Development finance trends to watch in 2026

The development finance landscape is in flux — and the year ahead is likely to deepen an already clear shift: as public finance tightens, private capital is expected to play a larger role. “There will be no fundamental change in the availability of capital for development finance unless we bring the private capital. For me, that has been clear for years and is more clear now than ever,” said Marcos Neto, assistant secretary-general of the United Nations Development Programme and director of UNDP’s Bureau for Policy and Programme Support, at a recent Devex Pro event. Donors facing pressure to stretch limited resources are increasingly looking to private capital mobilization as part of the answer. Many bilateral donors, constrained by fiscal realities, see contributions to multilateral development banks and development finance institutions as their preferred channel of engagement, Frederique Dahan, director of the development and public finance programme at ODI, said at the Devex Pro event. At the same time, attention is shifting beyond individual projects toward the broader development finance architecture — with growing interest in systemic approaches. That was echoed by the African Development Bank’s new president, Sidi Ould Tah, who said last month that “What is required is a large-scale, coordinated mobilisation of private capital — equity, debt, institutional investment — anchored by strong risk-mitigation and blended finance structures.” What has been missing, he added, is a more collective, platform-based approach, one that brings together concessional funding, guarantees, cofinancing, and private capital into “repeatable, scalable structures.” Many of these conversations are unfolding against a sobering backdrop. Some 56 countries are now spending more than 10% of government revenue on debt interest payments, according to the U.N. Development Programme. Despite ongoing challenges, Neto said meaningful progress on debt relief remains unlikely this year, largely due to a lack of political will — a situation he called unacceptable, warning it would mean “trapping millions of people in poverty.” So, despite uncertainty and questions about political will and concessional funding, here’s a look at some of the key issues to watch: Private capital mobilization Private capital mobilization is not new, but it is shaping up as one of the year’s megatrends. “We’ve been seeing a shift in how private capital mobilization is really being discussed,” said Elizabeth Boggs Davidsen, CEO of GSG Impact. “It’s no longer just about how much private money shows up in a single deal, but ideally it's about whether we’re actually changing how markets are working.” That implies greater use of instruments familiar to the private sector, finding ways to de-risk more investments, and structuring deals that align with risk-return expectations of different partners, experts said. It also requires something more than finance. A key part of mobilization remains “the boring, old-fashioned work of policy,” Neto said, including rule of law, anti-corruption policies, and enforceable contracts that give companies confidence. While there is often a push for creative structures to mobilize private capital, Neto cautioned that the focus should be on proven tools, such as guarantees. Momentum is also building around balance-sheet innovation. Last year, the International Finance Corporation completed its first securitization, where it bundled and sold a share of some loans, following a similar transaction by the Inter-American Development Bank the year before. Whether more multilateral development banks or development finance institutions enter the fray — and whether these instruments scale — will be an important trend to watch. Though complex, such transactions could open new pathways for private investors to participate. Pressure on MDBs and DFIs MDBs and DFIs are under mounting pressure to deliver, especially as official development assistance declines. Some must also navigate competing shareholders' priorities. While scrutiny of MDBs is not new, it is intensifying. Many have reformed internal risk frameworks to free up capital. A key question this year is whether that capital will start flowing and where. There will likely be ongoing debate about institutional culture, as MDBs and DFIs explore evolving from models centered on holding assets toward a new business approach focused more on mobilizing private capital. The World Bank’s reorganization and reforms continue, with the merging of departments and some staffing and leadership changes. The institution also faces a delicate balancing act between shareholders, especially on climate finance. Last year, tensions surfaced when the U.S. opposed climate funding, and 19 of 25 World Bank directors, including European shareholders, signed a letter affirming support for the bank’s 45% climate finance target. “It will be really interesting to see in this fraught multilateralism environment we are in, how MDBs with a very diverse set of shareholders are able to operate, or are they falling into some sort of paralysis because of a diversity of shareholders,” Dahan said. Institutions with a more “unified” shareholder base, she added, may be better positioned to push forward. A geographic shift “The center of gravity is moving away from external capital towards domestic capital mobilization,” said Boggs Davidsen. “With overseas development assistance declining and geopolitics so fragmented, countries are no longer asking, 'How do we attract more external capital?’ They’re asking, ‘How do we mobilize our own?’” Across Africa, institutional capital exists in pension funds, sovereign wealth funds, and insurance pools. The challenge is aligning policy, regulation, and market structures so more of that money flows to local investment, she added. Countries with more stable economies and strong governance are better poised to improve the flows of domestic capital, be it public or private, and build their local markets. Others may struggle even as the focus turns inward. This shift also elevates the role of local and regional development banks. To be effective, one development finance expert told Devex, public development banks must be more catalytic and systemic — and significantly better at mobilizing domestic capital. Local capital, capital costs Expect renewed focus on local currency lending, foreign exchange risks, and the cost of capital, particularly in Africa. Local companies typically earn money and transact in local currency, creating currency mismatches when borrowing in hard currency. Depreciation can quickly turn debt burdens unsustainable, with risks falling disproportionally on local borrowers. “It’s not that local currency lending is inefficient; it’s that our systems make it really difficult.” Boggs Davidsen said. MDBs and DFIs must scale local currency risk-sharing tools, including guarantees and portfolio facilities, to enable domestic banks to lend without absorbing all the volatility, she said. Lenders such as DFIs and MDBs raise funds primarily in hard currency and lack incentives to change, several development experts told Devex. Donors, some suggest, should mandate institutions to review currency risk frameworks and unlock funding for local financial institutions. “DFIs and MDBs, if properly incentivized, can shift their operations,” Dahan said. That message may be getting through. Makhtar Diop, managing director of IFC, the World Bank’s private sector arm, said recently that IFC now provides a third of its lending in local currency, with plans to increase that share. More self-interest Development finance is increasingly being linked to domestic economic benefits, a shift that could reshape how bilateral DFIs operate and potentially introduce new players. “We are entering into an era of self-interest organizations,” Dahan said, noting that this trend extends beyond the United States. Donors are placing greater emphasis on ensuring DFIs also deliver value to their own economies. “It’s going to bring a certain tension about the modus operandi of these institutions,” she said. The tension raises questions about priorities and trade-offs, said Joan Larrea, CEO of Convergence, the global network for blended finance. “You can’t optimize two things in an equation,” she said, arguing that countries and agencies will have to choose between maximizing development impact or supporting domestic companies. This evolution could also elevate the role of export credit agencies. Larrea expects greater intentionality in pairing export credit agencies with development finance. “We're going to see an acceleration of this trend, and the export credit agencies will become part of a tool kit, but also perhaps overlapping, complementing, or even competing with DFIs,” Dahan said. Insurance, blended finance, guarantees, and other instruments Could this be the year guarantees finally scale? “It’s time to stop talking about guarantees and start making them happen,” Neto said. Progress has been slow, he argued, because many concessional finance providers remain “stuck on their role as lenders,” making institutional mindset shifts difficult. Another challenge is a limited understanding of guarantees among ministries of finance and treasuries, which often struggle to assess their risks and costs. New data, experts hope, might help address some of those challenges. Insurance is also gaining attention — not just as protection, but as a potential financing channel. Thematic bonds, including green, blue, and social bonds, remain another lever for accessing capital markets. Blended finance — or the use of donor capital to help unlock private capital — will continue to play a role. But with donor flows declining, Larrea expects a slowdown in new deals. Many projects already in motion will move forward, but fewer commitments may emerge this year. In blended finance, as with other instruments, expect a focus on scale, rather than small one-off transactions that have dominated in the past.