Money where it matters: how to deliver finance to the local level

Blog by
15 December 2016

At an IIED-hosted event, financiers, decision makers, practitioners and researchers tackled three key questions on how to get climate finance to where it's needed most.

Financiers, decision makers, practitioners and researchers from across the globe gathered to share lessons and their experience in channelling finance to local levels (Image: Matt Wright/IIED)

Realising the world's ambitions to combat climate change and promote sustainable development will cost 'billions to trillions' of dollars.

There has been much discussion on where the money will come from to close the 'funding gap' that exists in most developing countries. But it is just as important to talk about where the money will go and how it will get there.

This was the subject of IIED's 'Money where it matters' event last week, where financiers, decision makers, practitioners and researchers from around the world gathered to examine the case for channelling development and climate finance to the local level. "It's not just about getting the right amount of money, but about what you do with it," said Jane Clark from the UK Department for International Development (DFID). 

With that in mind, participants were asked to consider three key questions over the two days:

1. What are the benefits of local level finance?

Using a series of case studies, the event's speakers outlined some of the benefits of local level finance, not least of which is the very tangible impact on people's lives.

We heard about federations of the urban poor in Africa, Asia and Latin America that have used community finance to build affordable housing and infrastructure for hundreds of thousands of informal settlement dwellers.

We heard about devolved funds in Kenya that have directly helped 110,000 people build their resilience to climate change. We heard about a private debt provider in East Africa that has helped more than two million people access affordable, clean energy through its loans to off-grid solar enterprises.

And we heard about forestry cooperatives in Guatemala that channel private and public finance to the local level to provide social, business and financial services to more than 25,000 families.

Nobody at the event doubted that, when done right, local level finance can deliver climate resilient sustainable development. The big question, of course, is what does 'doing it right' look like? 

Listening to the case studies, it seems that local finance works best when local people and local institutions are empowered to decide and act for themselves.

Behind every success story lies a local community or organisation with the power to mobilise resources and decide for itself how to use them. From Kenya to Guatemala, and Tanzania to Mozambique, speakers proved that devolving decision-making in this way makes investments relevant, longer-lasting, accountable and better value for money.

The solution then is clear: empower local actors to take responsibility for their own development. 

2. How can finance to the local level be increased?

How you deliver the necessary empowerment is not quite so simple. There are many tools available for the job and each speaker argued the case for their favourite.

For Aurora Malene of GAPI in Mozambique, the key lies in working closely – both culturally and geographically – with local communities and enterprises to strengthen business and technical skills. For Nick Godfrey of New Climate Economy, it is working with local governments to increase their credit worthiness.

For Victor Orindi from the Adaptation Consortium in Kenya, the key is local planning committees. And for Jane Weru of the Akiba Mashinani Trust (AMT) in Kenya, it is local saving groups.

In many cases, effectively delivering finance to the local level relies on aggregation. All too often, local resilience or development projects are small in scale and big in number.

External funders find it very difficult to support hundreds of small projects – the transaction costs of doing so are just too high to be worthwhile. But the aggregator effect of federations, local governments and cooperatives opens the door to reaching large numbers of projects and even large numbers of people.

"Once we had joined together as a federation, we had the strength to speak, to do many things… [and] to change our lives," said Anastasia Maina, informal settlement dweller and chairwoman of the AMT in Kenya. 

Beyond the problem of 'too many small projects', there lies another challenge: many investors see local finance as just too risky. They worry that the funds will not be used for the intended purposes, that they will not achieve value for money and that they will not be properly accounted for.  

It is true that in many cases – particularly for small- and medium-sized enterprises in both the energy and forestry sectors – there is an acute need for improved financial literacy. But it is also true that in many other cases, the social oversight provided by community-owned initiatives often means that there is more transparency and less corruption.

At the end of the day, it doesn't matter that the tactics vary. What matters is the shared endgame: local level finance works best when you have local ownership and oversight of development decisions and resources. 

3. What needs to happen next?

There were lots of answers put forward to the question of 'what do we do next?'. Many were built on the idea of scaling up.

In some cases, scaling up could be as simple as just getting donors to part with their money: "In the past 20 years, federations of the urban poor have proved themselves to be effective agents of change… They have the power to multiply twenty-fold what they do… But they need capital… International aid agencies put US$135 billion a year into development assistance – it's not as if there is a lack of funding available," said IIED senior fellow David Satterthwaite.

In other cases, scaling up can't happen without first plugging a 'capacity gap'. Before receiving funds from both public and private investors, local organisations must often first prove their worth in business development, technical expertise and financial management.

And that’s a problem: talking about small- and medium-sized forest enterprises in Guatemala and Mozambique, IIED researcher Anna Bolin said: "Getting businesses 'investor-ready' is our greatest challenge." Malene agreed: "[That is why] we can't work only with money," she said.

Sian Lewis (dr.sian.lewis@gmail.com) is a consultant to IIED's Communications Group.

Share: