IFE Mechanism

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 (Innovative Finance for Education)

With a global growing demand for higher education and while traditional student loans have become a globally used approach, many countries have also experienced issues around high student loan debt, incurring in national crisis in some cases.

Income Share Agreements (Innovative Finance for Education)

Many countries are facing an education financing dilemma: while there is a global growing demand for post-secondary education, most countries cannot afford to offer it free-of-charge for all.

Debt Swap (Innovative Finance for Education)

Loans can allow countries to access funding for specific development projects, but may also leave them indebted, limiting their capacity to fund education. See how a debt swap can relief national debts and thus play an important role in filling the gap in funding for education.

Advance Market Commitment (Innovative Finance for Education)

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 (Innovative Finance for Education)

Discover how education bonds can be structured to bring funds from investors into the education sector.

Harnessing Remittances (Innovative Finance for Education)

Harnessing remittances: an innovative way of increasing education funding or redirecting existing funds towards the education sector.

Social Impact Investment (Innovative Finance for Education)

See how social impact investment can be used in education to provide funds to private companies providing educational services.

Microfinance (Innovative Finance for Education)

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. This video explains why both domestic and international funding for education need to increase drastically in order to reach the target defined by the UN.

Parametric Disaster Insurance (Innovative Finance for Education)

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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