Innovative financing series: Introduction to innovative financing

Introduction

As political and fiscal constraints tighten in traditional donor countries, and with actual and projected declines in ODA, development actors are being pushed to reassess their funding strategies and explore alternative sources of financing. This pressure has intensified calls to mobilize additional resources beyond traditional public funding—an urgency that will be front and center at the upcoming Fourth International Conference on Financing for Development (FfD4), scheduled for June 30 to July 3, 2025, in Seville, Spain.

FfD4 marks a critical moment for the development community to align financing strategies with the scale and complexity of today’s global challenges. The conference agenda signals a growing consensus on the need to engage more actively with private capital, reform debt architecture, expand climate and disaster risk financing, and scale domestic resource mobilization. Alongside these themes, attention is increasingly turning toward how ODA itself can be used more strategically, not just as a funding source but as a lever to mobilize other types of finance.

In this context, this publication serves as the first installment in a 2025 series dedicated to innovative development financing and blended finance. The aim of the series is to help development organizations and stakeholders frame their engagement in the shifting financial landscape and to provide accessible, high-level overviews of emerging topics linked to the FfD4 agenda. Specifically, it will examine the evolving role of innovative approaches within ODA, the growing focus on private resource mobilization, and other developments that are shaping how resources are raised, structured, and deployed to achieve sustainable development goals.

This introductory piece provides a foundation for understanding what innovative finance is, how it differs from other concepts like blended finance, and what types of instruments exist and what actors are involved. It also looks at the potential, and the limits, of these approaches in addressing the massive financing gaps facing low- and middle-income countries. Subsequent articles will take a deeper dive into each thematic area, drawing from both real-world practice and policy discussions, including those emerging from FfD4.

By rooting this series in the global financing conversation and spotlighting practical tools and trends, we aim to support development actors in making informed, strategic decisions about how to engage with innovative finance at a time when both ambition and innovation are urgently needed.

Relevant definitions in development finance

• Development finance encompasses a range of financial tools extending beyond traditional grants and used to support economic growth and development, frequently through private sector engagement;
• Blended finance involves the deliberate use of development funds to attract additional private investment aimed at advancing sustainable development objectives; and
• Impact investing is the practice of providing capital with the simultaneous goal of achieving measurable positive social or environmental outcomes and gaining a financial return, typically through investments in the private sector.

What is innovative financing?

The COVID-19 pandemic, the war in Ukraine, and other crises like climate change, have increased financing needs for achieving the SDGs in LMICs. The investment gap to achieve the SDGs is estimated at around US$4.6 trillion. While traditional grants and concessional loans from public donor governments are essential for development, they are not enough to close this gap. Innovative development finance approaches are needed to bridge funding needs.

Using innovative financing can attract private investors to push for development impact while fairly sharing risks and rewards between public and private sectors. While innovative financing primarily involves international deals and capital mobilization, it also includes using local resources and does not exclude ODA; on the contrary, ODA can be used to attract new funding sources or to utilize existing funds more efficiently and effectively. Similarly, philanthropic and private funds can be creatively leveraged to catalyze greater funding volumes in areas that would not otherwise see significant investment.

How is innovative finance different from blended finance?

Blended finance brings together public, philanthropic, and private resources to achieve development goals and promote commercial investment through established financing mechanisms. By using concessional capital like grants or low-interest loans, it reduces risks and therefore attracts and catalyzes additional private funding. While this approach may result in lower financial returns for some participants, its primary aim is to bridge funding gaps by making projects less risky and more appealing to private investors. Development organizations can play a vital role in blended finance by offering concessional capital or grants to reduce investment risk and attract private sector involvement, or by providing technical assistance.

Innovative finance refers to new financial instruments (e.g., green or social impact bonds), mechanisms (e.g., carbon markets), or approaches (e.g., results-based financing) that mobilize additional resources for development or social impact, encompassing any financial innovation that goes beyond traditional grants, loans, and donations.

What potential does innovative financing have for resource mobilization?

As traditional sources of ODA come under pressure, innovative financing is increasingly relied upon to channel investment into low- and middle-income countries, reflecting a broader shift from traditional grant-based development assistance toward more diverse approaches that can attract a broader range of investors. Innovative financing also has the potential to mobilize private finance for development priorities through the involvement of development organizations—though this may not necessarily result in increased resources for the organizations themselves.

In 2023, total private mobilization for low- and middle-income countries reached US$101 billion, a 24% increase from the previous year and the highest amount recorded. Total private mobilization for LICs hit a record high of US$12 billion, marking a 40% rise from 2022.

What innovative financing instruments are most common?

There is a wide range of financing instruments that can be classified as innovative development finance. These instruments apply classic financial tools to development contexts (part of ODA or ODF as defined by the OECD), adapt existing tools (like climate insurance or debt-to-health swaps), or create new ones with specific goals (such as results-based financing or conditional finance).

Instruments and approaches can be categorized by:

• The source of the financing (public or private, ODA or beyond, domestic or external);
• The purpose of the financing (addressing financing barriers or project risks, mobilizing public or private resources, either for development projects more broadly or targeted to specific objectives); and
• The likely recipient of the financing (service providers, private sector, or public sector).

The chart below shows some of the most commonly used instruments and mechanisms:

Source: SEEK visualization, based on the World Bank (2013).

Who uses innovative financing?

As highlighted in the chart, the world of innovative finance relies on a number of players from both the public and private sectors, such as donor countries (through development agencies and bilateral DFIs), MDBs, multilateral development organizations, philanthropies, and impact investors-- each of which will be explored in detail below.

Development finance institutions

What are DFIs?

Bilateral DFIs are government-backed institutions investing in private sector firms in low- and middle-income countries, focusing on development projects that may be too risky or long-term for commercial investors. Whereas MDBs are broader, often funding both public and private sector projects, DFIs are more specialized, focusing on private sector investment as a driver of development. DFIs mobilize private finance frequently in areas or sectors that are considered risky investments or do not typically attract private capital. By leveraging their capital and expertise, DFIs facilitate and de-risk the flow of funds. Their investments not only have direct effects—such as building infrastructure or providing clean energy—but also indirect effects, like strengthening local markets and enabling private sector growth.

What are some important DFIs?

Europe features many prominent DFIs. British International Investment BII (formerly CDC Group) is the UK’s DFI, investing in businesses and infrastructure in Africa, South Asia, and the Caribbean. Germany’s KfW Development Bank supports a wide range of development projects worldwide, with a strong focus on environmental sustainability, while France’s Proparco, a subsidiary of the AFD, promotes private sector growth in Africa, Asia, Latin America, and the Middle East. In 2024, EDFI’s 15 member DFIs achieved the highest annual growth since 2018, recording EUR12.4 billion (US$14.2 billion) in new commitments—a 29% increase over 2023. When including affiliate partners such as the US DFC and Canada’s FinDev, total commitments swelled to approximately EUR21.4 billion (US$24.6 billion).

Outside of Europe, the US DFC provides loans, equity, and political risk insurance to advance development and US foreign policy aims. Canada’s FinDev emphasizes financial support for companies and funds that help advance gender equality, promote climate resilience, and foster inclusive economic growth.

How do DFIs use innovative finance?

DFIs have played a growing role in innovative financing by using tools like concessional loans, guarantees, and structured funds to enhance development outcomes. They attract private investors by sharing risks, proving project viability, and supporting project development, mobilizing private finance for global development. Governments have responded to the growing interest in innovative development finance by expanding and modernizing their DFIs, particularly in the face of growing pressures on traditional donor ODA.

Example: KfW Development Bank

Germany’s KfW Development Bank has introduced “shock resilient loans” to assist countries in mitigating the impacts of extreme weather events. These insured loans are designated to finance critical investments in climate protection and adaptation projects. The loans are coupled with climate risk insurance, ensuring that if a climatic event occurs, an insurer will assume the agreed payment obligations for a certain period so that funds can instead be funnelled to disaster response and reconstruction. This strategy aims to reduce long-term costs, prevent budgetary constraints, and avoid high-interest emergency borrowing. The concept is currently being piloted with the West African Development Bank.

Multilateral Development Banks

What are MDBs?

MDBs are international financial institutions established by multiple countries to provide financing and technical assistance for development projects in low- and middle-income countries. They typically have greater financing capacity than bilateral DFIs and can act as a forum for donor cooperation. Multiple governments are shareholders, contributing capital and receiving voting rights based on their contributions. RDBs, a subset of MDBs, generally have higher regional government representation. A key distinction from DFIs is that MDBs mostly lend to sovereign governments. They have private sector arms that lend to the private sector (e.g., IFC for the World Bank) but most of their operations are public. According to the OECD, MDBs accounted for nearly 70% of all private finance mobilized over 2018-2020, with the International Finance Corporation IFC accounting for 22%.

What are some of the important MDBs?

The World Bank is the largest non-regional development bank. In Europe, the main multilateral development banks are the European Bank for Reconstruction and Development and the European Investment Bank. In Africa, it is the African Development Bank; in Asia, the Asian Development Bank; and in Latin America and the Caribbean, the Inter-American Development Bank and Development Bank of Latin America and the Caribbean.

How do MDBs use development finance?

MDBs play a pivotal role in development finance by providing financial resources, expertise, and risk mitigation to support sustainable development in emerging and developing economies. MDBs have long experimented with innovative development finance and are able to provide different types of financing to both sovereign governments and the private sector. In their public sector arms, they can provide financing and technical assistance that supports the development of an enabling investment environment through regulatory changes.

MDBs serve as catalysts for other financing, including private sector funds and domestic revenues, aiming to scale up resources from ‘billions to trillions’ for the SDGs. MDBs increasingly serve as platforms for mobilizing private capital through innovative and blended finance approaches. Institutions like the IADB have developed dedicated vehicles such as blended finance facilities and guarantee programs to de-risk investments in sectors ranging from renewable energy to social infrastructure.

Example: GFF

The GFF—housed within the World Bank—blends grants with concessional financing from the International Development Association IDA and leverages private capital to accelerate progress on reproductive, maternal, newborn, child, and adolescent health and nutrition outcomes. This includes the launch of a Sustainable Development Bond SDB series and Development Impact Bonds. With these bonds, an investor provides upfront funding required to implement a health program; outcomes funders, typically a partner country government with GFF financing and/or other international organizations, pay the investor when results are achieved.

Multilateral development organizations

Innovative and blended finance are also used by other multilateral development organizations of all shapes and sizes. Traditional funding sources, such as government support, are often insufficient in volume or speed of distribution to meet development needs. Innovative finance allows these organizations to tap into private capital markets, incentivize better results, and spur investment in riskier but critical sectors.

Example: GCF

The GCF allocates funding to support developing nations in their efforts to combat climate change. It created the Private Sector Facility to address obstacles to private sector investment in adaptation and mitigation initiatives. The facility encourages private sector investment with concessional tools like low-interest, long-term project loans, credit lines to banks and institutions, equity investments, and risk mitigators (e.g., guarantees, first-loss protection, and grant-based capacity-building programs).

Example: Global Fund

The Global Fund's Debt2Health program converts debt into health investments. A participating country commits to funding programs aimed at combating three diseases or enhancing health systems through the Global Fund in exchange for a creditor country cancelling their debt. Since 2007, 11 countries have invested nearly US$379 million in health through the Global Fund, leading Australia, Germany, and Spain to cancel their debts.

Example: Gavi

Gavi’s Advance Market Commitments are a financial mechanism intended to incentivize manufacturers to develop vaccines for lower-income countries by ensuring the purchase of vaccines that meet pre-agreed quality and performance standards. The first AMC, initiated in 2009, aimed to promote the development of vaccines for pneumococcal disease, a major cause of child pneumonia. Within ten years, new and life-saving pneumococcal conjugate vaccines were introduced in 60 low-income countries. Gavi’s second AMC, COVAX, was launched in 2020 and ensured access to COVID-19 vaccines and affordability support for lower-income countries.

Additionally, Gavi's International Finance Facility for Immunization IFFIm, created in 2006, converts long-term donor commitments into immediate funds by issuing 'Vaccine Bonds' that investors can receive interest on. This approach, known as frontloading, facilitates the rapid expansion of immunization programs without waiting for donor funds to be disbursed over a longer time. By 2024, IFFIm had provided US$7.1 billion, accounting for 16% of Gavi’s funding. This financial support helped vaccinate 142 million children by Gavi’s estimates.

Philanthropies and impact investors

Although philanthropic and impact investor capital is smaller in size than commercial counterparts or larger development institutions, the ability of philanthropic and impact actors to provide upfront grant capital to fund or develop innovative financial mechanisms and unlock larger investment amounts from the private sector. This can look similar to established innovative financing mechanisms, such as providing de-risking mechanisms or covering upfront development costs, or by innovating new financing mechanisms altogether.

Given their smaller scale and tighter foci, philanthropies and impact investors can make targeted investments for small and neglected issues, diseases, or regions that might otherwise fail to attract international attention. By doing so, philanthropic actors and impact investors can help overcome financing barriers and play a catalytic role in enabling innovative finance on every scale.

Example: Medicines Development for Global Health

Medicines Development for Global Health has claimed that it is the first nonprofit to introduce a medicine in an endemic country without a multinational pharmaceutical or generic company—which it did with an innovative combination of impact investments, grants and philanthropic funds. Medicines Development for Global Health partnered with impact investor Global Health Investment Fund to fund a river blindness drug’s US FDA submission and obtain a ‘priority review voucher’, which is offered by the FDA as an incentive to develop medicines for neglected diseases and can speed up another drug's review or be sold for around US$115 million to another pharmaceutical company.

In 2019, the nonprofit sold its voucher to Novo Nordisk, repaid its initial impact investors for their support, and used the remaining funds for ongoing neglected disease research and development. After the FDA approved the medicine, the Ghana Health Service requested Medicines Development for Global Health for access to the drug, which was then approved and authorized for use.

Example: IIX

The IIX Accelerator for Customized Technical Assistance Services is an accelerator by IIX designed to help impact enterprises raise investment capital intended to benefit low-income women across Asia. A corporate foundation's grant covered the technical assistance and impact assessment costs to attract private sector investment, ensuring transparency and minimizing risk. Impact enterprises that raised capital through the program can go on to raise further equity or debt funding via IIX.

Conclusion

As traditional sources of ODA come under increasing strain, innovative financing tools are critical to addressing the growing and complex funding needs for sustainable development, especially in LMICs. This introductory publication lays out the foundation for understanding what innovative financing entails, how it differs from blended finance, and the types of instruments and actors involved. By leveraging public, private, and philanthropic capital through tailored financial instruments and a higher-risk appetite than the private sector, development organizations can enhance the efficiency, reach, and impact of their interventions.

Looking ahead, the potential of innovative financing lies not just in mobilizing more resources, but in reshaping how development finance is deployed towards more strategic, scalable, and inclusive approaches. However, success will depend on the ability of organizations to adapt, form cross-sector partnerships, and embrace new models of risk-sharing and accountability. This series will continue to explore these opportunities and challenges, offering practical insights to support organizations navigating this evolving financial landscape.