Blended finance turns development challenges into high growth investment opportunities

MCECO Brick Yard

The UK-Africa Investment Summit in London today will raise awareness of the growing economic opportunities in Africa and the urgent need for innovative alternative investment using blended finance instruments, writes Kenny Washington, AFFORD’s technical project lead for the Rwanda RemitPlus Diaspora Bond for affordable housing.

It is also a moment for extending and enhancing sustainable, socio-economic development gains on the ground through new equity sharing partnerships.

The City can play a pivotal role in mobilising investment to plug the huge capital gap in Africa.  London is already the financial centre of choice for African institutions, with the London Stock Exchange listing or trading more African bonds than other stock exchanges, and increasingly developing markets for local financing, which provide longer term financing insulated against exchange rate fluctuations.

The need for innovative alternative investment using blended finance instruments is acute.

A McKinsey report estimated that Africa needs $750 billion of capital spending from 2015 to 2025. An estimated further $331 billion is needed for SME growth on the continent.

Micro, small and medium enterprises (MSMEs) form the backbone of most African economies and investment in this sector will significantly enhance sustainable job creation and wealth development. The informal sector contributes 38 per cent of sub-Saharan Africa’s GDP and more than 80 per cent of jobs, yet 51 per cent of the continent’s 44 million formal MSMEs lack the necessary capital to grow.

Secretary of State for International Development Alok Sharma has highlighted UK companies investing in developing consumer markets, but given the post Brexit trade risks, more needs to be done to mobilise UK-based technical knowhow and innovative finance to create win-win relationships with growing African economies.

To meet the growing investment opportunity, a shift in thinking from the capital markets and overseas aid is needed to meet capital needs and opportunity for scale and innovation.

This is especially needed in directing capital to the funding gap for SMEs and ‘first mile’ producer groups in fast growth sectors and economies using a blend of philanthropy and overseas aid, co-investing with capital market funds.

DFID is already addressing this opportunity with its investment in CDC and ongoing support of funding platforms such as the Private Infrastructure Development Group with their subsidiaries GuarantCo and InfraCo Africa.  

The call for long-term, responsible capital for African development is one that AFFORD (the African Foundation for Development) has also been answering with a number of innovations, that leverage increasingly important diaspora funds for impact investment. This turns development challenges into high growth investment opportunities.

One such blended finance instrument is AFFORD’s partnership with the Rwandan government and the private sector to introduce the Rwanda Remit Plus Diaspora Bond (RRDB). Rwanda’s first local currency diaspora bond will be used to build affordable homes in Kigali and address Rwanda’s acute housing shortage.

The private sector has struggled with developing affordable housing under $30,000. To address this problem, but the blended RRDB instrument – involving diaspora, impact investors and development finance institutions – will launch a $10 million commercial bond in 2020 to build 400 family for sale at less than $30,000. We plan to market four further tranches, raising a $50 million affordable housing fund.

The Rwandan bond initiative has been specifically designed to provide secure and scalable finance solutions in low income countries that can be replicated across high growth housing markets right across Africa.

As leading stakeholders convene at the UK-Africa Investment Summit, AFFORD will be there promoting the importance of this new kind of collaboration between the UK Government, the private sector, the diaspora and African partners to unlock new blended finance opportunities.

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