In the last decade, Bangladesh’s GDP per capita has exceeded the South Asian average, and its economy is nearing the half-a-trillion-dollar milestone. Despite the growing middle and affluent class population, the country continues to grapple with inequality, soaring inflation, and economic exclusion. However, these challenges are not unique to Bangladesh. The question is, how can we move forward?

To make progress, concerted efforts are required from all stakeholders. One promising way is to implement “catalytic financing” (CF) to create more collaboration and synergy. 

Catalytic financing (CF) can leverage existing financial provisions to mobilize additional capital and investments from different sources, thereby “catalyzing” development and impact.  CF can support startups that can help in inclusive development in various ways but do not have sufficient capital to get started.

Here are some  key areas  in Bangladesh where catalytic financing for startups can help:

• Climate Change and Sustainability: Engagements and business models in alternative energy, climate-smart agriculture, and circularity can benefit from catalytic capital at the early stages of development. The capital can help show traction and proof of concept, thus helping to de-risk for later investors and operators. Considering Bangladesh ranks 7th in the climate vulnerability index and has set a series of targets in energy sufficiency and food security - this can be a real game changer. 
• Financial Inclusion: Catalytic capital plays an important role not only in facilitating access to payment services for the unbanked population but also in enabling the provision of value-added financial services such as credit, savings, and insurance. Startups can be incentivized through catalytic instruments to serve underserved markets, thereby shortening the time to market lifecycle and helping to test and scale early innovations. MSMEs also gain better access to capital and can use it to start operations and graduate to more traditional forms of capital once they find product-market fit.
• Technology Driven Service Delivery: In the wake of the COVID-19 pandemic, there has been a notable surge in the adoption of technology-driven service delivery, particularly in the fields of education and healthcare. Education tech Startups like 10 Minute School and Shikho are allowing students from all over Bangladesh to gain access to quality education through their after-school programs. Similarly, telehealth and medicine delivery startups are addressing critical market gaps. Startups such as Arogga and Medeasy are spearheading online medicine delivery. Meanwhile, enterprises like Praava Health are pioneering online health consultancy services, and Amarlab leading the way in providing on-demand medical tests at home. In this context, catalytic funding can serve as a catalyst for the launch and expansion of numerous such initiatives in the country, significantly bolstering their impact and reach.

• Sustainable and Green Infrastructure: With Bangladesh ranking as the 8th most populous country globally and boasting a densely packed population of over 1200 individuals per square kilometer, coupled with its susceptibility to climate-related challenges, the imperative for sustainable infrastructure has surged. While essential infrastructure such as affordable housing is direly needed, financing such projects poses challenges due to extended payback periods. The same applies to greening existing manufacturing industries. This is where catalytic financing instruments can help mobilize early capital in startups in these segments while de-risking investments for the private sector.

So what are some of the ways CF can help? CF can offer performance payments for achieving measurable and sustainable results and provide matching funds with the private sector, thereby reducing the cost of capital to the enterprise and de-risking investments for private investors. Additionally, CF can act as the first loss guarantee scheme for lending to enterprises working with vulnerable groups, ensuring that critical innovations can flourish.

Let’s take a closer look at some of these instruments:

• Performance Payments: Based on the needs of the target population, the funder and investee agree on impact metrics. Depending on the achievement of those metrics, the investee may either get a concession on the cost of financing or can simply pay based on the impact generated rather than financial return. This can also be matched with impact linked finance i.e. financing made available based on the impact generated by the enterprise.

• Blended Finance: Mixing different forms of capital, like grants in the early stages of the enterprise supported them, and once de-risked, more commercial capital can be attracted. For commercial or private investors they can wait and see if the enterprise has a strong proof of concept before deciding to invest. 

• Credit Guarantee or First Loss Capital: This acts as a commitment to cover the financial losses of the private investor if the enterprise or the project fails to reach its goal. This encourages investors to back businesses or projects where normally they wouldn’t invest due to the risk-return profile. However due to de-risking of their capital (in most cases the principal amount) they are more likely to make a positive investment decision.

Apart from these, there are a variety of other instruments like Challenge Funds, Development or Social Impact Bonds, matching funds, or even just different types of equity or quasi-equity instruments like SAFE (simple agreement for future equity) which offer the investors or the enterprise a monetary benefit based on the impact generated. There can be tax benefits for investing in certain sectors from the government to support high priority verticals. Implemented rightly CF can significantly help achieve SDG goals while ensuring inclusive development.