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Development finance is rapidly changing. Private financial flows and domestic revenues in developing countries are increasing, and contributions from new development partners, development finance institutions, and philanthropic organizations are on the rise. These new sources of finance and expertise complement traditional development cooperation and are creating opportunities for new partnership that make the best use of what each has to offer.

This report explains how Development Impact Bonds (DIBs) can increase the efficiency and effectiveness of development funding. Based on Social Impact Bonds in industrialized countries, a DIB creates a contract between private investors and donors or governments who have agreed upon a shared development goal. The investors pay in advance for interventions to reach the goals and are remunerated if the interventions succeed. Returns on the investment are linked to verified progress.

DIBs not only attract new sources of funding for development programs but offer a new business model that encourages innovation and flexibility for better results. Because investors assume the risk of financing programs, they have the incentives to put in place feedback loops and data-collection systems that make programs more responsive to the need of beneficiaries and more likely to succeed.

This report shows how DIBs could work in developing countries, outlines its advantages over alternative funding mechanisms, and offers recommendations for developing a viable DIB market. Six case studies illustrate the breadth of social issues to which the approach can be applied, and a technical section lays out considerations for the design of DIBs for audiences interested in their implementation.