Todd Cort
Senior Lecturer in Sustainability, Yale School of Management
Clint Bartlett
Partnerships and Innovative Finance Specialist, United Nations Development Programme
Jesper Hörnberg
CEO, Global Resilience Partnership
The cost of capital for businesses and communities living in vulnerability erodes capacity for resilience. The disconnect between financial markets and resilience undermines communities’ ability to withstand adversities, making them dependent on external aid and emergency funding.
Recognising the economic value of resilient communities in emerging markets in the Global South can stabilise markets and reduce emergency funding needs.
Resilient communities stabilise markets
Resilience refers to the ability of communities to withstand and recover from adversities, such as economic downturns and health crises, and continue to develop. It thrives by fostering social cohesion, inclusive governance and robust support systems.
Communities that are more resilient potentially create significant financial value in the long run by stabilising markets and supply chains and reducing the need for reactive, emergency funding to reverse the damages of sudden shocks.
Market neglects SME resilience
Yet, financial markets often assess vulnerable regions as high-risk, rather than critical components of economic resilience without recognising the risk mitigation value they bring. For example, bank interest rates on business loans in the Global South can soar as high as 78% or more per year.
The result is a system where small businesses — one of the most critical elements to build resilience in developing markets — are unable to survive; not because of a lack of infrastructure but because of a vicious circle that has become entrenched in ‘market systems.’ Markets overlook the role of small and medium-sized enterprises (SMEs) in fostering cohesion and resilience, as well as the positive societal and environmental effects they create.
The risk premium assigned to SMEs is overly inflated.
Mispriced loans cripples businesses
Instead, the market unfairly attributes SMEs as having higher loan risks, despite the reality that certain sectors, like farming, boast nearly 100% repayment rates. The risk premium assigned to SMEs is overly inflated, resulting in capital cost that is not real-risk-adjusted but perceived-risk-adjusted.
SMEs are not only unable to compete with businesses with access to cheaper capital but are disincentivised to create the systemic outcomes the financing is intended to achieve. This cripples their competitiveness; instead of building resilient infrastructure in-country, it leads to import dependency, loss of job opportunities and a skewed power structure.
Breaking the cycle with fairly priced capital
This cycle of social vulnerability, high cost of capital and systematic undermining of locally based resilience and adaptive capacity is exacerbating susceptibility to shocks, particularly amid the climate crisis. Breaking the cycle through affordable financing and capital can yield significant economic, social, and environmental benefits and resiliency, particularly for Global South communities. This fosters equity and levels the playing field in the medium to long term, benefiting not only the community but also the region and the globe at large.
