Head ‘Em Up and Move ‘Em Out! Rounding Up Private Capital in Financial Inclusion Territory

Howdy! We have been on the trail now for just over a week. What have we learned thus far in our journey?

Two things: First, that wagon trains are slow and this journey will take several months (but we will get there before the snow flies again!). And second, that this audience is more interested in financial inclusion than mobilizing private capital (which is why we included it in the title – but stay with us, because the two do intersect).

As the wagon train headed out, the key question posed to the party was this: "Why spend our precious dollars trying to encourage private investment rather than on traditional development activities – and how can that support financial inclusion?" We heard three possible reasons:

• We simply need those private investment dollars. The level of investment needed to make a dent in poverty is massive and far beyond what official development assistance and state coffers can provide. Without that investment, the rising income needed for true financial inclusion simply won’t happen.
• Traditional "hands-on" financial inclusion development initiatives are expensive, with too much of the money going to overhead. Maybe there is a cheaper way?
• Leverage. Perhaps a blend of private capital and development dollars can stretch our resources for greater financial inclusion impact.

The feedback we received was interesting. There were no violent objections (knives drawn or bottles thrown). But, there was confusion about what the "mobilizing private capital" rubric means. "Lay it out for us, Wagonmaster! Don't leave us aguessin’ here in the dark!"

Well, fair enough. So, when this blog series resumes, we will provide some examples (or vignettes to our French speakers) of different ways in which private capital has been mobilized – as well as how it has benefited the lower tiers of the pyramid.

We want to tease out the different ways of mobilizing private capital, and we urge your submission of success stories in this area (and why not...when you lasso the big stallion you ought to get some hurrahs!).

We are looking to feature examples of 300 words or fewer that speak directly to the following:

• How did (or will) your initiative bring in private capital?
• Were the benefits broad-based and inclusive?
• Why was it important for you to engage the private sector?
• What was innovative about your initiative?
• What did you learn from it?

Please submit to microlinks@microlinks.org by June 8, so that we can keep this wagon train arollin’! Here's an example of what we're looking for:

Finance for Agriculture Through Performance-Based Incentive Grants

The challenge: To encourage banks to start lending for smaller scale investments in agricultural value chains (e.g., for tractors and small storage units). Here-to-fore they had seen these loans as too small and risky.

The solution: The Mission provided a program to provide incentive grants to banks to encourage lending to these targets, but on a performance basis. (G rants made as loans were extended.)

How it mobilized private capital: A little bit of USAID grant money was able to trigger a vastly higher level of private sector credit for the targeted investment—at least 20:1 (while hopefully pulling banks into agriculture lending for the long haul).

How it was inclusive: The ability of rural entrepreneurs to invest in the lower end of the value chain enabled smallholder farmers to capture more of the benefits from that value chain.

How it was innovative: This approach had never been done before and used an auction process to ensure the highest leverage for our funds.

Lessons learned: Cash is king. As rational economic actors, if the incentives are structured correctly, banks will respond accordingly.

Next up: Getting Outfitted at the General Store: Introducing the Mobilizing Private Capital Lexicon.