From equity-based crowfunding and person-to-person lending, to crypto currencies and mobile money; entirely new players are disrupting the field of financing for development and public policy.
So, what does this alternative finance space look like? Who are the new players and what are they up to?
According to the World Bank, the crowdfunding market is expected to grow to US $100 billion by 2025.
Recent research shows that – despite living in countries where the cost of doing business is quite high – entrepreneurs are successfully raising money by crowdfunding, and bypassing loads of red tape in the process.
And it’s not just money.
New platforms are springing up focusing on everything from expertise and volunteering hours toremittances for social good. The Danish government is leveraging crowdfunding for supporting startups, while Kenya is the first government in the world to enable crowd investment in an infrastructure bond. Neighborly launched a civic-micro bond project allowing citizens to invest directly in local public projects.
Research shows that if it is able to capture just ten percent of the global remittance market over the next decade, diaspora crowdfunding can grow to $58 billion.
Alternative and digital currencies
In response to the 2008 financial crisis, five friends with no finance background set up Sardex, an alternative currency for Sardinian businesses to continue trading and operating. This year trades of Sardex exceeded 32 million euros, and the model is now being replicated on the Italian mainland. Where traditional financing systems failed small business owners back in 2008, Sardex provided an ability to continue their operations and grow.
What potential might similar types of community currencies hold for rural and impoverished regions where we work?
Blockchain has been identified by the World Economic Forum as one of the six mega-trends likely to impact our increasingly connected world.
Blockchain is the technology behind bitcoin, it allows people to transfer money without a bank and write enforceable contracts without a lawyer.
International banks are setting up blockchain labs to incentivize startups, foundations, and citizens to collaborate on designing a new generation of services. MIT has launched the Digital Currencies Initiative to explore its potential for social impact (as did the University of Nicosia, which is the first accredited university in the world to accept tuition payments in bitcoin).
A non-profit, Stellar, is investing in financial literacy of the poor to tap into digital currencies, while early experiments using blockchain to reduce costs of transferring remittances and enable low-cost, rapid disbursement of funds in humanitarian emergencies are ongoing.
In October, BitNation registered the first refugees entering Europe via blockchain and provided anonymous bitcoin debit cards that can be used at any cash point on the continent. Just this month, another start up, Cubits, launched an instant no-fee crypto donation service for refugees arriving in Germany.
Here is an entirely new set of players in the sandbox traditionally occupied by governments and the development sector, looking at the same puzzles and coming up with new ways of solving them.
Is 21st century development about financing not giving?
A recent New York Times article argues, “financial success and social impact are becoming ever more linked, with the lines blurring between the business and nonprofit sectors.”
By thinking about welfare as an investment as opposed to a cost, we can unlock a new universe of opportunities.
The social impact investment market is projected to grow to $3 trillion in the coming years.
One variation of this is the social impact bond (SIB) wherein a government repays the investor only if agreed-upon outcomes are achieved. The first development impact bond was launched in 2014 to improve educational outcomes among girls in India.
Variations on this principle are taking many forms including a landscape-based investment currently being tested, and a revolutionary forecast-based financing that the Red Cross hopes may unlock necessary investment to increase resilience and reduce risks of upcoming disasters.
None of these methods will be an easy fix for development (as this recent Guardian piece argues) and there are many of those who are examining impact investment with a critical eye; but, it does provide a fascinating, complementary approach to address some of the stubborn issues we’re working on.
- What does this mean for development and policy-making?
- What do we need to understand and tap into these new methods and financial technologies for social good?
- What about financial literacy of the poor and the sick, the elderly and those disconnected from the internet?
WE WILL BE EXPLORING THESE AND MANY OTHER QUESTIONS IN ISTANBUL ON 7-8 DECEMBER. STAY TUNED! **THIS INITIATIVE IS SUPPORTED BY THE UNDP INNOVATION FACILITY AND THE GOVERNMENT OF DENMARK**