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When to Use Financial Instruments Instead of Grants

Phedon Nicolaides

Financial Instruments should not be considered or used as repayable grants. This article shows that the amount of aid in grants is in most cases larger than in financial instruments. For this reason, and contrary to popular belief, financial instruments are not likely to incentivise aid recipients to work harder. However, financial instruments used in the context of “risk finance” measures are more useful than grants when their objective is to provide working capital to SMEs. They are not linked to any identifiable eligible costs and therefore cover expenditure which is not necessarily linked to investment projects.

Professor at the College of Europe and University of Maastricht.


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