Fostering the local dimension of blended finance: From principles to practice

Blended finance operations for development must respond to local needs and realities to be effective. This paper highlights some of the principles, approaches and practices that could serve as useful guidance.

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    Blended finance is emerging as one of the means to mobilise more effectively commercial capital to achieve the Sustainable Development Goals and the Paris Agreement – stimulating impactful investment, quality job creation and inclusive economic growth. To accomplish these objectives, blended finance operations must respond to local needs and realities.

    While all blended finance projects stem from local development considerations and land at the local level, they commonly stem from a client-driven and deal-oriented approach, which might be generated from an external or more standardised approach. As a result, many blended finance operations do not take local context and dynamics enough into consideration.

    Drawing on the experiences of some development finance institutions (DFIs) and multilateral development banks (MDBs), this paper considers several dimensions of the local context and illustrates them by highlighting some of the principles, approaches and practices that could serve as useful guidance to anchor blended finance to local realities. This requires direct responses to well-identified local demands based on broad consultations, strong local ownership, development of local (private and public) institutions and markets, and explicit positive spillovers at the local level – related to sector and economy-wide transformations, such as an improved investment climate.

    DFIs and MDBs need to enhance their understanding of local political economy dynamics, including power relations, market and institutional structures, to assess better vested interests, drivers of change and domestic constraints. The coordination between donor agencies and DFIs and MDBs is paramount to anchor their actions to local context and actors. While diversity of approaches should prevail, comprehensive frameworks and integrated approaches can help address the many dimensions of local engagement in blended finance.

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