Introduction to IFE

Introduction to Innovative Financing for Education

Within the education sector, funds are needed for a range of policies and activities to operate the education system and improve the quality of education. However, in many countries there is a lack of funding. As a result, some children are still left out of school, and in some countries the contribution of parents and households can be significant.

Thus, new forms of revenue and expenditure are needed in order to reach the Sustainable Development Goals.


What is Innovative Financing?

Innovative financing has the potential to attract additional funds for the education sector while also addressing quality and equity challenges. However, innovative finance is understood in many different ways by development and education stakeholders.

The term “innovation financing” does not have one concrete definition by its nature. Most simply, it means some form of innovation on how financial transactions take place for any purpose. Within the international development sector, the term was initially used after the global commitment to the Millennium Development Goals in the year 2000. Often used interchangeably with “Non-Traditional Financing” or “Alternative Financing”, the international community started exploring innovative financing mechanisms to bring in additional funding to reach the MDGs. Over the years, the innovation has been seen as the creative leveraging “of existing funding and revenue streams, infrastructure, expertise, and networks to generate new and desired impact in the domains of financing, efficiency gains, and reduction of business risk (Filipp & Lerer, 2013).”

Within the international development sector, the term generally used for development funding that has one or more of the following goals:

  1. Mobilize additional funding from existing or new funding sources that is currently not available.
  2. Improve the use of existing funding in an innovative manner to improve results and to make the funds go further.

IFE Mechanisms

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:

Income Contingent Loan
Income Contingent Loans provide an alternative model for designing higher education loans to tackle the challenge of the student debt crisis by changing the loan repayment terms.

Income Share Agreements
Income Share Agreements provide an alternative model to student loan programs by where the recipient agrees to pay a certain percentage of their future income to the funder for a fix amount of period.

Debt Swap
Debt Swaps can turn a country’s debt to funding for education where a creditor forgives the debt of a borrowing country on the condition that the country invests an agreed amount of local currency, which has been freed up, in the development/ education sector.

Advance Market Commitment
An Advance Market Commitment mechanism can be used in the context of market failure where the quantity of a product supplied by producers does not meet the quantity demanded by the users.

Education Bonds
Thematic Bonds can be structured in a manner to direct funds to education by national governments or multilateral financial institutions.

Harnessing Remittances
Remittances from the diaspora can be harnessed to redirect a larger proportion of funds towards education.

Social Impact Investment
Social Impact Investment, where investors seek both a financial and a social return to investment can attract funding to finance educational outcomes for social returns.

Microfinance
Some education providers need financing support to develop or expand their services. However, they often face difficulties accessing financial services due to their size or activity. In this video, discover how microfinance can serve as one possible solution.

 

Parametric Disaster Insurance
Disaster events like earthquakes, drought, armed conflict, financial crises, and civil unrest often disrupt education systems. Learn throughout this animation how a Disaster Risk Insurance with donor funding could alleviate the problem.

 

Please contact us:

  1. If you would like to develop workshops or talks for education and finance professionals on innovative financing for education using IFE project material.
  2. If you would like to develop additional case studies on an innovative financing project or partner with NORRAG on additional research on the topic.
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