Towards a Learning Agenda for USAID’s Role in Inclusive Financial Growth

On June 30, 2013, President Barack Obama launched Power Africa — an initiative intended to address the challenge of providing access to power in sub-Saharan Africa. As of June 2014, Power Africa has helped to facilitate the financial close of private sector transactions expected to produce nearly 2,800 megawatts (MW) of new generation capacity. Given Power Africa’s overwhelming success, President Obama tripled its goals in August 2014, pledging to bring 30,000 new MW online and add 60 million new home and business connections throughout sub-Saharan Africa. 

The initiative marks a new operating model for development in which the transactions of private investors (as well as policy reform) drive change. In many respects, Power Africa has been a win; but, with its achievements, come a string of questions: How should private capital be mobilized for development outcomes? What are the challenges? What is the best role for a development agency?  How can we ensure that gains are equally distributed and captured? 

Given USAID’s goal of ending extreme poverty and the post-2015 development agenda focus on inclusive development, the question of who wins is a crucial one. It is clear that economic growth is a key part of ending extreme poverty. And there is general recognition among policymakers that financial inclusion plays a significant role in sustaining economic growth, employment, and financial stability. So what does this evidence mean for USAID’s work? How does it tie into financial sector development? And what are the areas of creative tension we can collectively explore through experimentation and thoughtful reflection?

Where We’ve Been

Before we delve into these questions, what has USAID already done in this space? USAID’s foundational commitment to “change the game” with microfinance serves as a prime example of the Agency’s role in mobilizing capital to include the poor. USAID made significant investments to advance thought leadership, develop microfinance institutions, and work with host-country governments to create policies that enabled microfinance to take its rightful place in the banking sector.

Now millions of poor households have access to finance, and most urban centers have microfinance institutions or commercial banks that offer microloans. USAID demonstrated its ability to partner with the private sector to find market-driven solutions to end extreme poverty. That’s quite the development success!

Our Work Today

Today, over 80 percent of capital flowing to the developing world comes from the private sector. USAID is leveraging its relationships with private sector investors to maximize development impact as well as ensure that the poor benefit from economic growth. Building upon previous successes, the Agency looks to forge a more strategic, evidence-based, and comprehensive approach to mobilizing private capital around USAID development priorities. Three key objectives related to these efforts include the following:

• Facilitating private sector investment. This approach means using public funds to encourage private investment, such as facilitating the availability of financing for investment, especially by micro, small & medium enterprises (MSMEs). It also encompasses mobilizing private capital towards development priorities, such as supporting innovative models and financial institutions that engage people at the bottom of the pyramid.
• Promoting digital financial services. This effort stimulates new technologies to unlock opportunities to expand access to affordable financial products and services, including remittance services, agriculture and value chain finance, and streamlined payment mechanisms. These channels drastically reduce costs and expand outreach at a much larger scale than conventional channels, which is especially important for the poor.
• Championing inclusive finance. This objective balances profits with an emphasis on customer-centered products and services, consumer protection, and social performance. All of these things are essential to ensure that benefits are captured by poor and vulnerable people.

Where We’d Like to Go

The road ahead is marked with more questions than answers. And with a true inquisitive spirit, we forge ahead motivated by the possibilities for discovery. What do we mean when we say “mobilizing private capital”? When should we facilitate private sector investment for development outcomes? How do private investment and financial inclusion overlap? How can we ensure that everyone has access to financial services in order to capture opportunities and reduce vulnerability? What are the challenges to implementation?

We pose these as learning questions to our Microlinks community. As we embark on this journey, we welcome your thoughtful reflection, considerations, and lessons learned. We look forward to the milestones ahead as we advance the supply and demand side of finance for inclusion.