In this case, commercial loans are lent by private banks and other financial institutions (e.g. insurance companies, pension funds) to municipalities. A loan is given in exchange for future repayment of the loan value amount and interest or other finance charges. A loan may be for a specific, one-time amount or can be available as an open-ended line of credit up to a specified limit or ceiling amount.
High - much evidence available
Enabling conditions and success factors
- Some degree of commercial funding is available in every country and municipality - commercial banks provide the majority of the financing in countries.
- Where there is less sophistication, a single commercial bank would provide the bulk of debt financing.
- Commercial debt funding is usually cheaper than equity.
- Doesn’t require a sophisticated market.
Challenges and risks to implementation
- Usually requires collateral.
- There can be limited understanding of green investments from the side of banks, especially exacerbated by the low creditworthiness of some municipalities, therefore leading to reluctance to appraise projects, or high perceived risk, which in turn increases the cost of capital.