Blended finance is a key mechanism to attract private investors to close the estimated $2.5 trillion annual gap to finance the Sustainable Development Goals (SDGs). In financial inclusion, blended finance is an important enabler of the SDGs. Blended finance is not new; it has a strong track record in attracting private investments from international and local sources.
Within the framework of the SDGs, donors and development finance institutions (DFIs) are encouraged to use their funding to crowd in private capital. And even if progress is slow, the signs are clear: More private capital will become available for the SDGs and development, including financial inclusion. However, mobilizing resources should not come at the cost of neglecting problems that cannot be solved with investments. Is there a risk that projects that do not create financial returns receive insufficient attention?
Donors and DFIs must continue to address the underlying constraints that hold back the development of inclusive financial services markets or the inclusion of specific populations or communities. The following are a few ways donors and DFIs can optimize their impact:
- Address underlying issues that discourage private investors.
- Leverage existing funds and facilities and avoid reinventing the wheel.
- Empower DFIs to take more risks in building markets more broadly.
- Focus on developing local capital markets.
- Mitigate foreign exchange risk.
- Support information and transparency to build investor confidence.
- Promote and implement responsible investing.
This Brief presents opportunities for the new wave of blended finance and points to areas that deserve further attention to optimize the use of different funding sources to advance responsible financial inclusion.