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12 Mar 26

Six common critiques of blended finance and their implications

By Andrew Apampa, CFA
Six common critiques of blended finance and their implications

Many donor governments are navigating increased fiscal constraints as demands on official development assistance continue to expand. We have also passed the midpoint of the Decade of Action for the Sustainable Development Goals, with progress uneven and many targets off track.

As more donor countries utilize blended finance as a means of compensating for reduced traditional aid budgets, there has been closer examination of what it can realistically deliver.

In this context, we at Convergence have seen several recurring critiques of blended finance emerge. Many point to genuine limitations and trade-offs that warrant careful consideration. Others reflect uncertainty about the role blended finance is expected to serve within a broader development finance architecture.

Below we outline six commonly cited critiques and consider what they reveal about how blended finance is being applied in practice today.

1. Limited mobilization of private capital at scale

One widely cited critique is that blended finance has not mobilized private capital at the scale anticipated under the “billions to trillions” agenda. This concern underscores the need for greater clarity around the function blended finance is expected to serve. Blended finance was not designed to replace public finance or to close global financing gaps on its own. Its primary role is catalytic, supporting market development, risk sharing, and early-stage investment where private capital would otherwise remain absent.

When assessed against this function, progress has been incremental but substantive. Recent data from the State of Blended Finance 2025 indicates that deal flow and transaction sizes have increased. 2024 volumes exceeded the average of the previous four years and median deal sizes have risen accordingly. Private sector participation has also expanded, particularly among commercial banks and intermediaries, reflecting a gradual shift toward greater commercial engagement. Scale, in this context, is cumulative and path dependent rather than immediate.

2. Concentration in commercially attractive countries and sectors

Another critique concerns the concentration of blended finance flows in middle-income countries and commercially viable sectors, compared to more limited reach in low-income countries or sectors where development needs are most acute.

Recent market trends highlight this pattern. In 2024, the share of least developed countries in the blended finance market declined sharply, while investment flows into lower- and upper-middle-income countries increased. Mobilization incentives may also favour larger economies and standardized transactions, reinforcing allocation patterns shaped by investor preferences rather than development priorities.

In operational terms, this has often translated into a concentration of blended finance activity in sectors such as energy, financial services, and infrastructure, where deal sizes are larger and revenue models are more established.

Blended finance functions most effectively where some degree of commercial viability exists, which constrains its applicability in highly fragile contexts. In such settings, grants, public investment, and direct public service provision remain essential. For development actors integrating blended finance into their strategies, this requires recognizing its limitations and using concessional resources selectively where they can most effectively mobilize private investment, while preserving grant-based financing for contexts where market-based approaches are unlikely to work.

3. Alignment of private incentives with public objectives

Another critique concerns the extent to which blended finance structures are shaped by private investors’ risk and return requirements, and whether public objectives are sometimes adjusted to accommodate those commercial constraints. This tension reflects the fact that blended finance sits at the intersection of development policy and commercial investment, requiring projects to be structured in ways that meet investor expectations on risk, return, and time horizon.

This dynamic has raised questions about whether blended finance contributes to the gradual marketization of activities traditionally treated as public goods, including areas such as health, education, and climate adaptation. Critics have also warned of the risk of “private capture,” where concessional support effectively advantages specific firms, technologies, or supply chains rather than advancing broader development priorities. In some contexts, these dynamics may be reinforced when donor governments explicitly link blended finance to trade, supply chain, or geopolitical objectives, raising additional questions about whose priorities ultimately shape project selection and development outcomes.

These tensions are most visible in sectors where commercial engagement is possible but incomplete, and where public risk absorption plays a decisive role in determining which activities are financed and on what terms. This critique highlights the importance of disciplined design and clear boundary-setting. De-risking is not an end in itself, but a transitional tool intended to enable private capital to support public priorities and to catalyze the development of commercially sustainable markets over time. Blended finance requires clear boundaries, strong conditionalities, and an explicit public purpose to avoid mission drift.

4. Risk transfer and implications for public debt

There is also concern that blended finance may shift risk from private investors onto governments through guarantees, publicly backed lending, or other risk-sharing instruments. In countries already facing elevated debt burdens, this can deepen fiscal pressure and contribute to new forms of credit dependence.

In practice, however, most blended finance transactions fund private investment projects rather than sovereign borrowing. Public balance sheet exposure typically arises only where governments provide sovereign guarantees, assume contingent liabilities, or participate directly in project financing through public development banks or similar institutions. In most blended finance transactions, concessional capital is provided by multilateral development banks (MDBs), development finance institutions (DFIs), or donor-funded facilities, meaning risks do not fall directly on the host government balance sheet.

Only a subset of blended structures therefore creates fiscal exposure for the public sector. Examples include projects supported by sovereign guarantees, national development banks assuming subordinated or first-loss positions backed by public capital, or certain debt-for-nature swap arrangements that involve restructuring sovereign obligations. While these cases remain a minority of blended finance activity, they illustrate why careful structuring and transparency remain important.

These considerations reinforce the need for thoughtful design. Blended finance is not synonymous with lending, but debt instruments remain common, making careful structuring essential. Instruments such as equity, guarantees, and well-calibrated risk-sharing mechanisms can reduce public exposure relative to traditional borrowing, while poorly designed transactions can increase it. Robust debt sustainability analysis, coordination with fiscal authorities, and clarity regarding long-term financing trajectories are therefore essential.

Another frequently cited critique concerns the difficulty of verifying impact claims associated with blended finance. Inconsistent definitions, limited transparency, and methodological challenges have contributed to concerns regarding impact washing and weak accountability.

These challenges reflect the inherent complexity of blended finance transactions across diverse contexts. However, the field is evolving. Data availability, disclosure practices, and impact measurement frameworks have improved in recent years, including wider alignment among MDBs, DFIs, impact investors, and asset managers with shared standards such as the Operating Principles for Impact Management, which require public disclosure and independent verification of impact management systems. As the market continues to mature, the key question is whether transparency and accountability continue to strengthen in practice.

6. Financial complexity and replicability

Another critique concerns the financial complexity of some blended finance transactions and whether this complexity limits their scalability. Blended finance structures often involve layered capital stacks, concessional tranches, guarantees, and multiple institutional partners. While these arrangements are designed to balance risk and mobilize private investment, they can also make transactions more difficult to structure, negotiate, and replicate. Early blended finance deals were frequently bespoke, reflecting efforts to address specific market failures and generate learning across unfamiliar sectors and geographies. As a result, transaction costs have sometimes been high and deal preparation timelines lengthy.

These challenges do not necessarily undermine the value of blended finance, but they do highlight the importance of simplification and standardization as the market matures. Programmatic approaches, repeatable transaction structures, and clearer guidance on concessionality can help reduce complexity and make blended finance easier to deploy across a wider range of markets.

Financial sophistication can enable access to larger pools of private capital, but ensuring that structures remain transparent, replicable, and aligned with development objectives remains an important priority.

Conclusion

Blended finance is neither a panacea nor an inherently flawed instrument. When poorly designed or overextended, it can generate risks and unintended consequences. When applied selectively, with clear objectives and strong public oversight, it can play a constructive role within a broader development finance ecosystem. In the current context of constrained public resources and rising global needs, the central question is not whether blended finance works in principle, but how and when it can be used most effectively. Ultimately, blended finance is best understood as a complement to, not a substitute for, predictable public investment, grant-based assistance in fragile contexts, and a coherent development strategy.

About the Author
Andrew Apampa, CFA
Andrew Apampa, CFA

As an Associate Director on the Market Insights team, Andrew is responsible for developing Convergence’s data and research activities, including building out Convergence’s database of historical blended finance transactions and developing blended finance trends analysis and benchmarks. Prior to joining Convergence, Andrew worked at the African Private Equity & Venture Capital Association (AVCA) as a Research Associate. While there, Andrew inaugurated the Special Report series, publishing in-depth studies on thematic issues within African private equity, such as political and currency risk in African PE, and the rise of the private credit industry in Africa. Prior to joining AVCA, Andrew worked at HSBC as an Emerging Markets Equity Strategist, where he published reports focused on investing in frontier equity markets. During his time at HSBC, he also worked on the European Equity Strategy team and the Global Research Marketing team. Prior to his time at HSBC, Andrew was at the University of Cambridge, where he completed his master’s thesis on protest and mobilization in Sub-Saharan Africa. He is a CFA charterholder.

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