Innovative Finance Will Not Deliver Without Structural Reform
- Dr. Yakama Manty Jones
- 6 days ago
- 5 min read
In 2022, Ghana launched an electronic levy on mobile transactions, projecting it would raise hundreds of millions of dollars. Within months, transaction volumes plummeted as citizens reverted to cash. The levy was restructured, then effectively abandoned. Meanwhile, that same year, Nigeria quietly redeemed its 2017 diaspora bond—US$300 million, paid on schedule, no drama. Two innovative instruments. Two radically different outcomes.
As bilateral aid to sub-Saharan Africa continues to fall, with projected cuts of up to 31% by 2029, the call for developing countries to embrace ‘innovative financing’—green bonds, diaspora instruments, social levies, sukuk issuances, mobile-based retail bonds, and blended finance -has grown louder. The promise is enticing: unlock billions, crowd in private capital, transform domestic resource mobilisation. However, the pattern emerging across the continent highlights a fundamental but powerful truth: financial instruments alone do not deliver transformation. Without sound structural economic foundations, credible institutions, and citizen trust, innovative finance cannot deliver transformative results.
The Numbers Behind the Urgency
Africa’s domestic revenue challenge is stark. The International Monetary Fund (IMF) estimates that many low and middle-income countries collect tax revenue below 15% of GDP, the minimum threshold required to fund basic services sustainably. The continental average hovers around 16%, compared with 34% in OECD countries. The Fund further estimates an untapped tax potential of 8-9 percentage points of GDP across emerging and low-income economies.
Foreign aid, once a lifeline, is contracting. In 2024, Official Development Assistance (ODA) to Africa from OECD donors fell by 7.1% in real terms, with steeper cuts announced for the coming years. Projections suggest bilateral aid to sub-Saharan Africa could fall by as much as 16% to 28% in 2025 and reach up to 31% by 2029 if announced cuts are implemented.
The impact of ‘innovative’ instruments promoted to fill this gap remains marginal. Africa accounts for less than 1% of global green bond issuances, representing only 0.3% of total global value. Over 15 African countries have introduced digital transaction taxes in the past five years. Still, most have remained pilot schemes, been restructured, or rolled back as behavioural and economic backlash eroded their revenue potential. Remittances contribute 2-3% of GDP across sub-Saharan Africa; even if diaspora bonds captured 5-10% of these flows, they would yield only 0.1-0.3 percentage points of additional GDP in government financing.
These are not replacement-level revenues. They are supplements, and only if the conditions are right.
Why Some Succeed and Others Fail
Proponents of innovative financing frequently point to success stories, but closer examination reveals that they succeed for structural reasons, not financial creativity.
Senegal raised over US$1 billion through sukuk issuances, attracting strong demand from Islamic investors. Notably, Senegal's success rested on decades of macroeconomic stability, credible debt management, and legal frameworks compliant with Islamic finance principles, not the novelty of the instrument.
Johannesburg's 2014 municipal green bond was oversubscribed by 150%. Yet the bond succeeded because Johannesburg demonstrated strong municipal governance, transparent project pipelines, and a track record of service delivery. The ‘green’ label mattered far less than the institution behind it.
Nigeria's diaspora bond worked because the government marketed it through reputable international banks and had demonstrated a capacity to service external debt. Ethiopia's diaspora bonds for the Grand Renaissance Dam, by contrast, struggled despite intense patriotic appeals, undermined by currency controls and investor scepticism about macroeconomic management.
Kenya's M-Akiba mobile bond, once hailed as revolutionary, saw limited uptake. The platform worked. The innovation was real. However, without trust in government fiscal management, adoption stalled.
Five Essential Foundations
Countries that successfully mobilise innovative finance share common structural features. These are operational prerequisites, not aspirational goals.
Macroeconomic stability and fiscal credibility. Investors reward predictability. Countries with low inflation, sustainable debt trajectories, and credible fiscal frameworks enjoy lower borrowing costs. No green bond premium compensates for currency risk or debt distress.
Functional tax systems and revenue administration. Before launching new instruments, governments must demonstrate they can collect existing obligations. This means strengthening compliance and enforcement, rationalising exemptions, digitising filing systems, and formalising the informal sector.
Legal frameworks and institutional credibility. Investors require clear and enforceable rules. Green bonds depend on verified environmental disclosure standards. Sukuk demand Sharia-compliant contracts. Diaspora bonds require strong legal guarantees and currency convertibility. Weak frameworks deter investors regardless of headline promises.
Transparent spending and visible service delivery. Citizens and investors will support new instruments only when governments demonstrate that resources are allocated efficiently and spent transparently. Trust is earned through evidence, not assurances.
Effective distribution and communication. The most sophisticated instrument will fail if it does not reach the intended investors.
Escaping the Capacity Trap
Critics note the obvious paradox: countries need resources to build capacity, but need capacity to mobilise resources. The answer is sequenced reform supported by targeted technical assistance, not financial gimmicks.
Start with diagnostics. Undertake revenue potential assessments and benchmark against peers to ensure instruments are tailored to national realities, rather than relying on copy-paste models.
Strengthen domestic revenue systems. Rationalise exemptions, digitise tax filing and payments, simplify procedures, professionalise revenue authorities, and expand the base while protecting the vulnerable.
Stabilise macroeconomic frameworks. Commit to medium-term fiscal strategies, disciplined debt management and inflation control to reassure investors and lower borrowing costs.
Build the legal and institutional scaffolding. Enact clear laws for green bonds, sukuk, and public-private partnerships. Strengthen enforcement and investor protection mechanisms.
Demonstrate spending efficiency. Publish allocation, spending and impact reports and ensure that new levies or bond proceeds are visibly channelled into health, education, and infrastructure projects.
This sequencing is not slower; it is more durable. Quick fixes that collapse waste time and resources. Patient reform compounds.
Build Credibility, Then Innovate
The temptation to chase headlines with exotic instruments before undertaking unglamorous reforms is powerful. Yet, the evidence is clear: financial engineering cannot substitute for state capacity. A green bond issued by a government that cannot maintain roads will not suddenly finance climate resilience. A mobile levy imposed on citizens who distrust how taxes are spent will drive economic activity further into informality.
Sustainable results will come not from inventing new instruments but from reinventing state capacity—transparent, predictable, disciplined, and accountable. With macroeconomic stability, robust tax systems, clear legal frameworks, and proven delivery, innovation will no longer be a slogan. It will be the natural outcome of reform.
Africa cannot treat innovative financing as a shortcut to fiscal sustainability. These tools can complement domestic resource mobilisation, but only when deployed on solid foundations. Without reform, they risk becoming expensive experiments that deepen mistrust and fiscal vulnerability. The task before policymakers, therefore, is not to chase novelty but to build credibility. Innovation will then no longer be a slogan but the natural outcome of reform.
If you build it, they will come!