Speech by World Bank Group Senior Vice President Mahmoud Mohieldin: Blended Finance

Wednesday, October 5, 2016

Senior Vice President for the 2030 Development Agenda, UN Relations and Partnerships Mahmoud MohieldinKPMG/Thomson Reuters Event


In 2016, we don’t lack for challenges. One of the biggest is extreme poverty. Today 700 million people live on less than one dollar and ninety cents per day.  This is happening at a time of accelerating globalization—with its concomitant political challenges.  Urbanization is intensifying. We’re already seeing impacts from climate change. Conflict and fragility has led to major disruptions, including the largest refugee crisis since World War II.

A group of optimistic leaders responded to these challenge. In 2015, the world came together and agreed on a transformational agenda — the Sustainable Development Goals — to address the needs of the poor and vulnerable, but also to work toward creating a world in which people in all countries had greater security, higher living standards, and used the world’s resources sustainably.  And the successful COP21 Paris climate conference is evidence of a new global public good that serve the interests of all countries, while also prevent millions of people from falling into poverty due to the effects of climate change.

While the intentions of the framers of the climate goals are sincere, now it’s time to focus on evidence-driven implementation.

The World Bank Group has made substantial financial and organizational pledges to help implement these goals — and we’re collaborating with the other multilateral development banks, the private sector, governments, the UN, and others to increase our joint impact.

President Kim outlined three priorities for the World Bank Group to reach out twin goals of ending poverty and boosting shared prosperity, which are fully aligned with the SDGs. Each of these priorities require financing and private sector participation.

First, he said we need to accelerate inclusive and sustainable economic growth. This obviously requires adequate private sector finance, especially in infrastructure.

Second, President Kim said that we need to invest in human capital, which requires funding and private sector innovation and management to create efficiencies.

And third, he said he need to foster resilience to global shocks and threats, from pandemics to climate change, and of course this also requires a variety of financial responses.

In our previous efforts to reach the Millennium Development Goals — the predecessors to the SDGs — we learned that there are three critical pillars for success: data, financing, and implementation.  For us to be successful on the 2030 Development Agenda we need to make adaptations in our work for each of these areas.

Today I’d like to talk about just one of those three key pillars: finance. The other two pillars – data and implementation – each depend upon private sector finance and innovation as well, but let’s focus on finance as a category of its own for now.

Lately the development community has become fond of the phrase that we have to move from talking about billions of dollars to finance the SDGs — to trillions. But many of my colleagues in the development community have not proffered solutions when asked where these new trillions will come from. In a moment, I’m going to suggest a few promising sources, but even these are not enough to reach the financing needs. For example, global infrastructure alone requires an additional $1 trillion to 1.5 trillion dollars each year for roads, bridges, energy plants, and other infrastructure to lift up those 700 million people out of poverty.

Official Development Assistance (or ODA) has been relatively flat – in 2015 it was about $132 billion dollars; $137 billion in 2014 — and is subject to many competing demands, from humanitarian crises, to climate adaptation. To get to the trillions we need, we need to leverage ODA with private finance. We also need to boost domestic resource mobilization, which the World Bank Group estimates developing countries could grow up to 2-4 percent of GDP. Yet domestic revenue would take many years to grow, our only hope to reach the goals we’ve set is to quickly crowd in private sector finance and expertise.

At the World Bank Group we are instituting innovative financial instruments to leverage official development assistance. We’re doing this by blending concessional contributions from donors with capital market debt through our fund for the poorest countries, called IDA.  The blended financing model will allow IDA to provide clients greater financial assistance through grants and zero- to low-interest loans appropriate for the poorest and most vulnerable countries.

IDA’s first-ever public credit ratings of Aaa/AAA (stable) were recently issued by Moody’s and S&P. This will enable IDA to raise money in the capital markets to support its financing of a wide range of life-changing investments—from the provision of clean water and energy to the creation of opportunities for refugees and response to natural disasters and health crises—in the world’s 77 poorest countries.

Another growing area of innovative finance is Islamic Finance, which is in itself a form of impact financing. Let me explain. Islamic finance has important advantages over conventional financial products. Its prohibition of interest and requirement that investments be linked to the real economy, and the profit-and-loss sharing arrangements add stability to the financial sector. Islamic finance would also enhance financial inclusion as it incorporates people who, for cultural or religious reasons, are excluded from the traditional financial system. This is perhaps one reason why Islamic finance has been expanding at 10-12 percent per year during the last decade or so.

The World Bank Treasury has issued a variety of Islamic Financial instruments, including two Sukuk (bonds that meet Islamic strictures on interest), which have raised $700 million. Similarly, the Bank’s private-sector arm, the International Financial Corporation (or IFC), has established the IFC Sukuk Company, which issued $100 million dollars in trust certificates in 2015.

The Bank’s political risk insurance arm, the Multilateral Investment Guarantee Agency (or MIGA), has provided a $427 million-dollar Sharia-compliant investment guarantee for an infrastructure project in Djibouti and $450 million in political risk insurance for a telecommunications investment in Indonesia.

The World Bank has created, with the Islamic Development Bank Group, the United Nations and other donors, a joint facility to assist the hardest-hit countries with concessional financing, which includes an Islamic finance instrument for Lebanon and Jordan to help them bear the costs of supporting refugees from Syria.

Another tried and true source of financing is cooperatives. Long before Uber or Airbnb, cooperatives capitalized on a sharing economy, but with an explicit mission to share benefits with everyone in society, especially the poor and vulnerable. Cooperatives have a storied history, and distinct advantages when addressing the needs of low-income people.

Cooperative Financial Institutions include savings and credit cooperatives, credit unions, financial cooperatives, as well as savings and loan associations. They are key strategic partners in achieving both the goals of universal financial access, and ending extreme poverty.  They have low operating costs and are located in remote, rural areas without no financial institutions.

They are one of the main providers of financial services to low-income people, with 700 million members/ accountholders worldwide.  CFIs have large constituencies in India, China, Indonesia, Brazil, Mexico, Kenya, Morocco, and over 35 smaller developing countries such as Togo or Haiti.

In 2014, only 62 percent of the world’s adult population had a financial account – leaving 2 billion adults without one.  Cooperatives are a key partner to scale up financial inclusion — especially with the use of new technology which is quickly making the bricks-and-mortar banks obsolete — with millions of people in the developing world accessing savings, credit, and insurance through their mobile phone.

Last year the World Bank Group’s private sector arm, the IFC, had an estimated $500 million of investments in cooperatives around the world. And our policy teams have helped governments to supervise and regulate cooperative financial institutions. For example, in 2009, the Bank Group worked with Rwanda to strengthen both the supervision and reach of Savings and Credit Cooperatives.  By mid-2012 financial access in Rwanda increased from 47 percent to 72 percent. The newly created savings and credit cooperatives played an important role in this increase since they operated in 215 rural locations in which no financial institution existed previously. And the partnership with Rwanda also significantly increased the financial sustainability of the savings and credit cooperatives.

Now let’s talk about climate change — and the green finance needed to fight it. The deliverables from the Paris agreement are the ultimate global public good — responding to a public threat that doesn’t respect borders and which requires the world community to work together to solve it. August was the 16th consecutive month of record-breaking heat. The planet is warming at a pace not experienced in the past 1,000 years.  For those of you working in risk mitigation and insurance, you know that markets are already making adjustments for the current and future effects of climate change. This is going to require massive amounts of financial firepower to achieve.

Two weeks ago, I attended the UN General Assembly, where UN Secretary General Ban Ki-moon announced that the Paris Climate Agreement now has enough countries signing to be declared in force. World Bank Group President Jim Kim engaged with the private sector and the financial community, urging action on climate and carbon pricing that not only delivers on the Paris agreement commitments, but also provides tremendous business opportunities for our clients and country partners.

We are seeing increased interest in instruments that crowd in the private sector — including the trillions of finance currently sitting on the sidelines — to contribute to solving global challenges and help mitigate the impact of recurring disasters.

There are hundreds of climate projects around the world, but they are not happening fast enough at the scale we need.  The investment needs embedded in the countries’ existing climate change plans amount to more than $1 trillion dollars a year over the next 15 years. And just to close the energy gap sustainably, developing countries need to increase annual energy spending to $1.8 trillion dollars by 2035.

As President Kim said in New York, unlocking this finance will take coordinated action across countries, institutions and financial markets.  We need action in three big areas:

First, we must reduce the cost of capital for investors. Countries can help by putting in place good, stable policies and risk mitigation mechanisms.

Second, we must draw in non-traditional sources of finance. Sovereign Wealth Funds and Pension Funds have trillions of dollars in liquidity looking for secure investment opportunities.

Third, we must “green” the financial sector so that it is ready and able to finance the infrastructure of the future.  At the same time, the emergence of green bonds as an asset class holds great promise. The green bonds market has since developed rapidly and is expected to reach a total volume of $80 to $100 billion dollars by the end of this year.  Greening the financial sector while require adequate standards and mechanisms, and this is a matter that needs to be taken seriously by all industry participants.

We have to continue to test new models on carbon pricing, such as results-based payments for emission reductions, and inform and shape the evolution of new carbon markets. Last year alone, carbon pricing generated $26 billion dollars in revenues worldwide. As more countries price carbon pollution, we’ll see global financing flow from carbon emissions into more climate smart investments.

For all of these new opportunities in finance — from IDA, to cooperatives, to Islamic Finance, to green finance – it will require close cooperation with countries to make it happen. The World Bank Group will be leveraging our existing country relationships to do joint analyses and planning to build a shared commitment to the twin goals and SDGs, while respecting the country clients’ needs and domestic commitments. Of course, also have to leverage a number of global partnerships to deliver on these commitments, with other multilateral development banks, foundations, civil society, and most importantly, the private sector. The Bank Group’s work on with countries also includes an ongoing dialogue and technical assistance to make markets functional and optimal. We help create a policy and regulatory framework that encourages private sector involvement, builds fair and functional tax systems, while also making human capital investments and protecting consumers. These are not mutually exclusive, in the long-run help stabilize markets financially and politically.

Ninety percent of the jobs created in the past 15 years – which lifted over a billion people out of poverty – were created by the private sector. The private sector is a major force for good, and its innovative financing and knowledge — in everything from energy, to supply chain management, to infrastructure, to health care delivery — is badly needed…and right now. Private sector finance is an essential component of our ambition to lift the remaining 700 million people out of extreme poverty, and to put the world on a path to economically and environmentally sustainable growth

In his book “Finance and the Good Society” the Nobel Prize winning economist Robert Shiller said “Finance, despite its flaws and excesses, is a force that potentially can help us create a better, more prosperous, and more equitable society. In fact, finance has been central to the rise of prosperous market economies in the modern age—indeed this rise would be unimaginable without it…finance remains an essential social institution.

Your work and that of your many colleagues in the finance industry, is essential to achieve the SDGs, so that together we can create a world that is more peaceful, prosperous, and secure.

Thank you very much.