Blended Finance in the Middle East & North Africa

Blended finance in the Middle East and North Africa (MENA) is nascent, with the historical deals databases recording 83 blended transactions to date that have targeted MENA in part or in full, representing aggregate committed financing of $14.2 billion. Blended finance is an approach that involves the use of public funds to change the risk and return profile of investment projects in order to attract the private sector. This report seeks to explore some of the key challenges and opportunities facing blended finance in MENA, presenting insights from interviews conducted with industry stakeholders.

Perception of risk is the most common challenge to mobilizing private capital in MENA. Meanwhile, regional markets vary by levels of geopolitical stability and currency risk.

Egypt is the most active blended finance market in MENA, accounting for nearly 24% of all blended finance deals in the region.

The top three sectors targeted by blended finance transactions in MENA are financial services (36%), energy (22%), and infrastructure (20%).

Building upon the macroeconomic challenges explored in the report, and engagement with different blended finance practitioners, several themes regarding key challenges and opportunities for blended finance in MENA arose, including:

• Lack Of Financial Intermediation For SME Financing: A key challenge facing blended finance in general that Convergence has previously identified is the lack of financial intermediation; that is, donors and investors are looking to channel large amounts of capital towards market opportunities aligned with the SDGs, but SDG projects are often small, with few intermediaries in the market to channel these flows.
• Mismatch Between Humanitarian Led Aid Systems & Private Sector Mobilization: Another key challenge in some MENA markets relates to the mismatch between aid-focused development systems and international private finance flows classified most often as foreign direct investment (FDI).
• Regulatory Constraints & Risks: The regulatory environment in MENA can sometimes be an additional constraint, In some cases, regulation makes it difficult for foreign investors to retain full control over a project. There can also sometimes be issues with the repatriation of foreign currency, with foreign exchange risk being an addition risk factor for particular attention.
• Opportunities to increase blended finance in MENA include experimentation with different vehicles and financing models to enhance private sector mobilization, particularly in more fragile MENA states, and boosting education to catalyse local institutional investors, philanthropy, and grant-makers.

Awareness of MENA’s broader investment story has grown in recent years, in part as a result of the 27th and 28th Conference of Parties (COP 27 & COP 28) hosted in Egypt and the UAE, respectively. However, perception of risk is the most common challenge to mobilizing private capital in MENA. Meanwhile, regional markets vary by levels of geopolitical stability and currency risk. Rising government debt in markets like Egypt and heightened geopolitical risk in markets like Jordan have presented challenges to regional investors. MENA, of course, is not homogenous. Several of our respondents note that more stable markets like Saudi Arabia, the UAE, and Morocco, have a less acute need for de-risking via concessional support than unstable markets like Syria or the West Bank, in which commercial funds would otherwise not be invested. Heightened capital costs are one consequence of elevated political risks across some MENA markets.

Some identified challenges from the report include:

• Low access to finance amongst small and medium-sized enterprises (SMEs) remains a major challenge across many MENA economies, with up to 96% of registered companies in the region being SMEs. Many of these enterprises are unable to access adequate financing, particularly in climate or sustainability-related spaces like renewable energy.
• Currency mismatches and currency volatility, meanwhile, present another macroeconomic challenge to investors in some regional markets.
• Other core regional challenges that blended finance can help to address, high levels of youth unemployment and gender inequalities in economic participation are major focus areas.

• Most climate blended finance in MENA to date, by both transaction count and aggregate financing, has focused on climate mitigation – if clients are considering climate mitigation projects, blended finance is a tool for consideration.
• Industry stakeholder respondents note that experimentation with different types of vehicles and initiatives, particularly in less stable markets in MENA, can begin to help catalyse private sector financing more effectively – for example seeking out blended social enterprises that provide financial and non-financial services with first-loss mechanisms.
• Boosting education on blended finance to catalyse local institutional investors & draw in local philanthropy & grant-makers. Enhanced awareness through knowledge dissemination is needed for blended finance to be seen as a tool that can be deployed more broadly across local economies.
• With MENA’s sovereign wealth funds expected to play an increasingly large role in the development of the region’s sustainable investment market, which they can approach as part of a broader strategy of national diversification due to their high political visibility, soft power mandates, sovereign backing, and longer time horizons, they can also play a leading role in de-risking commercial investors and developing the blended finance ecosystem in the region.

Today we finance a number of industries that significantly contribute to greenhouse gas emissions. We have a strategy to help our customers to reduce their emissions and to reduce our own. Find out more: https://www.hsbc.com/who-we-are/our-climate-strategy