Blended Finance – Leveraging Public And Private Funds For Growth

Blended finance combines public and private capital to fund projects that deliver social, climate, and economic benefits in developing countries. This approach leverages public and philanthropic funds to attract private sector investments, making projects that might otherwise be too risky or unprofitable more appealing to private investors.

Financial instruments like guarantees and insurance help mitigate risks for these investors. In recent years, blended finance has become a powerful tool to address the significant funding gap in achieving sustainable development goals. While the goal of turning “billions into trillions” in funding remains ambitious, there is growing recognition of blended finance’s potential to help close this gap. Blended finance offers several benefits: by reducing risks and improving returns, it attracts private capital that would otherwise not be invested in development projects. The involvement of the private sector brings innovation, efficiency, and expertise, leading to more effective and scalable solutions. Additionally, blended finance facilitates knowledge transfer between the public and private sectors.

However, this approach also faces challenges. Designing and implementing blended finance structures can be complex, requiring a careful balance of risk and return. Effective coordination between public and private sector partners is essential, and measuring the development impact of blended finance can be challenging.

GOPA AFC provides advisory services to overcome these challenges. We design and develop innovative financial instruments such as investment and technical assistance grants, as well as debt, equity, and risk-sharing instruments. We also offer advice on optimal financial structures, including fund and project structures. Moreover, we focus on building capacity within the blended finance ecosystem through customised technical assistance, workshops, and specialised training sessions.

Unlocking finance for MSMEs in Laos

According to the World Bank Enterprise Survey (2018), 35% of registered Lao companies cite access to finance as their primary barrier. This is nearly three times the regional average of 13% in East Asia Pacific. Especially micro, small and medium-sized enterprises (MSMEs) in Laos face significant barriers to accessing finance, which limits their ability to expand and improve production. The share of bank lending directed to MSMEs has steadily decreased from 31% of banks’ total lending in 2015 to just 12% in 2022. Banks are reluctant to lend to MSMEs due to their lack of formal accounting and valuable collateral. This closes the door to bank credit for many, stifling growth and competitiveness.

Recognising that subsidised credit alone is not effective, the Lao Government is exploring alternative solutions. GOPA AFC has introduced an approach that leverages domestic private refinancing by lowering the uncertainty of lending to MSMEs through credit guarantees.

Establishing the Credit Guarantee Company

GOPA AFC was selected by the Ministry of Industry and Commerce of Laos and the national MSME Promotion Agency to provide technical support on the set-up of the Credit Guarantee Company. We developed the business plan for the Credit Guarantee Scheme in close collaboration with national stakeholders, including the ministry, domestic banks, and the Central Bank.

We proposed a balanced approach to gain buy-in from domestic banks while avoiding the moral hazard of banks earmarking dubious MSME clients for the credit guarantee. The risk is shared 60:40 between the company and the partnering bank, with all credit guarantees issued on an individual basis during the startup phase.

To ensure sustainability, we recommended an annual revenue of 1% of the outstanding debt to cover operational costs and a provision for loan loss. We also proposed a company set-up and governance structure that promotes transparency and accountability, a prerequisite for World Bank seed funding. In July 2024, the business plan was approved by the Prime Minister's Office and the implementation phase kicked off.

Launching the Lao Credit Guarantee Company

The implementation phase began with a multi-stakeholder meeting in September 2024, chaired by the Deputy Minister of Industry and Commerce. GOPA AFC assembled a multidisciplinary team of international experts to support all aspects of the setup and operations of the new company, including legal issues, credit guarantee, risk management, financial management, IT, and environmental and social compliance.

The Lao Credit Guarantee Company is being established as a state-owned enterprise, compliant with Lao regulations. Our experts assist the MSME Promotion Agency with company registration, business licensing, staff recruitment and training, commercialisation of credit guarantees to banks, and the development of internal control systems and governance.

The goal is to issue the first credit guarantees by May 2025. We are rising to the challenge and propose to test credit guarantees with a small group of pioneer banks before rolling them out to the entire banking sector. We are working closely with the Lao MSME Promotion Agency to ensure the success of the project despite difficult macroeconomic conditions, incomplete regulation, and a still developing governance culture.

Blended finance requires a delicate balance to leverage public seed funding and attract private investment. Governments pursuing this path need skilled and pragmatic technical advice. With its extensive network of specialised international experts and experience engaging with public agencies in developing countries, GOPA AFC is well-positioned to make blended finance work for widespread economic development.

Our work in Laos, establishing the Credit Guarantee Company to support MSMEs, is a prime example of how strategic financial structures can unlock growth and opportunity. By providing comprehensive advisory services and building capacity within the blended finance ecosystem, we help bridging the gap between public goals and private sector capabilities.

Ultimately, blended finance is about more than just funding projects; it’s about fostering sustainable development, encouraging innovation, and creating resilient economies. Through our ongoing efforts and partnerships, GOPA AFC remains committed to driving positive change and enabling communities to thrive.

For further information, please contact: Jakob.lutz@gopa.eu or Federico.bilder@gopa.eu