By Judith Karl, Executive Secretary of UNCDF, and Samuel Choritz, Policy Adviser at UNCDF
Addressing market failures by making finance work for the poor is a critical catalyser to this end. Official Development Assistance (ODA) can be the largest source of external finance in least-developed countries, where private investment often favours commodity and real estate sectors. Disparities in incomes and living standards show that location matters more for living standards in developing countries than it does in developed ones . “Last mile finance” models can use public resources — such as ODA — to de-risk and crowd-in public and private finance, especially from domestic sources, to create virtuous dynamics of inclusion, local growth, resilience, and productive investment.
Challenges to a sufficient flow of finance at the local level are daunting. Population growth and urbanisation will see 2.5 billion people added to the world’s urban population by 2050, with some 90% of that increase in Asia and Africa. Yet, only about 7% of total aid goes towards urban development.
Perceptions among investors of high risk, insufficient returns, and weak management and accountability at the local level underfund local development plans. Business models are ill-adapted to meet the needs of poor households, businesses and communities.
Direct ODA investment at the sub-national level or in financial service providers can leverage — at a rate of 1 to 10 or more — public and private resources that already exist in the domestic economy, such as from pension funds, bank liquidity or savings “under the mattresses.”
Supporting performance-based fiscal transfer systems can expand the financial bandwidth of local governments to invest in infrastructure and services. By applying structured project finance models to local development plans, domestic banks and private investors can be crowded in to finance transport hubs connecting people to markets, hydro-power facilities, or agro-processing plants. In Tanzania, for example, USD1.2 million in seed capital has so far unlocked USD52 million from the domestic private sector through this approach, and the amount is growing.
Another channel for reaching the last mile is through financial inclusion. Two billion people globally, most of them women, are unbanked. Financial inclusion is a target under seven SDGs, recognising the importance of expanding access to the financial services people need most — savings, insurance, payments or credit.
With blended finance models that use ODA strategically, we can incentivise financial service providers to reach poor people and businesses with appropriate formal financial services. Alternative delivery channels, such as mobile money and agent networks, can extend the reach of such services even as they lower costs. As a result, providers increasingly see the business case for serving populations once considered unbankable. In five years, UNCDF’s Microlead programme reached over 1 million depositors in 13 countries, mobilising savings balances of USD450 million. UNCDF’s YouthStart programme reached over 600,000 youth who saved over USD16 million, allowing over 80,000 young entrepreneurs to access USD11 million in loans.
Putting informal savings into productive circulation also boosts small businesses, which create millions of jobs. About 200 million businesses in developing and emerging markets lack adequate financing to grow.
Digital finance services are central to this work, helping reach unbanked and remote populations. In Malawi, for example, with the direct deposit of cash crop receipts into savings accounts, participating farmers saw a 21% increase in the value of their crop output and an 11% increase in household consumption post-harvest.
Leaving no one behind in least developed countries requires that governments and development partners deploy public resources directly to the sub-national level to unlock public and private investments in local infrastructure and services. It requires they take calculated risks, test new approaches, and create the incentives for private sector investment in underserved markets. And it requires they support those business models that adapt to the new frontiers of digital. This includes, for instance, “pay-as-you-go” models, which offer people ways to pay for clean energy in the same way they use prepaid mobile airtime, and those tools that challenge perceived wisdom about the poor’s bankability.
Leaving no one behind will not come by waiting for rising development indicator averages. Rather, it will come by changing business models and how finance flows to catalyse transformation in the last mile.
 World Bank, 2009. World Development Report 2009: Spatial Disparities and Development Policy.