Figure 1: Blended SIDS transactions vs. blended transactions of small economies by size (USD)
Small Island Developing States (SIDS) occupy a distinct position within the global economy. Their small domestic markets, geographic isolation, dependence on climate-sensitive sectors, and exposure to natural disasters create financing needs that are substantial relative to the size of their economies. Yet individual investment opportunities are often too small or bespoke to attract commercial capital on their own.
At the same time, SIDS are on the front lines of the climate crisis. Although they contribute less than 1% of global greenhouse gas emissions, natural disasters can consume an average of 18% of GDP in SIDS, compared with 3% globally. High debt burdens and borrowing costs further limit the fiscal space available for governments to finance resilience.
Convergence Market Data has recorded 49 blended finance transactions that were active in one or more SIDS between 2016 and 2025, totalling $4.6 billion in aggregate financing. In Convergence's latest data brief, we look at how blended finance is being used in SIDS, drawing on transactions captured in our database and interviews with practitioners.
What the data tells us:
The median SIDS transaction is $37.5 million, close to the $35.9 million median for other small economy countries (countries with a GDP<$20 billion); however, not a single recorded SIDS transaction exceeds the $500 million threshold. While SIDS deals can reach a considerable size, none reaches the largest deal-size brackets. Funds can help overcome this constraint by pooling smaller projects across countries or sectors and diversifying geographic and climate risks.
Given the need for aggregation, it is unsurprising that the most common vehicle type in SIDS is funds, which account for 27% of transactions. Another common type is financial institutions, which account for 14% (twice their share in the broader small-economy market). By working through local lenders and aggregating smaller investment opportunities, blended finance can reach a larger number of beneficiaries that investors may struggle to finance directly. For example, in the Dominican Republic, the Women Entrepreneurs Finance Initiative (We-Fi) has combined technical assistance and incentives with partnerships with Banco Promerica, Banco BHD, and Banco Adopem to expand financing for women-owned small and medium-sized enterprises. Technical assistance was also present in 31% of SIDS transactions, compared with 20% in other small economies. This highlights the important role of technical assistance in SIDS by helping projects become investment-ready, particularly where local capacity or project pipelines remain limited.
Figure 2: Blended SIDS transactions vs. small economies blended transactions by vehicle type
Looking at the top investors, the 10 most active commercial capital providers are all development finance institutions or multilateral development banks. The IDB Group leads with 15 commitments, followed by FMO (The Dutch Entrepreneurial Development Bank) and the International Finance Corporation. Purely private investors, including domestic/international banks and pension funds, remain largely absent. Interviews with practitioners point to familiar barriers, including currency risk, small deal sizes, high transaction costs, and limited exit options.
Figure 3: Top 10 commercial investors in blended SIDS transactions by commercial capital commitments
The concessional side of the market is similarly concentrated. The United States Agency for International Development (USAID) and the Green Climate Fund together accounted for more than 16% of all concessional commitments recorded in SIDS. The elimination of USAID and the closure of the West Africa Trade & Investment Hub, which was one of the most active programs in SIDS, have therefore narrowed an already limited concessional base, increasing the need for other bilateral donors, philanthropies, and regional financing mechanisms to play a greater role.
Challenges and opportunities:
Strengthen the enabling environment
Scaling blended finance in SIDS requires strong government leadership and clearer investment pipelines. In small markets like SIDS, investors may place greater importance on policy certainty and institutional credibility. For example, Belize’s dedicated Climate Finance Unit shows how governments can coordinate financing around national climate and development priorities.
Build resilient markets, not permanent dependence
Interviews highlight that SIDS will continue to need grants and concessional capital. But over time, that funding can also help build local institutions and markets that can attract more commercial capital. Investments in renewable energy, sustainable agriculture, aquaculture, and local production can also reduce dependence on imported goods and exposure to external shocks. Blended finance can play a role in supporting these investments where risks or other barriers prevent commercial capital from participating independently.
Finally, SIDS have already served as a testing ground for new financing approaches, from blue bonds to debt-for-nature swaps. The challenge now is to move beyond individual transactions and find ways to replicate what works. Many of the barriers SIDS face are not unique to island economies. As a result, innovations tested in SIDS could offer lessons for other emerging markets facing similar challenges.
