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Locked out of homeownership: Exploring the challenges of accessing affordable housing finance in Kenya

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Jane is a single mother who works as a casual laborer and receives a weekly wage of KES 4,000 (USD 27). She dreams of a better home for her family. She has tried to secure a housing finance loan from different financial institutions, but her efforts have been in vain. Her unstable income, lack of bank account, lack of a title deed, and absence from any formal group have created insurmountable hurdles to obtain housing finance. Jane represents the 60% of the Kenyan urban population compelled to live in informal settlements. Her story is one of many that highlight Kenya’s pressing issue of affordable housing.

Jane’s story reflects the challenges faced by many low- and moderate-income (LMI) Kenyans who cannot access housing finance. This underscores the national housing crisis and how affordable housing remains a distant dream for the majority. Stories of countless people like Jane highlight the need for systemic change in the housing finance sector.

Access to affordable housing could transform Jane’s and many others’ lives. Homeownership is more than a dream for LMI individuals—it represents economic empowerment, stability, and improved living conditions. For many, it means breaking free from poverty and offers far-reaching benefits, such as access to better education and healthcare and a secure future for their families. It is the cornerstone of a better life and a brighter future.

Affordable housing situation in Kenya

The LMI segment comprises a significant portion of the country’s population and desperately needs housing solutions. Kenya has been grappling with a housing deficit, with only 50,000 units supplied against an annual demand for 250,000 units. The demand for housing is particularly high in urban and peri-urban areas, where most low-and middle-income earners live. The rapid urbanization rate (3.7%) and the increasing number of people in the workforce are expected to increase the demand for housing finance within this segment.

In Kenya, a mere 11% of the population can afford a mortgage. Informal settlements are widespread in the nation. This often forces LMI individuals into substandard housing conditions. These settlements lack proper sanitation, access to clean water, and security. This makes life challenging for those who live there. Government-led programs and financial institutions have been working to make homeownership more accessible to the LMI segment.

Barriers to affordable housing finance

LMI households, such as Jane’s, are often confused about whether they should save for a home or meet their immediate needs. Most Kenyans spend almost 15% of their income on housing. The pursuit of dignified shelter in the absence of affordable housing finance risks the continuation of the poverty cycle. These households face systemic barriers in their access to affordable housing finance besides the effects of low- and unstable income. High interest rates, lack of collateral, and complex loan application and approval processes are just a few systemic challenges that LMI people face.

MSC helped Habitat for Humanity Kenya conduct a study to identify barriers to access and use of housing finance in Kenya. High interest rates and clearing costs were respondents’ most frequently cited challenges (50%). High construction costs and the rising cost of building materials were other significant challenges. Only 2% of newly built houses target LMI families, which drives up the mortgage costs beyond the reach of 89% of Kenyans. The prohibitively high costs to build or renovate a home and high financing costs keep current financial solutions unaffordable for most. The box below shows the barriers LMI people face.

The study underscores the importance of designing housing finance products that specifically cater to the LMI segment’s needs and financial capabilities.

Designing the right housing finance products

Product features play an overwhelming role in consumers’ borrowing decisions. MSC’s survey results indicate that convenience is a significant factor as individuals opt for solutions that are easily accessible and user-friendly. Affordability is another key driver of consumer preference, as borrowers prioritize solutions that offer low repayment amounts tailored to their financial capacity. Moreover, financial service providers who target and prioritize specific geographies, such as rural areas, significantly improve the level of access to housing finance LMI earners in those regions enjoy.

Delivery channels significantly impact the access and usage of housing finance. Delivery channels need to be hybridized to ensure greater reach and accessibility to housing finance as implemented in other sectors. This process combines traditional physical branches with digital platforms. Similarly, a well-designed and targeted marketing strategy significantly impacts the awareness, perception, and usage of housing finance products. For example, Habitat for Humanity’s Terwilliger Center for Innovation in shelter has worked with financial service providers to help them design their branding and marketing strategies. This approach positions housing microfinance products as opportunities for LMI households to achieve their dream home in stages, through a series of successive loans tailored to their affordability.

Financial service providers can benefit immensely if they understand the LMI population’s unique needs and constraints. Although incremental construction for the LMI segment is mostly tied to housing microfinance, such as home improvements, the model can potentially extend to housing construction. Some SACCOs and MFIs offer micro-mortgages that adopt the incremental lending model. This approach tailors housing development to the borrower’s financial capabilities and generates a demand for previously non-existent loans.

These findings should drive the financial service providers to develop solutions that are easy to use, convenient, affordable, and tailored to their target customers’ needs. By doing so, they can increase the uptake and usage of their housing finance products and services and better serve their customers’ housing needs.

The untapped potential for home ownership within the LMI segment

Serving the LMI segment is a public policy imperative and offers a sound business case. The demand for affordable housing is undeniable. If we unlock the segment’s potential, it would bring several economic opportunities waiting to be tapped.

The untapped potential primarily stems from financial barriers that have traditionally hindered the LMI segment’s homeownership. Financial inclusion plays a pivotal role to make homeownership a reality for the LMI segment. Tailored financial products can provide necessary support, such as affordable mortgage options and down payment assistance programs. The Kenya Mortgage Refinance Company (KMRC) has enabled lending through savings and credit cooperative societies. It, thus, made homeownership more accessible for LMI households in Kenya.

Another common barrier to homeownership in the LMI segment is the perceived challenge to obtain credit. Mechanisms for fair credit evaluation and recognition of alternative forms of creditworthiness can empower individuals with limited credit histories. This inclusivity is not just a social imperative but also a key driver for economic growth within communities.

Our next blog explores the opportunities for donor investment in housing finance to promote financial inclusion.

Why are women entrepreneurs seeking mentors?

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Improving the ecosystem of innovation and entrepreneurship for women and men alike is one of the central goals of public policy. India improved its ranking from 16th in 2021 to 4th in 2023, among 51 countries surveyed by the Global Entrepreneurship Monitor (GEM). This ascent reflects a steady improvement in the country’s overall entrepreneurial environment. However, a gender gap in entrepreneurship persists, as entrepreneurship is tough and it’s tougher for women. Their constraints are amplified due to entrenched gender bias in social and economic systems, which has material consequences on their entrepreneurial journey.

Entrepreneurs need much more than money, they need customers, networks, peers, contacts, and knowledge. Our recent research suggests that experienced mentors are often the best way to get almost all of these.

However, the question is how many women entrepreneurs have access to such mentors? What has been their experience of seeking entrepreneurial mentorship and how does it accelerate their entrepreneurial journey?

In a recent study done by WEP and MSC, we find that only 25% of women entrepreneurs surveyed have access to entrepreneurial mentorship, and the majority (64%) are not aware of any mentorship programs for entrepreneurs. The concept of seeking formal mentorship support for business growth still remains an alien concept, especially for women entrepreneurs in smaller towns and cities. In some Tier II cities, active local women’s industry associations are key to regular troubleshooting for women’s businesses and come closest to being institutional mentors.

Family-based mentorship for women entrepreneurs plays a key role, especially among those who run an inherited family business. 24% of women entrepreneurs mention friends and family or relatives with business experience as their mentors. Women who lead their family businesses mostly receive mentorship from male family members.

Family-owned businesses remain the dominant form of business organization in India. More than 90% of all listed firms in India are family-owned businesses, but only 12% of them have second or third-generation owners who are women. Discussions with female family business owners who are mentored by family revealed a variety of experiences, which are primarily determined by how supportive male members of the family are.

Others state that the majority of them discover mentors through their peer networks and social media.

Women’s top expectation from mentors is to connect them with industry networks.

It pays to have networks is no secret. Women traditionally have less social connections and networks outside their family circles. Access to networks also varies based on your PIN code, income, and education level. An interesting research by Harvard economist Raj Chetty and his team finds that cross-class friendships are a significant key to upward mobility in America. It is no different in India, where access to networks outside your social circles can be instrumental in providing exposure, access, and opportunities.

Our experience from the Women’s Entrepreneurship Platform (WEP) also indicates that access to industry networks is a lifeline for an entrepreneurial journey, mentors bring access to diverse networks and opportunities apart from providing valuable psychosocial support and feedback.

Women with access to high-quality mentors shared their transformational impact on both business metrics and entrepreneurial ability.  72% of women entrepreneurs report an improved ability to understand risks and opportunities in their business. 67% report enhanced confidence.

It is not surprising that mentorship is considered one of the oldest and most influential tools of human development. History is packed with stories of famous mentor-mentee relationships that have shaped human civilization. However, in the context of entrepreneurship, it’s only with the explosive growth of the Indian startup ecosystem that recognition has increased for mentorship as an effective entrepreneurship development tool. Despite this, access to quality, structured, and formal mentorship for women entrepreneurs still remains a challenge. Incubators and accelerators dominate India’s mentorship landscape however only 3% of all incubators and accelerators specifically target women entrepreneurs and remain concentrated in few regions.

As per McKinsey, an additional 55 million women could enter the workforce by 2030 if their long-standing underrepresentation is at least partially corrected. Not all will be job seekers, many will be job creators. Speeding up India’s journey to a $5 trillion economy will depend on how best we can support women’s entrepreneurial ambitions.

Along with money, markets, and skills, enabling access to high-quality mentorship will have practical implications on improving the texture of the entrepreneurial journeys of millions of budding women entrepreneurs.

The article was first published in The Hindu Business Line on 28th November 2023.

Access to finance alone will not save youths from unemployment. What will? Part 2

Posted on by MSC

As our previous blog shows, youth unemployment in Africa is a multifaceted challenge—exacerbated by several factors, which include macroeconomic instability, educational mismatches, and social biases. These problems hinder young individuals’ potential and impede the continent’s economic and social development. They call for comprehensive solutions as diverse and complex as the problems themselves.

These solutions offer a roadmap to empower Africa’s youth, from policy reforms and educational alignment to breaking social barriers. We can turn the tide on youth unemployment and unlock Africa’s young population’s immense potential through environments conducive to job creation, skill development, and inclusive practices. This blog discusses how we can manage youth unemployment challenges in Africa, what has worked, and what lessons these experiences offer.

How can we address the youth unemployment challenge in Africa?

We must acknowledge that no one-size-fits-all solution can address Africa’s youth unemployment challenge. Different contexts require different approaches. Employment comes in two forms: Wage and self-employment. As per the World Bank announcement in October 2023, Africa has 12 million new young job seekers and only 3 million jobs. This gap of 9 million unemployed, which represents 75% of new young job seekers, will likely worsen if we do not take action, as the number of applicants could reach 100 million by 2030. This blog focuses on self-employment and entrepreneurship. It recognizes their significance to address the escalating youth unemployment crisis in Africa, given the widening gap between job seekers and available positions.

Youth employment in Africa cannot rely solely on scarce salaried jobs. This presents a significant challenge as relying solely on such jobs is not a viable solution for youth unemployment. Entrepreneurship is a credible alternative to tackle employment difficulties. However, this journey is filled with pitfalls, especially for young people who face numerous challenges to set up and develop their businesses. A frequently faced challenge is access to finance—the ability to obtain sufficient and accessible funds to launch, manage, and grow a business.

Several initiatives were developed to address this challenge. The Kenyan government’s Youth Enterprise Development Fund sought to support youth enterprises. The Nasira program was born of a public-private partnership to set up a youth loan guarantee fund. The Africa Growth and Innovations Initiative project is another similar initiative. These programs provide young people various forms of financial support, such as grants, loans, equity, guarantees, and subsidies.

The Youth Enterprise Development Fund program enabled many young people to access finance and create or develop their businesses. Despite this, youth unemployment in Kenya has continued to rise from 6.9% in 2006, when the program started, to 13.4% in 2022. Only 10% of the youth employment programs in Africa have positively and significantly impacted employment outcomes. These statistics suggest that access to finance alone is not enough to solve the youth unemployment problem in Africa. What is missing, then?

The Challenge Fund for Youth Employment (CFYE) is an initiative that takes a different approach to create, match, and improve jobs for young people in Africa. It emphasizes private-sector participation and youth engagement. It encourages innovative job creation strategies beyond the promotion of financial access to create jobs, as reported by the Palladium group as part of the CFYE initiative’s success story.

These findings suggest that we must adopt holistic approaches that consider the several dimensions that affect African youth entrepreneurship. These dimensions include individual, company or value chain, and ecosystem. This is further explained below.

Some regional development organizations, such as AGRA, have recognized the benefits of a holistic approach to youth employment programs. AGRA has developed the Youth Ecosystem Development Framework (YEDF) with MSC’s support. YEDF is a framework to analyze the youth employment ecosystem to foster collaboration and accelerate youths’ access to economic opportunities in food systems. This framework has helped redefine AGRA’s strategy to create sustainable jobs for young people in Africa’s food system. AGRA has been working to create 1.5 million jobs in food systems for young people across Africa over the next five years.

A holistic approach, such as that undertaken by AGRA and CFYE, recognizes that young entrepreneurs need non-financial support along with access to finance. This non-financial support includes business development assistance, a business-friendly environment, and capacity-building opportunities. It recognizes that stakeholders must design financial services to meet young people’s diverse and dynamic needs and preferences. Moreover, it advocates a systemic approach to youth employment that promotes collaboration and coordination between actors from the public and private sectors, civil society, and academia.

A holistic approach acknowledges that financial services should cater to diverse youth needs. Young people are not a uniform group but are varied and dynamic. Our field research shows that youth preferences vary. Some favor savings over loans, require different loan amounts, repayment terms, or collateral conditions, and have varied risk appetites and aspirations. Development partners have recognized the need to understand youths and have taken steps to make this information available. For instance, MSC helped FMO and Making Cents International develop a compendium of global good practices as practical guidance to financial service providers (FSPs) to understand the youth market, improve their products, and broaden and deepen their institutional strengths, priorities, and resources to serve the youth better. MSC also helped Opportunity Bank Uganda Limited (OBUL) develop financial products for the youth. OBUL can now better address the unique financial needs of young entrepreneurs in Uganda through dedicated products.

 

The approach would promote coordination, complementarities, and partnerships among different actors, which include:

  • Policymakers and regulators, such as governments, ministries, and agencies, to formulate and implement policies and regulations that affect young entrepreneurs;
  • Research and education institutions, such as universities, think tanks, and media, to generate and disseminate knowledge and information on youth entrepreneurship;
  • Financial institutions, such as banks, microfinance institutions, and FinTechs, to provide financial products and services to young entrepreneurs;
  • Business development service providers, such as NGOs, foundations, and incubators, to provide non-financial assistance to young entrepreneurs;
  • Youth organizations and networks, such as associations, clubs, and forums, to represent and advocate for young entrepreneurs’ interests and needs.

However, a holistic approach also has several risks, such as:

  • Divergences in interests and priorities of different stakeholders can hinder effective coordination and collaboration;
  • Information and power asymmetries between young entrepreneurs and other stakeholders can limit people’s access to opportunities and resources;
  • Institutional and regulatory constraints, such as bureaucracy, corruption, and entry and exit barriers, can discourage or hinder youth entrepreneurship;
  • Challenges in the measurement of youth employment and entrepreneurship programs’ impact and performance can affect interventions’ quality, relevance, and effectiveness.

A holistic approach would emphasize the need for youth involvement through a participatory approach. A participatory approach recognizes young people as critical actors in development and not passive beneficiaries in program design, implementation, and evaluation. It ensures the programs are relevant, responsive, and effective for the target beneficiaries. Youth involvement would also empower and inspire young people to take ownership of their entrepreneurial journey and contribute to develop their communities and countries.

The path ahead

The challenge of youth unemployment in Africa is an immediate and pressing issue that demands urgent action. Although access to financing is crucial, it is only a part of the solution. A comprehensive and holistic approach is essential to truly make a difference—one that addresses the problem’s multifaceted nature.

We recommend that stakeholders recognize the youth population’s diverse and dynamic nature, and design financial services tailored to their specific needs and preferences. This design will consider different financing options, repayment schedules, and risk appetites. Additionally, stakeholders should prioritize nonfinancial support. Collaboration and coordination among various actors, such as financial institutions, business development service providers, policymakers, research and educational institutions, and youth organizations, are also essential. We must also consider risks and challenges in the implementation of strategies and include a participatory approach of youth in interventions.

In summary, we propose a holistic approach that considers the individual, business, and environmental dimensions of youth entrepreneurship, practical recommendations, and a critical review of risks and challenges to address the problem of youth unemployment in Africa. We can solve this pressing problem and contribute to the continent’s transformation through a conducive and supportive environment, youth’s involvement at every stage, and usage of their potential and the strengths of the financial sector and the broader ecosystem.

This blog was written with inputs from Willis Ogutu. 

Access to finance alone will not save youth from unemployment; what will? Part 1

Posted on by MSC

Youth unemployment is an urgent challenge in Africa. The International Labor Organization (ILO) reports the youth unemployment rate in Africa was 12.7% in 2022. More than 20 million working-age youth are unemployed, which hinders the continent’s economic development.

Addressing youth unemployment is a crucial step to harness the potential of Africa’s youth to foster sustainable economic growth, social stability, and innovation. Employed youth contribute to a virtuous cycle of poverty reduction, increased consumer spending, and the cultivation of a skilled workforce that can adapt to the evolving demands of the global economy. The realization of this potential is not just an economic imperative but a moral one. The continent must ensure that its most valuable resource—young people—does not become a narrative of lost opportunities but a beacon of progress and prosperity.

Why are African youth unemployed, and what are the consequences?

The factors behind youth unemployment in Africa and their consequences may vary across countries and regions. Still, we identified a few common factors, which we have classified into three categories:

 Macro factors

Africa struggles to provide sufficient employment for its youth, with a low economic growth rate of only 2.5% in 2023. Youth comprise 23.5% of the 38.1% estimated working poor in Sub-Saharan Africa (SSA). 60% of Africa’s population is younger than 25, which exerts immense pressure on the need for job creation. While 10 to 12 million youth enter the workforce yearly, only 3.1 million jobs are available. This leaves many youth unemployed.

As per the International Labor Organization (ILO), micro, small, and medium enterprises (MSMEs) are Africa’s largest source of employment, yet they face significant entry barriers. MSMEs comprise 90% of African businesses and generate more than two-thirds of the continent’s employment opportunities. Youth-led MSMEs often face significant barriers despite their immense potential to create employment opportunities. They struggle to access essential resources, such as land, capital, and technology. The FinAccess report in Kenya states that youth aged 18 to 25 are the most excluded from access to financial services, with an exclusion rate of 22.5%. Only 45% of youth-led MSMEs are likely to approach financial institutions for financing compared to 50% of non-youth-led MSMES because youth-led MSMEs cannot present an adequately structured business plan.

Weak governance and institutional deficiencies further discourage job creation. With an average score of 51.8 in the ease of doing business, SSA ranks below the global average of 63. This makes it one of the poorest performing regions. This low score indicates that the business environment in SSA is challenging and less conducive to economic activities. This score may discourage potential investors and business activity, which leads to high unemployment rates.

Meso factors

Insufficient education and a lack of skills that align with market demands exacerbate youth unemployment. For example, in South Africa, the unemployment rate for those aged between 15 and 24 is a staggering 63.9 %. Stats SA highlights that the lack of suitable jobs that match their skills leads to a significant loss of hope for these youth.

Poor coordination between employers and job seekers creates significant barriers. This lack of communication makes it difficult for youth to find suitable jobs and align their skills with job market needs, which continues the unemployment cycle. A good example is South Africa. As per the ILO, labor market institutions—intermediaries between job seekers and employers—raise wage levels above what would be needed to reduce unemployment.

Additionally, the limited integration of youth into local, regional, and global value chains exacerbates the unemployment challenge. The Organization for Economic Co-operation and Development (OECD) reports that Africa’s participation in regional value chains constitutes only 2.7% of its global value chain engagement. This rate starkly contrasts other regions, such as Latin America and the Caribbean, with a participation rate of 26.4%, and Asia, with 42.9%. Insufficient integration into these economic networks restricts young individuals’ opportunities to apply their skills and talents. This limits their access to suitable employment opportunities.

Micro factors

Social and cultural biases, especially against groups such as women, rural dwellers, and ethnic minorities, contribute to youth unemployment. ILO states that women in some SSA countries face high underemployment rates, around 40% or 50%. Additionally, youth unemployment is more pronounced in rural areas, with a 10% difference compared to urban areas. These biases limit job opportunities for specific groups, make it harder for youth to find work, and perpetuate the issue of youth unemployment.

Summary of the macro, meso, and micro levels constraints

Complex challenges at the macro, meso, and micro levels cause unemployment among African youths. These challenges limit economic opportunities for young Africans and lead to social issues, such as inequality and underused human capital. MSC identified the following factors and consequences of rising youth unemployment when it developed AGRA’s youth employment, empowerment, and entrepreneurship strategy:

Macro

Factors

• Low level and quality of countries’ economic growth
• Limited access to productive resources, such as land, capital, and technology
• High barriers to entry and growth for small- and medium-sized enterprises (SMEs)
• Weak governance and institutions 

Consequences

• Insufficient job creation opportunities due to a stagnant or slow-growing economy result in limited positions for youth.
• Youths face barriers to start or expand businesses due to the lack of essential resources, such as funding and technology. These barriers limit entrepreneurship and the potential for economic empowerment.
• Significant barriers hinder the establishment and growth of small businesses. This reduces entrepreneurial activities among youths, and this reduction of activities leads to missed opportunities for self-employment and innovation.
• Lack of effective policies, enforcement, and regulatory frameworks may result in an unstable business environment. This uncertainty discourages domestic and foreign investments, which leads to a diminished job market for the youth.

Meso

Factors

• Lack of quality education and skills adapted to the demands of the labor market
• Lack of intermediation and coordination between employers and job seekers
• Poor integration into local, regional, and global value chains

Consequences

• Youth may have qualifications that do not align with the skills employers need. This results in a mismatch between the education system and the job market’s needs. This mismatch can lead to higher rates of unemployment and underemployment.
• The mismatch of skilled youth with suitable employment opportunities leads to inefficiencies in the labor market. This mismatch can result in prolonged job searches for young individuals and higher unemployment rates.
• Limited economic opportunities restrict innovation, growth, and the creation of new jobs.
• Youth may face restricted employment prospects due to a lack of integration into broader economic networks.

Micro

Factors

• Social and cultural norms that discriminate against certain groups of young people, such as women, rural dwellers, and ethnic minorities
• Employment involves various risks, such as instability, vulnerability, exploitation, and violence, which often lead to migration.

Consequences

• Exclusion and limited access to employment opportunities for specific groups contribute to higher unemployment rates among marginalized segments of youth. This exclusion perpetuates social and economic inequalities.
• Fear and uncertainty in the job market may deter youth from seeking or maintaining employment. Precarious work conditions, along with exploitation and violence, undermine job security and adversely affect the well-being of young workers.
• Additionally, migration may respond to limited opportunities, but it leads to brain drain and further exacerbates unemployment issues in certain regions.

What do we lose when youths are out of productive economic engagement?

We lose the potential of a large and dynamic population segment that could drive innovation, entrepreneurship, and social change in Africa. We lose the opportunity to harness the demographic dividend, the economic benefit that arises when a country has a large share of working-age people relative to dependents. Around 60% of Africa’s population is predominantly young and could contribute to job creation, increased productivity, and higher living standards if put to good use. We lose the chance to achieve the sustainable development goals (SDGs), a set of global targets to end poverty, protect the planet, and ensure peace and prosperity for all by 2030.

The exploration of the multifaceted challenges of youth unemployment in Africa proves that tackling this issue requires innovative and multidimensional solutions. Our next blog delves into these solutions and offers practical approaches to address the identified barriers and capitalize on African youth’s untapped potential.

This blog was written with inputs from Willis Ogutu. 

 

 

Design elements for a facility to finance energy transition

Posted on by MSC

Climate change is among the biggest challenges of our times. What role can innovative finance play to enable the transition to net zero? We scout for answers in a recent project that sought to catalyze finance in the electric mobility sector. We draw out a model to finance the energy transition from the insights.

India’s transport and mobility sectors contribute more than 12% of its total carbon emissions. It significantly contributes to its import dependency on crude oil as well, making the adoption of electric vehicles (EVs) an imperative to a greener and more sustainable future.

Supply-side interventions, such as the FAME subsidy in India or the policies focused on the EV supply chain and batteries in Europe and the US, have enabled the push toward EVs. But demand-side interventions, such as access to affordable finance, are also necessary. While 77% of all vehicles are financed in India, experts estimate that only 5% to 10% of EVs are financed. The estimated financing gap of USD 6 billion is even more surprising given the favorable economics of switching from internal combustion engine (ICE) vehicles to EVs for the end users.

MSC’s work to finance energy transition in the e-mobility sector shows that certain basic approaches to design innovative financing structures are applicable across various sectors from mobility to energy efficiency, to climate smart agriculture. These structures, however, presume that the participating financial institutions (FIs) will have robust credit underwriting mechanisms and strategic intent to penetrate new market segments. The key elements of the approach are to:

  1. Build a de-risking framework for FIs that reduces their credit losses;
  2. Identify key market segments that will likely be the growth drivers;
  3. Enable the ecosystem via market-making, that is, identify missing pieces in the delivery of critical services that preclude the market from taking off.

Elements for designing a facility to finance energy transition

The creation of the de-risking frameworks

Financiers hesitate to invest money into projects where:

  • Products are based on technologies with unproven market standards;
  • The cashflows generated from the financed assets are uncertain due to the high probability of downtime or other operational issues;
  • The salvage value of an asset is either not readily determinable, or where the repossession itself is costly, or both.

Over and above the risks associated with lending to any specific asset class, financiers have to factor in the customer and counterparty risks inherent in any segment to which they lend. Most nascent markets are riddled with such risks that elevate the financiers’ risk perception and credit losses. To de-risk the ecosystem, the FIs must have tools to implement de-risking measures. Few examples of such tools can be strict onboarding criteria for the product companies, or guidance on attuning FI’s internal credit processes to the asset class’s specific nature.

Focus on the market segments that are the growth drivers

Identifying the existing, emerging, and high-potential market segments helps the FIs to pick pockets of growth and risks that arise from different segments. For instance, two-wheelers account for about two-thirds of the EV market in India and are the fastest-growing type of EVs. Moreover, the B2B channel is a bigger market than B2C (retail), with fleet operators who rent out EVs to drivers who work as gig workers. The segment knowledge is essential to identify and prioritize the risks that emanate from them and design suitable de-risking responses.

Market-making to enable the ecosystem

Market-making requires three specific actions:

  • Create conditions for near-perfect competition. This requires a balance between setting acceptable standards for products and services and ensuring that these are non-exclusionary. Thus, FIs must be nudged to take calculated risks by encouraging new entrants who meet set quality and fiscal criteria.
  • Create suitable conditions that incentivize private players to offer currently underdeveloped or absent products and services. For instance, the lack of a market for secondary sales significantly hinders EV financing. Players that deal in secondhand EVs have a clear opportunity.
  • Consider data as a public good and gather data on key parameters, such as product performance and repayment trends. This data will enable FIs to assess risk accurately and move the market pricing from perceived risk to actual risk.

The creation of an innovative finance structure for energy transition based on the three elements of segment focusing, de-risking, and market-making requires initiative from stakeholders with a sharp impact focus and an appetite to absorb risks from nascent or underdeveloped markets. Public financial institutions (e.g., the multilateral and bilateral institutions and development finance institutions) are best placed to play this role. They have a mandate to drive large-scale impact, which enables them to provide catalytic capital.

They can support a facility that generates impact and financial returns, and absorbs risks posed by nascent markets focused on energy transition, such as EV and carbon. More importantly, these institutions can lead the way for the private sector to enter markets it may hesitate to explore. They can then help establish a market and create a supportive environment that eventually attracts private investment.

One such ongoing effort is the EVOLVE-RSP Electric Vehicle Risk Sharing Program in India. It is a joint effort of the World Bank, the Korean Economic Development Cooperation Fund (EDCF), NITI Aayog, and the Small Industries Development Bank of India (SIDBI). It seeks to accelerate two- and three-wheeler EV uptake through a partial credit guarantee and concessional loan facility to help India achieve its 30@30 goal. Similarly, USAID launched the South Asia Regional Energy Partnership (SAREP) to accelerate the energy transition in South Asia.

Structuring a blended finance facility

A blended finance facility (BFF) is a structure that helps mobilize capital for sustainable development from the private sector through anchor funding from public and philanthropic sources. It “blends” concessional funding with other sources of capital, such as debt or equity, to maximize funding and social impact capacity. Public financial institutions play a vital role to set up a BFF as their name lends credibility and trust required to gain investors from the private sector. This includes philanthropic, commercial, or impact-focused investors.

MSC played a key role in the design of a BFF structure for EVOLVE-RSP aligned with the three elements discussed above. Based on that experience, here are the key design features for the BFF facility:

  1. Access to wholesale finance for FIs at affordable rates and on terms that promote market-making. Besides lower interest rates, the concessional loans offered under EVOLVE-RSP also nudge the FIs to make their loan terms less restrictive to end customers, such as through increased loan tenures and loans-to-value.
  2. Access to suitable risk-sharing arrangements allows the participants to extend their services and products to underserved segments, markets, and geographies. For instance, EVOLVE-RSP’s partial credit guarantee product enables FIs to take calculated risks and offer EV loans to new-to-credit customers, as they can now invoke the credit guarantee if the borrower defaults.
  3. Embed de-risking measures in the BFF’s structure and its financing mechanisms. For instance, it must offer incentives or rewards for participants who adopt best practices in their processes. In the EVOLVE-RSP program, the facility set standards for collection, repossession, battery tracking, and secondary sales, which will likely become industry benchmarks. These policies may even spur the markets for underdeveloped services, such as the lack of a secondary sales market, which hinders EV lending.

While the facility does all of the above, it has to price its products and services to meet its operational costs and ensure its long-term sustainability. Thus, the BFF itself must have a viable business model that keeps the investors’ interest alive and attracts other potential investors.

The above framework enables the design of a suitable strategy to finance energy transition. It yields an understanding of ecosystem risks, identifies key market segments, and focuses on market-making functions. The time is ripe for governments and multilateral and bilateral organizations to join hands and establish BFFs to ensure a green and sustainable future.

Empowering youth through entrepreneurship and financial inclusion

Posted on by MSC

Youth financial inclusion

Imagine a world where young people are not just tomorrow’s leaders but today’s sustainable business creators. Youth can achieve this vision through provisions, such as access to funding and co-working spaces, mentorship, business incubation, networking opportunities, and an enabling environment. Such provisions can enable them to drive innovation and entrepreneurship, strengthen their communities, and contribute to their continent’s progress.

However, several significant barriers hinder youths’ access to essential financial services and thus stop them from achieving this vision. Only 40% of young people in Sub-Saharan Africa have access to financial services. This exclusion hinders how well they can start and sustain a business. It leads to lower revenue, limited growth prospects, and staffing shortages. MSC’s study for FMO’s Making Cents International Youth Compendium Project revealed barriers on multiple fronts, from policy and regulatory constraints to supply- and demand-side challenges.

Despite substantial barriers, Africa’s youth possess drive and innovation. They constitute 70% of Sub-Saharan Africa’s population and will be key to achieve the sustainable development goals. They need support from governments and development stakeholders to overcome unemployment and underemployment challenges.

The digital advantage in bridging the financial gap for youth

In recent years, African youth have shown a strong interest in technology. As per the GSMA’s reports, approximately 50% of people in Sub-Saharan Africa adopted smartphones. The region has experienced a rise in digital entrepreneurship—with 618 active tech hubs in Africa, online learning, and mobile banking. Youth’s preference for digital over traditional banking is evident as a higher percentage of young people in various countries prefer mobile money accounts. These countries include Uganda, where 51% of young people have a mobile money account compared to 29% who use traditional bank accounts, and Senegal, where 27% of the youth use mobile money accounts while only 13% use traditional bank accounts. This showcases mobile technology’s potential to bridge financial gaps.

Using technology for youth financial inclusion

Technology can enhance youth financial inclusion through efficient and swift financial services. The electronic Know Your Customer (e-KYC) process simplifies account opening for youth who lack the necessary documents. For example, Opportunity Bank Uganda Ltd (OBUL) built a mobile app with an online wallet feature called “SmartPocket.” It only asks users to provide a mobile number for registration. This simplified account helps youth build a credit history and subsequently improves their access to credit.

Digital savings and loans offer features that simplify how young people save and borrow. For instance, M-Shwari in Kenya allows users to connect their M-PESA mobile money wallet to a savings account with no required minimum savings, no fees, a fixed interest rate, and the option to make microdeposits.

Moreover, technology provides the opportunity to integrate financial services with non-financial services that young people require. These services include information, training, networking, and mentoring. Financial service providers (FSPs) can partner with FinTech companies to lower the technology’s cost. For instance, Ecobank Ghana collaborated with OZÉ to develop a mobile app for youth-owned MSMEs to help them track their sales, expenses, and customer information. OZÉ subsequently used the data to evaluate the MSMEs’ creditworthiness and link them to funding provided by Ecobank. The data also created tailored recommendations, reports, and training.

Digital financial solutions are transformative. Yet, they face challenges that hinder their adoption and effectiveness, such as limited digital literacy and access, cybersecurity risks, and regulatory hurdles. We must also address cultural resistance, the risk of over-indebtedness, infrastructure deficiencies, and interoperability issues to ensure inclusive and sustainable financial access for all youth.

Strategies for sustainable youth financial inclusion

Contrary to popular belief, financial education is not the ultimate solution for many youth barriers and cannot guarantee sustainable financial inclusion. As per a recent meta-analysis, conventional financial education falls short in both its content and instructional methods. Interventions that involve the youth’s experiences or surroundings are more effective for accelerated financial inclusion. FSPs can use the strategies below to deliver financial and non-financial services or products for sustainable youth financial inclusion:

  • FSPs should incorporate five dimensions of customer experience value when they craft products and services. These are functional, economic, humanistic, social, and mechanic. They contribute positively to financial inclusion’s access, usage, and quality.

  • FSPs can use existing touchpoints and seize relevant moments in young people’s lives to make financial services more relatable to them. Some examples of touchpoints are civic classes in schools and weekly savings group meetings. Some suitable “teachable” life moments FSPs can use include the time an individual earns an income for the first time, starts a business or a family, and buys a first home.
  • FSPs can integrate critical influencers into youth life when they introduce services or products. These include parents, teachers, or community leaders. Financial socialization by parental figures can lead to positive financial habits, such as budgeting and financial planning. It is more effective than traditional financial education.
  • FSPs can create an issue map and adopt a portfolio approach to employ different solutions to tackle financial inclusion challenges based on the issue map.
  • FSPs can adopt a peer educator model to make youth more comfortable and increase their trust in FSPs. Word-of-mouth from family and peers is crucial to influence youth’s decisions.

  • FSPs can use a unified or parallel model when they integrate non-financial services into financial services. In the unified model, FSP staff will provide non-financial services directly, while the parallel model delegates the non-financial services to another department inside the FSP. They can lower the cost since they use their internal resources.

Alternative financing for the youth

In today’s dynamic financial landscape, we must explore alternative financing options to cater to the different youth segments’ unique needs. These segments include urban and rural youth, young women, and entrepreneurs. Barriers for youth are more pronounced for young women. Therefore, addressing the gender divide in financial inclusion is essential for economic development.

One innovative financing option is crowdfunding. It offers access to seed capital without traditional collateral. Crowdfunding allows entrepreneurs to build a financial history that may lower their collateral requirements and interest rates. Peer-to-peer (P2P) lending platforms directly connect borrowers and lenders online. Such platforms offer an alternative financing option for young entrepreneurs who lack access to seed capital and collateral. E-commerce platforms have transformed into innovation hubs. They provide accessible, convenient, and affordable financing options.

Crowdfunding and P2P lending carry risks despite their innovative approach to financing. These risks include the potential for fraud due to fewer regulations, the possibility of non-repayment or default on loans, and the volatility of funding amounts, which can be unpredictable and may not meet the target capital required. Moreover, these platforms may lack the financial protections offered by traditional banks and, thus, expose youth to financial losses without recourse for recovery.

Conclusion

The call to action is clear. Policymakers, financial institutions, and young entrepreneurs should collaborate and take resolute steps. Financial institutions should develop tailored financial products and services that cater to young people’s unique financial needs. Policymakers should create an enabling environment that provides access to financial services and the skills needed to create a more inclusive financial landscape. Together, they can help young entrepreneurs accumulate assets, generate income, manage financial risks, and fully participate in the economy.