Five Steps for Using Financial Intermediary Loans for Economic Inclusion

Women-owned small businesses are vital for economic health yet face significant challenges in securing financing for growth and job creation. Photo: ADB
Women-owned small businesses are vital for economic health yet face significant challenges in securing financing for growth and job creation. Photo: ADB

By Lotte Schou-Zibell

Financial intermediary loans can improve access to finance, enhance financial system stability, lead to private sector-driven and sustainable economic growth, and reduce poverty.

 Small businesses, including those owned by women, are key drivers of a healthy national economy. But they are also among those who find it the hardest to obtain financing to grow their businesses and create jobs. 

This credit gap can be addressed through the use of financial intermediary loans, which are lines of credit provided to banks and other financial institutions that are earmarked for lending to people and businesses that struggle to get credit. 

This tool can help to overcome traditional barriers to funding for those in need of financing, which in turn fosters inclusive economic growth and reduces poverty. 

Take, for example, the Small Business and Entrepreneurship Development Project in Uzbekistan, which demonstrated a strategic approach to enhancing financial service outreach and efficiency. By targeting micro-enterprises, particularly in rural areas, the project boosted the GDP share and created substantial employment opportunities. 

Meanwhile, a financial intermediary loan supporting green finance access in Tajikistan tackled the scarcity of accessible financing and a general lack of awareness among potential buyers and lenders regarding smart green energy solutions. The project facilitated loans via microfinance institutions for households and small-scale entrepreneurs to acquire and install cost-effective smart green energy solutions. As a result, smart green energy solutions became more widely accepted and economically feasible for households with limited income. 

 Innovative financing projects like those in Uzbekistan and Tajikistan are prime examples of how targeted financial intermediary loans can catalyze economic vitality, environmental sustainability, and private sector development, providing a template for broader application. 

Several critical steps must be taken to bring the power of financial intermediary loans to the people and businesses who need them. 

Conduct a comprehensive analysis of the finance sector: Designing a financial intermediary loan demands a thorough analysis of the status of and relevant issues for finance sector development. This includes contributions to creating sustainable and efficient financial mechanisms and institutions, as well as business strategies, financial and operational performance analysis, and the establishment of governance practices.

Assess the financial performance and economic viability: A thorough analysis is needed to assess the financial performance of participating financial institutions. In some cases where financial intermediary loans are used to finance significant infrastructure investments and the projects to be financed are well defined, economic analysis of representative projects demonstrates that such investment will be economically viable. 

Identify and address credit demand: Confirm that potential borrowers have a substantial and unmet demand for credit and that the demand cannot be efficiently met through the domestic financial system. This is often due to constraints in the macroeconomic framework, market failure and distortions in the financial and relevant real sectors, or other structural problems that well-designed FILs can address.

Financial intermediary loans have the capacity to address market gaps, develop the financial fabric of countries, and act as a dynamic force for green and sustainable growth.

The disbursement of the financial intermediary loan can be tied to proactive steps in tackling pivotal concerns. This might include compliance with environmental and social management systems, deploying the first tranche to women-owned businesses, or easing the business environment and removing trade barriers, which would lead to more efficient and globally competitive financial and economic sectors.

Ensure sound management and robust monitoring:  Ensuring financial intermediaries' sound management and guarding against failure requires a robust risk management framework. It also calls for monitoring and evaluation mechanisms underpinned by trained staff adept in designing, processing, implementing, and monitoring the loans to guarantee their success.

Well-designed financial intermediary loans can not only boost the financial sector. They can also have an impact on the real sector, which is the part of the economy that focuses on the production of goods and services. The financial and real sectors are interlinked. When they both operate effectively, they enhance each other's performance and collectively contribute to the economy's growth and health.

 A robust financial sector is a catalyst for the growth and development of the real sector. It opens doors to capital, financing, and investment opportunities, fueling economic expansion and job creation. Conversely, a weak financial sector can impede the real sector's progress by limiting access to capital, stalling investment, and hindering economic growth.

The real sector is a foundational element of the economic system, fueling sustainable growth and job creation. It is a cornerstone for many countries whose production of goods and services is integral to international trade. By bolstering the real sector, countries can alleviate poverty and reduce economic inequality through job creation and providing consistent income sources for people and their communities.

For example, if banks face capital shortages and cannot provide loans, real sector businesses may find expanding and creating jobs challenging. This can lead to slow economic growth and a decline in living standards. However, a robust financial sector can reverse this trend, instilling hope and optimism in the economy.

Financial intermediary loans help these two aspects of the economy work together efficiently. They help leverage the expertise and networks of local financial institutions, which can allocate funds more efficiently than centralized bodies due to their closer understanding of the local markets and clients. Financial intermediary loans can ensure that investments are directed towards projects that are not only financially viable but also contribute to private sector-led growth and sustainable economic growth.

The ultimate objective of this lending mechanism is to develop a more dynamic, stable, and inclusive financial system and extend services to a broader spectrum of individuals and businesses.

Financial intermediary loans have the capacity to address market gaps, develop the financial fabric of countries, and act as a dynamic force for green and sustainable growth.