear proof of the potential that blended finance solutions possess.

One case study from our 2018 edition of Blended Finance in the Least Developed Countries involves the Central Africa SME Fund (CASF)—a $19 million fund that provides private equity, long-term debt and technical assistance to SMEs in the Democratic Republic of Congo and the Central African Republic—that was launched by XMSL, a Dutch private equity fund. The International Finance Corporation (IFC) provided the anchor investment and technical assistance funds, totaling just over $13.5 million, which catalysed $6.5 million in additional equity investments. As of the 2018 report, CASF provided finance to 32 SMEs across 10 sectors in these markets, exiting four investments completely while returning over 50% of invested capital to investors, performing in line with initial return targets. Additionally, more than 500 jobs have been created at portfolio companies since investment by CASF alone.

Our 2019 edition showcases an example from a domestic financial intermediary in Nepal—the Town Development Fund (TDF). Relying on a combination of loans, upfront cash contributions, and grants from the Government of Nepal, TDF has supported over 70 towns in the financing of water-sector projects. TDF’s executive director credits their blended finance model with providing access to safe drinking water and basic sanitation facilities to 87% of Nepal’s population.

Clearly, blended finance approaches can help mobilise resources to help LDCs bridge financing gaps, as well as create demonstration effects that narrow the gap between the perception of risks in these markets and the actual levels of risk. This is why we offer clear action items to improve the use of blended finance in LDCs: including expanding the involvement of LDCs in blended finance policy discussions; improving impact measurement and transparency; and encouraging concessional finance providers to engage with their boards, donors and LDC governments in finding innovative ways to take more risk and experiment with new solutions.

How do you turn the SDG road map into an opportunity for creating finance for LDCs?

I have always seen the SDGs as an opportunity map – for businesses, for money managers, for all of us. After all, it lays out the profile of what a prosperous, inclusive, and sustainable world needs to be. Today’s private customers, consumers, savers, and investors are increasingly proactive in directing their dollars towards value for the planet and for the future they want to see. The challenge to all of us is to design the pathways that make it more attractive to direct our collective resources toward that good.

And that is where UNCDF plays a role. We are helping to answer the “how” question, by creating demonstration effects and showing new approaches to address old problems. In the process, we are making finance work for those too-often underserved by the global financial ecosystem. That potential for transformation—and the promise of the SDGs to leave no one behind—is what motivates UNCDF, now and into the future.