There is still limited awareness and convergence of local actors towards the idea of blended finance for development in Uganda, a new study has said.
The study, Blended Finance in Uganda: Opportunities, Challenges and Risks, says, “The existing forms of financial blending and any related evidence currently remain scattered, and as such, there is limited comprehensive evidence on the blending portfolio in Uganda and its impact on development.”
Blended finance is defined “as the strategic use of development finance and philanthropic funds to mobilize private capital flows to emerging and frontier markets”, resulting in positive results for both investors and communities. (Wiki)
Published early this year, the study adds, “The fact that most of the local actors interviewed were unaware of the term “blended finance” itself signals that there is hardly a locally entrenched community deliberately creating awareness on blended finance.”
However, this does not mean that blended approaches are not being used in Uganda.
A staff of Uganda Development Bank (UDB) interviewed reiterated that many private actors, especially at lower income level do not have access to adequate information about blending facilities. As a result, many of them miss out on the opportunity to access blended funds. Through dissemination events regarding financing, UDB has played a limited role in informing the private sector about such financing methods.
Uganda’s Development Bank is a government-owned development finance institution established by an act of Parliament with the ultimate aim of promoting and financing development across sectors in the economy. Built in 1972, UDB is a market leader in financing SDG related development on concessional terms in Uganda. By mandate, therefore, blended facilities that involve government financing should ideally involve UDB, yet that has not always been the case.
There are several blended initiatives involving government financing without UDB, example ACF is being coordinated by Bank of Uganda.
Overview of the economy and financial flows
The study said growth has picked up in the financial year 2017-2018 at 6.1% from the previous 3.9%. Critical sources of development finance are government revenues, official development finance which includes loans and grants, foreign direct Occasional Paper Series 45 15 investments, and remittances. The service sector is the most significant contributor to the economy but employs less than agriculture. The cost of private finance is still high, with market interest rate averaging about 20%. This is hindering private investment in high-risk SDG projects.
Commercial banks which account for over 90% or private credit tend to lend more to the government because it is low risk. However, actors like Uganda development Bank and donors are using blending to reduce interest rates for specific SDG related investments.
“Blended facilities could focus more on balancing employment levels across agriculture, industry and service sectors. Donor funds remain a significant part of development finance in Uganda, but there is a need to pack more into blended approaches to help unlock the private capital that is currently shy of risks,” the study concludes.
Sectors and projects that blended finance is supporting in Uganda
Blended finance is predominantly in the agriculture and energy sector. In the agriculture sector, it is being driven by donors. This is partly because most poor people are in this sector, but also because it is the riskiest sector. In the energy sector, it is driven by the government’s current growth strategy of frontloading physical infrastructure. Public-private partnerships are heavily financing the roads and transport sector; however, due to limited data, estimates could not be established in this study. The principal risks being mitigated across sectors including political instability, loan default, breach of contract, transfer restriction, expropriation, war and civil disturbances and weather/environmental shocks.
Risks, barriers and challenges related to blended finance in Uganda
This study found that corruption, human and institutional capacity gaps in programme implementation, limited technical support for projects do affect the bankability of projects. Risks to blending include the possibility of unfair competition among banks, different banks targeting the same individuals leading to duplication, blended projects increasing inequality in gender and regions, the risk of leaving out the poorest of the poor because they are not bankable, and political disturbances that may affect investment decisions.
Challenges discussed include limited capacity for monitoring and evaluation, severe project delays, limited sources of long-term finance, information gap especially to low income groups, and the high cost of domestic credit. It calls for more technical support to projects, better coordination between banks, broader awareness creation on blended facilities, and the need to match blending packages with poverty levels. It also argues for the need to develop other cheaper financing sources like equity, to provide an alternative to debt.
Opportunities for blended finance
The study by Ibrahim Kasirye Job Lakal observed that there is an increasing interest from private investors to invest in development in Uganda. Secondly, the Ugandan government has a high interest in and support to the private sector. Thirdly, there exist untapped potential funders like the National Social Security Fund and insurance agencies that could be incentivised to invest more in SDG related development.