We’ve both spent a lot of time over the past year in conferences and roundtables asking some version of the same question: what comes next for development finance? The same theme came through in a recent CGD podcast with Leslie Maasdorp, CEO of British International Investment. While there is growing agreement on the direction of travel, there is much less attention paid to what this means for development finance institutions (DFIs). Policymakers rarely stop to ask whether today’s DFI business models are equipped to deliver the ambitions now being placed upon them.
The policy discourse has certainly changed, but the future potential directions are not only unclear but at times contradictory. Donors should become investors, but also focus more on evidence and maximising impact. Aid should give way to partnership and local ownership, while also better reflecting the national interests of donor countries. And all of this is happening at a time when aid budgets are being drastically cut.
DFIs, in particular, are caught in the middle of this, as their mandates have always involved balancing multiple priorities—a demand that is now growing. DFIs are being asked to mobilise far greater volumes of private capital within their transactions, while increasing investments in the poorest and riskiest markets, tackling climate change, bolstering strategic supply chains, and, increasingly, supporting wider national economic interests. At the same time, shareholders of course still expect DFIs to preserve their capital and generate returns.
This is quite a list, and each of these asks reflects a legitimately important consideration, so it is understandable that DFI leaders would hesitate to push back on any of them.
Yet while the asks have expanded, the business models of many DFIs have changed far less, which makes us wonder whether we have got the sequence backwards. Policymakers keep setting new ambitions and targets before asking a more fundamental question: what do we want our individual DFIs to be for? The problem is that when objectives pull in different directions, the business model inevitably starts to determine which objective receives the greatest focus. If shareholders do not make those choices explicit, financial models, incentives, and metrics will quietly make them instead.
When incentives decide
The tension we keep coming back to is between mobilising as much private capital as possible within transactions today and doing the slower, harder work of building markets that can mobilise much larger flows down the line.
Much of the current policy discourse is about reaching scale directly through transactions today. More billions mobilised. More institutional investors brought in. Bigger platforms and larger transactions. The shift from originate-to-hold towards originate-to-share—from making loans and holding to maturity to selling stakes to private investors to recycle capital more quickly—has now bedded down in the multilateral development bank (MDB) system, with DFIs now reflecting on what this agenda means for them.
There has been real progress. MDBs and DFIs reported a record $109 billion of private capital mobilisation in low- and middle-income countries in 2024. Helping private capital move, rather than replacing it, should absolutely be a core focus of DFIs. But there is more than one way of doing that.
The incentives behind a focus on transaction volume metrics create a particular gravitational pull towards certain types of investments. The decline in mobilisation in low-income countries, which fell by 36 percent in 2024, illustrates the challenge. If the main signal is dollars mobilised within transactions, institutions will naturally go for the low-hanging fruit and gravitate towards larger transactions in more commercial markets where private investors are already more willing to invest. These may be good investments with a strong developmental case. But they do not necessarily change how a market works by addressing market-level challenges.
Market creation often looks very different. It begins with an assessment of the constraints to the development of a given market and seeks out investments that address these constraints through coordination on policy changes, demonstration effects, support for pioneer anchor firms, local capital participation, innovative and replicable instruments, and other mechanisms that deliberately try to effect long-term change in market dynamics. Rather than assessing transactions by the amount of private capital participation in a given investment, evaluations would instead examine long-term contributions to spillover effects, financial market development, replication and demonstration effects, and future private investment flows. This likely means accepting lower transaction leverage ratios and a larger degree of uncertainty in the service of meaningful contributions to long-term industrial and financial system development.
Mobilising local capital with a view to develop local capital markets is a good test of this. A DFI could hit a private capital mobilisation target without mobilising any domestic capital or making any contribution to local capital market development. Yet local capital involvement is clearly a critical part of any well-functioning local market. Helping shift domestic financial flows towards investments in local enterprises and infrastructure is difficult and requires alignment of internal incentives and metrics to avoid drift.
Under most current mobilisation measurement and key performance indicator approaches, an investment that is proving out a potentially transformative model in a frontier market could be viewed as unimpressive even while creating significant and sustainable long-term change. For example, FMO’s $1.25 million in catalytic support for the Ci-Gaba Fund of Funds in Ghana was instrumental in allowing the new vehicle to finalise a $35 million first close. That volume of investment mobilisation may pale in comparison to the tens or even hundreds of millions of dollars mobilised by massive transactions from larger MDBs and DFIs. But the majority of participation in Ci-Gaba came from Ghanaian pension funds, and the fund’s success on that front could have a major demonstration effect in shifting a significant portion of the $613 billion in African pension funds towards more local investments.
Addressing fundamental questions head-on
This tension between transaction-level mobilisation at scale and market transformation raises a more fundamental question: what is a DFI for, and how should we define and measure success? The answer to this may not be the same for every DFI, and that’s OK. MDBs and DFIs are not all the same, and it is likely neither realistic nor desirable to push them all in the same direction. Their differences in mandate, balance sheet, risk appetite, and geography can be helpful to the system by generating complementary competencies and positions.
But acknowledging the necessity of these differences only increases the need for open discussion of the trade-offs of different mandates, since effective coordination requires each institution’s role and constraints to be clear, and its financial and operational models to reflect prioritised goals. Despite a notable rhetorical shift in the sector towards mobilising private capital at scale and building local markets, the financial models, risk frameworks, and incentives underpinning investments have changed far less and remain misaligned with the rhetoric.
Both objectives require MDBs and DFIs to deploy much more risk capital, but they place different demands on how that capital is used. As we have already noted, mobilisation at scale requires risk to be deployed in ways that bring much larger pools of commercial finance into large, pooled portfolio products. Market creation requires taking on risk earlier, amid greater uncertainty, to test new models, demonstrate what is possible, and create the conditions for private investment to follow. Policymakers have paid surprisingly little attention to whether existing financial models, risk frameworks, and incentives are well suited to either objective, let alone whether the existing model can optimise for both.
The danger is that we keep adding mandates to the existing model, while asking every institution to do everything. But if priorities remain in tension and the underlying operating model remains unchanged, the result will be incremental change when something more fundamental is needed.
Some institutions may be better placed to mobilise private capital at scale. Others may be more valuable as market creators, taking early risks, backing new models, and operating where private capital is still a long way from following. We do not have a neat answer to the right division of labour. But too often the debate starts in the wrong place, with changes to targets, instruments, or sources of capital, before we have resolved the more basic question of purpose and what success should look like. Form should follow function. The role should determine the business model, not the other way around.
