According to the Islamic Development Bank (IsDB), the financing gap for Member Countries to meet the United Nation’s Sustainable Development Goals (SDGs) amounts to USD 1 trillion per year. Official Development Assistance funding only amounts to USD 135 billion global disbursements per year and is finite[1]. Relying only on public resources to address this gap is not enough. There is a clear call for the development community to consider how best to mobilize resources from the private sector if they are to ever close the financing gap of the SDGs. A shift in even 1.1% of the total financial assets held by banks, institutional investors and asset managers could be enough to fill the financing gap, something that the public sector can’t do alone due to limited resources and available capital. The question therefore remains, how does this get done?
Development Finance Institutions (DFI) play a catalytic role in financing meaningful and often large-scale projects that align with national, regional, and global development goals, including the SDGs. However, there is potential to attract far more international and domestic capital from a variety of private-sector sources, including commercial banks, institutional investors, impact investors and foundations, who themselves are becoming increasingly driven by ESG considerations. The sharper focus on ESG and impact within the private sector is creating an open opportunity for DFIs to seize this momentum and direct it toward achieving the SDGs by drawing in private sector financing for SDG-aligned projects.
To attract the private sector, DFIs must consistently hold the concept of “additionality” as a guiding principle by ensuring their financial interventions seek to be catalytic and go beyond what is available in the market in order to not the private sector crowd out[2]. According to the World Bank, DFIs have played a major role in financing sustainable development because they can take risks (or portion of risks) that the private sector has traditionally steered clear of.
How is ICIEC additional?
A Specialized Multilateral Insurers (SMIs), such as ICIEC, exist to address market gaps and crowd in the private sector by assuming risks that are not already being taken and offering additionality through their product offerings. In many respects, achieving additionality as a “risk-taker” is much easier than when providing direct financings. A key strategic recommendation of the G20 Stock Take Report is for DFIs to “shift the basic business model of the MDBs from direct lending towards risk mitigation aimed at mobilizing private capital”. The report stresses, inter alia, the catalytic value and additionality of insurance and guarantee products that achieve the outcome of “multiplying private capital by adopting system-wide approaches to risk insurance and securitization” [3].
In order to deliver on their mandates and contribute to the SDGs, most ECAs and SMIs provide Credit and Political Risk Insurance (CPRI) cover for impactful development projects and transactions that would otherwise be deemed too risky for the private sector. When financing projects in high-risk environments, private financiers, such as commercial banks, are able to lower the cost of debt to the borrower when they have access to CPRI. CPRI is, therefore, an instrument with great potential to crowd in the private sector by hedging risk in markets and geographies that would otherwise represent unacceptable risks for lenders who are unable or unwilling to take on high-risk financing. CPRI also allows for the leveraging of debt at a lower risk and margin, which results in more efficient use and allocation of resources and capital. The G20 Stock Take Report prepared by IsDB and ICIEC demonstrates that providers play a critical role in transferring and mitigating the risks for the private sector financiers. Comprehensive insurance provides important capital relief benefits for commercial banks.
The G20 Stock Take Report advances that increasing the provision and diversification of CPRI from MDBs and SMIs is essential to attracting the risk-averse private sector into financing development, taking on the sharing of the risk through system-wide insurance and diversification of risk, to create large-scale asset class. This can transition countries towards market-based finance rather than being dependent on concessional and nonmarket-based development finance. Insurance is beneficial in mitigating risk, avoiding loss from default, solutions for limits and constraints to borrowers, sectors and countries, and solvency for credit risk. Furthermore, CPRI benefits equity investments by protecting against losses due to political risk events and improving risk profiles of foreign direct investment. ECAs and SMIs need to play complementary roles in providing CPRI and PRI to overcome ECAs limitation to providing equity support to their local investors and limited capital. CPRI providers have a unique opportunity to utilize their mandate to contribute to reaching national development strategy goals, leveraging their expertise in LMIC finance sectors to incentivize private sector financing behavior to align with development goals.
Since the pandemic, uncertainty has been growing around sovereign debt sustainability, which is actually the best argument to sell CPRI. The increase in the demand for this type of guarantee will continue to grow, especially when it comes to financing the SDGs in addressing market gaps within politically unstable and risky economies. CPRI acts as a catalyst for many different reasons. For one, it finances the real economy by enabling trade and supporting growth. Second, it unlocks private capital financing. Third, it protects against non-payment risks. And finally, it supports the economic growth of both emerging and developed markets by enabling market entry and investments[4].
In summary, CPRI is a great tool to address the SDG financing gap and crowd in the private sector. For development finance institutions and commercial banks, risk thresholds are well defined, which limits their capacity to finance projects in high-risk environments and markets. In order to crowd in the private sector, such as impact investors, there needs to be some risk mitigation. This is an incredible opportunity for ECAs and SMIs to offer solutions that transfer the risk. A collaboration between the private and public sectors will be necessary to mobilize the necessary capital for projects that would traditionally not be done, using a combination of credit wraps, funded instruments, and DFI lending into the same project as the private sector. According to the Berne Union Yearbook 2021, there is no doubt that collaboration between private and public institutions will be necessary to increase current levels of insurance support. This requires instruments that are inherently additional.
Additionality is at the forefront of ICIEC’s strategy. By mitigating risks through its CPRI products, ICIEC offers catalytic financial instruments to crowd in the private sector sources of financing in Member Countries. The Corporation works closely with the private sector, cherishing relationships with both its financing clients and the private insurance market – all for the benefit of member countries achieving the SDGs. Credit information reporting systems are a shared challenge within the OIC and ICIEC will have a unique role to play through its accumulated data on credit information after three decades of underwriting processes and assessment of trade transactions. ICIEC’s efforts to build this database will help inform credit decisions which will improve lending and foster economic growth within OIC Member Countries.
[1] https://www.oecd-ilibrary.org/sites/6ea613f4-en/index.html?itemId=/content/component/6ea613f4-en
[2] 201809_MDBs-Harmonized-Framework-for-Additionality-in-Private-Sector-Operations.pdf (ifc.org)
[3] https://www.isdb.org/sites/default/files/media/documents/2020-10/G20%20stock-take%20clean%20copy%2015092020%206h53pm.pdf
[4] Berne Union – 2021 Berne Union Yearbook: Adapt, Innovate, Accelerate, Repeat
