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Member Spotlight: Mobilizing Finance for Development


Nov. 10, 2021 | By Estefania McPhaul


USAID is putting self-reliance at the core of its strategy to help countries achieve and finance their own development objectives and thereby end their need for foreign assistance. To finance self-reliance, countries will need systems that mobilize and spend public resources efficiently, enabling environments that allow the private sector to thrive, and diverse and well-regulated financial markets. Mobilizing private sector capital to help finance development objectives is key to creating sustainable long-term growth. Foreign direct investments surpass official development assistance, but they remain concentrated in countries with high growth potentials, stable markets, and effective rule of law. Domestic private investors and financial institutions also gravitate toward more creditworthy finance seekers and build in premiums to account for their real and perceived risk of doing business. From the Philippines to Tunisia, Chemonics’ programs are working with financial intermediaries, government institutions, and domestic and international private sector stakeholders to lower risks that inhibit private investment and catalyze finance needed to empower countries to achieve sustainable development impact and economic growth.

The International Finance Corporation (IFC) estimates that 65 million firms, or 40% of small- and medium-sized enterprises (SMEs) in developing countries, have an unmet financing need of $5.2 trillion every year. High interest rates, short-term products, and rigid collateral requirements make it challenging for SMEs to access the finance they need for their businesses grow. Let’s look at an example. Isaac is an entrepreneur in Ghana with an annual operating income of $300,000 looking to invest in agricultural equipment leasing. When he goes to the bank to request a five-year loan of $800,000, the bank gives him a 20% annual interest rate on the loan. Can Isaac get the loan to start his business? No. Isaac would need to pay $160,000 in principal plus $160,000 in interest annually which totals $320,000, or $20,000 more than what he can afford in a given year. What if Isaac’s interest rate instead was 10%, could he get the loan? Yes. He would only have to pay $80,000 interest for a total of $240,000 leaving him $60,000 in net cash flow.

The difference in interest rates and whether Isaac can access the finance he needs to start his business depends on several systemic and transactional factors that could have less to do with Isaac’s business and more to do with risk and cost factors faced by the financial institution in Ghana. The financial institution may offer a higher interest rate to account for a period of macroeconomic instability in Ghana or for not having an easy way to assess Isaac’s creditworthiness and conduct know-your-customer due diligence. Foreign investors may face similar worries when looking to invest in a company like Isaac’s. Of course, Isaac’s creditworthiness will also impact his interest rate, but that is often one factor of many. How can donors like USAID and implementers like Chemonics help lower cost and risk factors faced by the private sector to catalyze private capital in developing economies?

USAID’s Five Point Framework introduces a way to assess the constraints to finance across five main factors:

1. enabling conditions
2. financial infrastructure
3. disrupters/ facilitators
4. finance seekers
5.finance providers and intermediaries

 
The systemic factors — enabling conditions, financial infrastructure, and disrupters/facilitators — represent the broad conditions in which the financial sector operates. The transaction-specific factors are those that affect the ability of finance seekers and finance providers and intermediaries to close a deal. Interventions in each of the five points can lower the risk and cost factors that the private sector face and help mobilize finance for development. Chemonics has a long history implementing economic growth projects that work across the five points of the framework and are mobilizing finance around the world.

Interventions to Strengthen the Enabling Conditions

Improving conditions for private investment, the USAID Kosovo Economic Governance Activity, implemented by Chemonics, is supporting national and municipal government partners to fully formalize unpermitted constructions in Kosovo, helping property owners realize the benefits of secure property rights and empowering them to use their property as collateral to access finance. In just two years, the pilot municipalities formalized over €200 million in estimated property value.

Interventions that Build the Financial Infrastructure

The USAID Philippines E-PESO project, implemented by Chemonics, partnered with the Philippines Central Bank to create the National Retail Payments System and establish a governance and regulatory framework for a safe, reliable, and efficient interoperable retail payment system. With the project’s support, the National Retail Payment System created automatic clearing houses, PESONet and InstaPay, to facilitate electronic fund transfers and established a Payment System Management Body to set policies that eliminate risk for real time financial transactions and promote anti-money laundering. A more efficient and interoperable payment system that reduces the time, cost, and risk of transferring funds enhances the financial infrastructure and lowers transaction costs of originating and processing loans making finance more affordable.

Interventions as Disrupters and Facilitators of Finance

In the Democratic Republic of Congo, through USAID’s Investment Facilitation Activity in the DRC, Chemonics is operating an investment facilitation platform that provides support to businesses and investors. On the demand side, the USAID Investment Activity trains businesses on investor due diligence requirements, business plans and pitching, and how to structure deals to help them become investment ready. On the supply side, the USAID Investment Activity investment facilitation professionals work with investors to assess and mitigate transaction costs and risks by providing market research and due diligence before they make a deal. By serving as convener and advisor to both businesses and investors, USAID Investment Activity is lowering the investment risk factors and helping to mobilize private capital into the DRC. In Tunisia, the USAID Jobs, Opportunities, and Business Success (JOBS) activity helped design and launch Tunisia’s first digital investment platform, JoussourInvest. Through JoussourInvest, JOBS connected 2,000 SMEs seeking equity and quasi equity investments with 50 equity investors and facilitated 27 transactions of over $20 million.

Interventions with Finance Seekers

At the transaction level, the USAID Zrda activity in Georgia is implementing innovative blended finance mechanisms with the Georgian Partnership Fund’s subsidiary, StartUp Georgia, to help start-ups in Georgian municipalities increase their competitiveness. The capital provided by StartUp Georgia was matched by the Zrda activity grants which reduced the start-up’s debt to equity ratio, making them more attractive finance seekers. In Pakistan, the USAID Small and Medium Enterprise Activity (SMEA) is giving business development support to help SMEs comply with international quality and safety standards, access new markets, and attract investments. In parallel, SMEA flagship Challenge Fund is giving SMEs access to three types of grants 1) traditional growth grants to help SMEs become more competitive, 2) innovation grants to pilot novel solutions to sector-wide growth barriers, 3) scale up grants for SMEs that demonstrate potential to launch, market, and grow. To date, SMEA has awarded 113 Challenge Fund grants and directly benefited 3,929 SMEs through its business development support. SMEs that receive business development support, directly or through grants, strengthen their competitiveness and are more likely to meet the requirements from banks or investors to access private capital.

Interventions with Finance Providers and Intermediaries

The USAID Jobs, Opportunities, and Business Success (JOBS) Activity works with the largest public sector bank in Tunisia to streamline and facilitate lending to SMEs by adopting new benchmarking criteria for finance seekers and developing a new scorecard to review credit applications. The reforms led to $35 million in new lending to over 250 SMEs in Tunisia. Additionally, to support the recovery of businesses impacted by the pandemic, JOBS partnered with microfinance institutions (MFIs) Baobab Tunisie and Advans Tunisie to launch their new rapid recovery loan packages for micro and small enterprises and women-owned businesses in underserved regions across Tunisia. With $3 million in grants to the MFIs — in technical assistance and microgrants to help borrowers repay their loans — JOBS catalyzed $33.3 million from the microfinance institutions that supported 16,445 SMEs sustaining more than 40,000 jobs and creating 3,200 more Meanwhile, in Colombia, the USAID Rural Finance Initiative (RFI) is working with 14 financial intermediaries — from large, commercial banks to small MFIs — to increase inclusive financial services in Colombian municipalities. The project used grants, technical assistance, and Development Credit Authority guarantees to mobilize $1.21 billion in financial services and products to over 900,000 rural clients. Using grants, technical assistance, and loan guarantees strengthens the capacity of financial intermediaries and offsets risk and cost factors that lead to higher interest rates.

The Impact of Private Capital

The Five Point Framework is a useful tool to organize a range of interventions to mobilize finance for development. It is important to remember that there is never just one factor that constrains finance; interventions are needed across all five points for good deals to get made. At Chemonics, we recognize the catalytic impact that private capital has in fostering enterprise-driven economic growth. Our programs are implementing systemic and transactional-level interventions around the globe to help business owners like Isaac access finance and create jobs that will stimulate economic growth and help countries achieve self-reliance.

Posts on the blog represent the views of the authors and do not necessarily represent the views of Chemonics.

 

Perspectives On Localization

A paper drafted by three of CIDC’s leading experts in the field, with significant input and real-world examples provided by the CIDC membership.


Member Spotlight: Modernized Honduran Judicial System Promises Lower Costs, Increased Efficiency, Safer Communities


Nov. 9, 2021


Chief Justice Rolando Agueta


SEJE Launch Event

By Dan Alder, Communications Advisor for Unidos por la Justicia | Photos by USAID Unidos project

Despite greater economic stability since 2000, Honduras has yet to significantly improve living conditions or reduce poverty for much of its citizenry. The National Autonomous University of Honduras reported that, in 2020, the extreme poverty rate had reached 53.4 percent and the total poverty rate 70 percent. Some economists have warned that the poverty rate could increase to 75 percent in 2021 due to the economic crisis caused by the COVID-19 pandemic, natural disasters, and lack of work opportunities. The average Honduran living in an urban area faces additional risks such as bus robberies, indiscriminate homicides, extortion, and other criminal activities perpetrated by gangs. Along with corrupt law enforcement officials and political interests that oppose reforms, the rising violence has undermined the public’s trust in the judicial system.

Against this backdrop, the DAI-led Justice, Human Rights, and Security Strengthening Activity (Unidos por la Justicia)—funded by the U.S. Agency for International Development (USAID)—works with local partners to improve citizen engagement with the security and justice sectors, enhance the efficiency of the judicial system, and increase the effectiveness of community police.

With support from Unidos and its implementing partner, the National Center for State Courts, the country’s Judicial Branch recently unveiled an electronic case file system. Called SEJE for its initials in Spanish, the system is nothing short of a transformation of the Honduran justice system. Courts currently use paper case files, which are economically and ecologically costly as well as logistically difficult and time consuming to handle. Under SEJE, these case files will be digitized. Digital files are a more efficient, reliable, and transparent system for processing cases, and will allow for real-time notification of all relevant parties to a case of court scheduling, rulings, and other procedures. Digitization will also allow the Judicial Branch’s statistical and quality control units to collect and analyze data about case flow, identify bottlenecks, and better measure the performance of judicial units and individual judges.

SEJE will yield cost savings and make judicial operations more efficient and transparent. With complex cases now requiring as many as 30,000 folios, savings on paper alone will be significant. In addition to improving the efficiency of that part of the Judicial Branch responsible for tackling corruption, SEJE will make court operations themselves more transparent and therefore less susceptible to wrongdoing. Digital files will be harder to alter, hide, or misdate due to built-in timestamps and digital fingerprints left by every user action in the system. Documents that are legally public will be easier for citizens to access.

“Strengthening access to justice creates hope,” said USAID/Honduras Mission Director JaninaJaruzelski in her address during the launch event last month. “This will also help to reduce irregular migration, since citizens will feel safer in their country.” The overall impact of this innovation will be more efficient administration of justice and reduced impunity for people who break the law, summed up Unidos Chief of Party Caterina Valero.

Flagship Project

The creation of SEJE started almost four years ago after Unidos assessed the technology the Judicial Branch was using at the time. That assessment resulted in the drafting of a Strategic Innovation and Modernization Plan, with SEJE as the centerpiece. The Supreme Court Plenary then authorized the implementation of SEJE and the creation of three groups to oversee it: the National Coordination Committee (justices of the Supreme Court), a Technical Committee, and 18 Departmental Committees to coordinate regional implementation.

The Supreme Court’s approval of the SEJE governance structure and of the 13 courtrooms where SEJE’s implementation will begin represents a crucial sustainability milestone because it ensures that permanent governance bodies will continue to lead this effort beyond the current president’s tenure, which concludes in January 2023.

As recommended by the Unidos assessment, the Judicial Branch created an executive committee of information technology (IT) staff and top administrators tasked with implementation. The committee includes the institution’s directors of budget and planning, human resources, quality control, IT, communications, and statistics, reflecting the level of teamwork required to implement the Strategic Innovation and Modernization Plan.

SEJE’s implementation process is designed to train Judicial Branch IT staff to maintain and expand on the system without outside help. And the Judicial Branch has demonstrated its commitment to do just that; it’s already invested in new technology and hired computer programmers and systems designers. This institutional buy-in will help ensure the sustainability of USAID’s investment.

Taking Aim at Corruption

SEJE is now operational in Tegucigalpa’s Extortion Court and will roll out to the Corruption Circuit Court by the end of the year. Unidos decided to pilot SEJE in the extortion area because extortion is a major source of revenue for Honduras’ violent street gangs, robbing small business owners of the ability to make a living, putting lives at risk, and depressing economic development. The resulting lack of security and opportunity makes extortion an important push factor for irregular migration. The Judicial Branch plans to eventually extend SEJE to the entire court system, but the next stop in the system’s rollout will be the Corruption Court. While extortion robs people of their security and the ability to make ends meet, corruption robs them of hope that their situation will improve.

Another aspect of SEJE designed to bolster people’s security is its biometric controls module, which replaces the current system for documenting the compliance of people charged with crimes but granted pretrial release. Those defendants are obliged to appear periodically before the court and sign a logbook that is stamped and dated by a court secretary. The biometric system will instead require a fingerprint scan that is automatically entered into an electronic court record with a digital timestamp, eliminating the potential for fraudulent registry entries.

Second Layer

In addition to SEJE, Unidos also supported the creation of an Electronic Annual Operating Plan (e-AOP), which enables Judicial Branch managers to track the progress of the Strategic Innovation and Modernization Plan implementation online, in real time, and link to budgets and expenditures, a capability that soared in importance with the arrival of the COVID-19 pandemic in Honduras.

“The advantage of this tool is that it brings everything together in one shared place, allowing us to align our efforts, and all under the established goals and objectives of the institution and the priorities of management,” said Judicial Branch Planning and Budget Director Maria José Laitano. “It allows us to improve all our monitoring and evaluation processes.”

“As of today, this is a shared workspace for only our administrative offices, but our goal is to be able to implement the e-AOP in all of our jurisdictional areas,” Laitano added. “It is a big challenge. We have more than 500 jurisdictional offices on a national level, but we are not going to rest until we achieve that, because we are convinced that it will be of great benefit,” she said. Giving everyone easy access to performance data will engender friendly competition within the court system and result in improved justice services for the public.

Judicial Branch IT Director Arely Montano is both a primary protagonist and a big fan of the modernization process now underway. “The pandemic has crystalized the conviction that technology is key to the modernization of any institution, and the Judicial Branch cannot allow itself to lag behind,” Montano said. “The support of USAID Unidos has been a decisive factor in allowing the Judicial Branch to get behind this process.”

Contact PSC

Paul Foldi
Vice President, International Development Affairs
foldi@pscouncil.org
703.875.8397

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