Does Blended Finance Have a Branding Problem?

In every development conference there will be one person who will suggest blended finance is the solution to Africa's $331 billion MSME funding gap, the continent's infrastructure deficit and probably world hunger while we're at it.

The uncomfortable truth is that most people using the term blended finance, including many deploying it, can't clearly explain how money actually flows through these structures or who absorbs losses when projects fail.

Complexity Becomes Camouflage

According to Convergence, blended finance is "the use of catalytic capital from public or philanthropic sources to increase private sector investment in sustainable development."

According to the International Finance Corporation's 2025 technical note, blended finance can deploy "financial instruments like first-loss guarantees, subordinated loans, junior equity, or currency swaps" to "catalyze investments that would not otherwise occur."

That's a lot of words to say: some investors agree to lose money first so other investors feel safer.

Uncomfortable questions come up: Why do we need development agencies to absorb losses for commercial investors to participate? If commercial returns exist, why isn't commercial capital flowing naturally? If commercial returns don't exist, why are we dressing up subsidies as innovative finance?

What These Terms Actually Mean And Why It Matters

First-Loss Capital:

If a $100 million infrastructure fund loses $20 million, first-loss absorbs that entire loss before anyone else feels pain. Amundi Research Center's 2025 analysis states, in 2024 guarantees accounting for 46% of concessional instruments used in blended finance transactions, first-loss capital is the risk mitigation tool most commonly deployed.

The African Local Currency Bond Fund raised $180 million to support local currency bond issuances. The structure included credit enhancement in the form of a first loss amount representing 26% of the total fund size. $46.8 million sits ready to absorb losses before the remaining $133.2 million faces any risk. Development agencies contributed that first-loss capital. Commercial investors contributed the remaining $133.2 million at market-rate returns.

The uncomfortable question: If you need to guarantee that commercial investors won't lose a dollar until development money loses $46.8 million first, are the commercial investors actually taking commercial risk? Or are they taking subsidized, government-backed risk masquerading as private sector engagement?

Subordinated Debt:

If a company goes bankrupt, senior lenders get paid first from whatever assets remain. Subordinated lenders wait in line behind them and by the time subordinated lenders reach the front of that line, there's nothing left.

DFI’s frequently take subordinated positions to make deals attractive. The African Agriculture and Trade Investment Fund raised $170 million by positioning concessional capital in the form of first-loss capital that helped attract $106 million from private investors.

The uncomfortable question: Is this catalyzing commercial investment or just subsidizing it with a sophisticated structure that obscures the subsidy?

Guarantees:

Partial risk guarantees are promises by development institutions to reimburse commercial investors if specific risks materialize. Currency volatility? Guaranteed. Political instability? Guaranteed. Regulatory changes? Guaranteed.

The UN Capital Development Fund's 2025 report notes they provide first-loss capital, credit guarantees and concessional finance to absorb risk and attract private investments into SDG positive projects.

In Zimbabwe, UNCDF helped structure the country's first Renewable Energy Fund with an expected leverage of 3.5x by the end of 2025. In Tanzania, $1 million UNCDF catalyzed $20 million of domestic capital, 65% of it from the private sector.

The Leverage Illusion:

The value proposition of blended finance rests on mobilization ratios of how many dollars of private capital each dollar of public capital attracts.

What is success?

Rwanda's Development Bank used $10 million in IDA (International Development Association) funds to collateralize a $24.8 million sustainability-linked bond.

The mobilization ratio: 2.48x. One dollar of IDA money mobilized $2.48 of private capital.

The $10 million say at Rwanda's National Bank, invested in government bonds matching the bond issuance tenor. If the Development Bank defaulted, bondholders could seize that $10 million collateral. This is a cash-backed guarantee. Commercial investors lent $24.8 million knowing they had $10 million of guaranteed collateral plus whatever recovery value the Development Bank's other assets provided.

Were they taking $24.8 million of risk? Or $14.8 million of risk backed by a $10 million government guarantee? The "mobilization ratio" counts the full $24.8 million as private capital mobilized. That dramatically overstates actual private risk-taking.

When "Blended" Just Means "Subsidized"

Convergence 2025 found that 65% of all concessional capital ($5.1 billion) was supplied by mainly public sources.

Meanwhile, impact investors allocated only 6% of capital to blended structures over the past three years and more than 80% of these investments were made on commercial terms with minimal participation in concessional roles such as first-loss or subordinated capital.

Translation: Even impact investors whose mandates include accepting below-market returns for social impact, take senior, commercial positions in blended structures while development institutions absorb the risk.

Leah Weiss states, "Impact investing in 2025 has largely come to resemble traditional commercial investing in seeking top-quartile returns... They have begun to lean on development finance institutions and multilateral development banks to invest risk capital and take more junior positions, making it safer for impact investors to participate commercially instead of catalytically."

Read that again. Impact investors, created specifically to take catalytic risk, are now relying on development banks to take risk so they don't have to. Blended finance therefore isn't describing innovative capital structures but traditional subsidy with better branding.

The Terminology Race

Blended finance sounds innovative, market-driven and scalable. Calling it subsidized lending with complex legal structures sounds expensive, donor-dependent and unsustainable.

DFIs need to justify their existence and demonstrate impact. Saying "we provided $100 million in guarantees that mobilized $400 million in private capital" creates a 4x multiplier that looks fantastic in annual reports and donor presentations.

Commercial investors benefit because it blurs how subsidized their market-rate returns actually are. Would pension funds invest in African infrastructure if pitched honestly: "We're investing $80 million but only after development agencies commit to losing their $20 million first if anything goes wrong" Probably not.

The only groups that don’t benefit are the countries, companies and communities these structures supposedly serve. For them, complexity adds cost, delays deployment and accountability when things go wrong.

When Blended Finance Actually Works

There are genuine cases where catalytic capital unlocks commercially sustainable investments that simply needed de-risking during market-creation phases.

The Eastern and Southern African Trade and Development Bank's Green+ Class C shares offer one example. It enables institutional investors to support climate action with risk capital. Each dollar invested leverages up to 4x into qualifying projects and these shares don't carry voting rights but receive senior priority over other share classes in liquidation. The AfDB and the Clean Technology Fund committed $30 million initially. The structure adds capital without diluting existing shareholders, attracts impact-focused institutional money and directs it toward climate finance which is a genuine market gap.

What makes this different?

First, it's transparent. Investors understand precisely what they're buying: equity with senior liquidation preference but no governance rights.

Second, it targets institutional capital that wants climate exposure and can afford equity risk not pension funds seeking guaranteed returns. The structure matches capital characteristics to risk profile honestly.

Third, it doesn't pretend to mobilize private capital at ratios that overstate actual risk transfer. The $30 million is genuine risk capital. The 4x leverage comes from the development bank's own lending capacity expansion, not from claiming commercial investors are taking risk they're actually protected from.

Who Loses When It Fails?

When a traditional bank loan defaults, consequences are clear: the borrower loses collateral, the lender loses money, credit ratings drop and everyone involved faces reputation damage that affects future transactions.

When a blended finance structure fails, accountability diffuses across multiple parties and tranches:

First-loss capital (development agencies) absorbs losses but those agencies don't face market discipline; their capital comes from donors, not profit-seeking investors
Commercial investors may avoid losses entirely if first-loss tranches are large enough
Borrowers may face consequences but the complexity of structures makes it unclear which party's failure caused default
Intermediaries and consultants who structured the deal have already collected fees regardless of outcome

The United Nations Capital Development Fund's Zimbabwe Renewable Energy Fund expects 3.5x leverage by the end of 2025. What happens if that fund underperforms or defaults? Who takes losses, in what order, and based on what payment waterfall? The complexity of these structures makes accountability opaque.

MUFG's blended finance platform, profiled in a June 2025 African Business article, has raised €7 billion ($8 billion) for infrastructure projects or sovereign financing across Africa since 2018. According to MUFG's head of blended finance, "In each one of those transactions, we've brought in new sources of liquidity."

The Clarity Test

Can you explain the structure to a smart undergraduate economics student in five minutes, including:

Who puts in money and when?
What returns does each party expect?
If the project loses 30% of value, who loses how much in what order?
What incentives does this create for each party?

The Rwanda Development Bank bond example passes this test: Development agency puts $10 million in escrow. That collateralizes $24.8 million in bonds. If the bank defaults, bondholders seize the $10 million plus whatever they can recover from bank assets. The development agency loses money first, bondholders lose second.

Clear. Transparent. Anyone can evaluate whether this makes sense.

Conclusion

Blended finance isn't inherently problematic. Using public money strategically to enable commercially sustainable investments can be legitimate and valuable but current terminology and structuring practices have created a system where:

Complexity benefits intermediaries more than recipients
Subsidy is disguised as market innovation
Accountability diffuses across parties when things fail
Even practitioners struggle to explain structures clearly

The solution isn't banning blended finance. It's demanding clarity:

For Development Institutions: Say explicitly: "We're providing $X in guarantees/first-loss capital to enable $Y in commercial lending to sectors/countries that can't currently access commercial capital on these terms."

For Commercial Investors: Stop claiming to take risk when development institutions have absorbed most downside. Say explicitly: "We're investing $Z in commercial-return positions protected by $X in development capital absorbing first losses."

For Consultants and Intermediaries: Explain structures in plain language that non-specialists can understand. If you can't, simplify the structure.

For Borrowers and Recipients: Demand clarity on who owns what, who gets paid when and who absorbs losses if things go wrong. Complexity often hides terms unfavorable to you.

For Journalists and Analysts: When someone uses blended finance ask the five-minute clarity test questions. If they can't answer, call it out.