IFE Mechanisms

IFE Mechanisms

IFE MECHANISMS VIDEOS

Innovative financing mechanisms are usually creative structures designed to facilitate the movement of funds from sources that are interested in giving funds for a particular purpose to domains or sectors that need funds to carry on their activities. In the development sector, traditionally, bilateral donors (like DFID, USAID, CIDA, SDC, DFAT, etc.) or multilateral donors (World Bank, Inter-American Development Bank, African Development Bank, Asian Development Bank) give funds in the form of grants (where no repayments are required) or concessional loans (where the funds need to be paid back with a very small interest) to developing country governments to carry on reforms or projects in various sectors to support social and economic development of the country. Innovative financing mechanisms either modify some part of the transactional structure of the grants and concessional loans in traditional financing, and/or bring in new actors (donors or recipients) in order to meet the two goals outlined above. Some examples include Social Impact Bonds, Results-based financing, Debt-Swap, Income Contingent Loans, Social Impact Investment, Green Bonds, etc.

Ideally, an innovative mechanism is designed to solve a very specific development challenge in a given context. However, in reality, mechanisms are often borrowed from one context and adapted to meet the needs of a very different context. In this case, actors engaged in the design and implementation should be knowledgeable about 1) the technical and financial aspects of the innovative mechanism structures, and also 2) have a sound understanding of the challenges of the new context that need to be addressed.

Innovation in development financing is taking place constantly with many approaches, mechanisms and instruments being conceptualised and implemented by various actors. An instrument or mechanism that were innovative in the past are considered traditional now, or may still be considered innovative in certain sectors or contexts. Identification of what makes a particular financing modality innovative can lend to a better understanding of the technical aspect of the structure or the instrument and the actors involved. In turn it can help with analysing the applicability and adaptability of these instruments.

Keeping the primary purpose of innovative financing in mind, i.e. mobilisation of additional resources and improving the use of existing resources, the innovative component of a financing modality can have one or more of the following characteristics of innovation supporting development (Guarnaschelli, Lampert, Marsh & Johnson, 2014) :

A) What is innovative?

1. New product/instrument: Development of new approaches, as in creating a new financial instrument, to solve for established development challenges.
2. New market: Using existing proven approaches in a new context, like a new sector or new country/region. For example, introducing public lottery in a country where it does not exist.
3. New participants: Attract new actors to development financing, such as the engagement of the private sector or new global donors like China, India, UAE, etc. (Ridge & Terway, 2019)

B) How does it support development?

1. Mobilize resources – Mobilising additional resources that were previously not available for development, for example a mechanism like Product(Red) that combines commercial and philanthropic objectives and channels financing to development projects.
2. Financial intermediations- Creating efficiencies in financial investment by distributing the risk across many actors through financial intermediaries. The intermediation includes the institutional capacity building to reduce transaction costs (ex. pooled funds) and to reduce or share the financial and delivery risk (ex. insurance instruments).
3. Delivery of resources – Improving the effectiveness of the delivery of resources or programming. This can include methods to improve performance metrics, transparency, creating or aligning performance incentives, and coordination of activities by different actors.

The following videos are examples of innovative financing mechanisms that can be used to meet the education sector financing challenges: