Development Guarantees: Unlocking Private Capital for Sustainable Development

Why do guarantees matter for development?

With the SDG financing gap estimated at trillions of dollars annually, traditional aid is insufficient. Development guarantees have emerged as a blended finance tool to mobilize private capital at scale.

Guarantees are financial instruments through which a guarantor—typically a DFI or MDB—commits to cover losses if a borrower defaults or a specific risk materializes putting the repayment at risk. Guarantees are different to loans in that they do not require upfront capital as the payment occurs only if a claim is triggered when capital is at risk. They are often considered highly catalytic as they seek to transfer risks from investors to guarantors changing the risk profile of a transaction or a portfolio. In doing this, they can help mobilize more commercial capital that may consider an investment too risky.

This has two consequences. First, for borrowers, guarantees can help lower financing costs as transaction risks are reduced. Secondly, for blended finance providers, guarantees reduce balance sheet burden given that they do not require as much upfront capital, creating space for additional lending.

Donors are showing renewed interest in guarantees spurred calls for greater private finance mobilization. In this article we explore what guarantees are, who the main providers of development guarantees are and what some of benefits and challenges in using them as a development tool are.

What are some types of guarantees and providers?

Effective guarantees target specific risks such as credit, political or currency risks, that genuinely prevent investment, rather than offering blanket coverage. This means coverage levels, from partial to full coverage, should be set appropriately—enough to change investor behavior, but not so high as to eliminate beneficiary skin-in-the-game.

In development finance, guarantees are often provided by DFIs, MDBs, bilateral development agencies as well as specialized providers. Some of the most notable providers include the International Finance Corporation, the Multilateral Investment Guarantee Agency, the Swedish International Development Cooperation Agency, the US Development Finance Corporation and GuarantCo ( PIDG).

These providers offer different types of guarantees depending on the risk they target and their coverage to adapt to the needs of different borrowers and transactions. The most used structures include partial credit guarantees ( PCGs), partial risk guarantees ( PRGs), portfolio guarantees, and first-loss guarantees.

Source: EDFI investment data portal

What are some successful guarantee facilities?

IFC MSME Finance Facility: First-loss guarantees enabling local banks to extend credit to underserved MSMEs. In Gambia, a US$2 million first-loss guarantee unlocked US$10 million in new MSME lending.

Sweden's Sida Guarantee Portfolio: One of the most active bilateral guarantee programs, with US$1.2 billion in guarantees across 40+ countries. Notable for its flexibility—covering credit, political, and currency risks—and willingness to operate in LDCs and fragile states.

MIGA's Türkiye Earthquake Response ( 2023): US$456 million in guarantees to support post-earthquake reconstruction financing, demonstrating how guarantees can be rapidly deployed for crisis response.

GuarantCo's Local Currency Guarantees: Supporting local currency infrastructure bonds in Kenya, Nigeria, and India, addressing currency mismatch risks that deter international investors from domestic capital markets. Since 2005 and as of 2023, GuarantCo had closed guarantees totaling US$1.5 billion in 22 countries, which has mobilized US$5 billion of private sector investment covering up to 100% of principal and interest over a loan or a bond issued by a private sector entity up to US$50 million equivalent.

Why are guarantees a hot topic?

Unprecedented mobilization

According to OECD data, US$77 billion of private finance was mobilized in 2024, primarily through guarantees and direct investment. Guarantees account for 23% of all private finance mobilized over 2012-2023—the second most-used mechanism to leverage private finance after direct investment ( 29%). The value of guarantees is recognized by the private sector in LMICs as a way to mobilize asset owners and institutional investors. For instance, the 5% Agenda launched in 2017 by the African Union Development Agency (AUDA-NEPAD) is a campaign to increase the allocations of African asset owners to African infrastructure from 1.5% to 5% of AUM.

Balance sheet efficiency

Unlike loans, which require full capital deployment, guarantees require only provisions for expected losses. This means they remain unfunded unless triggered and allow providers to increase their lending activity. With ODA shrinking, issuing guarantees can be an effective use of scarce public resources to catalyze additional commercial investment in emerging markets. The 2023 OECD DAC ODA accounting rule changes included guarantees as ODA-eligible instruments, paving the way for donors to consider them as a way to leverage smaller amounts of ODA to catalyze private finance.

A track record of remarkably low losses

Perhaps the most compelling—and least appreciated—argument for development guarantees is their exceptional track record. Despite operating in challenging markets often perceived as high-risk, major guarantee providers have experienced remarkably low claim rates over decades of operation. This evidence fundamentally challenges the assumption that development-oriented guarantees must inevitably result in significant losses.

MIGA reports eleven claims in 35+ years. Since its establishment in 1988, MIGA has paid only eleven claims—an extraordinary record for an institution that has issued billions of dollars in political risk insurance across some of the world's most challenging investment environments. MIGA's approach focuses on preventing claims through early intervention. The claims that have been paid were primarily for war and civil disturbance events.

Sida reports approximately 1% cumulative losses over 20+ years. Sweden's development agency, Sida, has one of the most mature bilateral guarantee portfolios in the world. Sida's guarantees are sovereign guarantees, which allow Sida's partners to have high levels of confidence in its repayment ability in the event of defaults. The Swedish National Debt office assesses the expected loss for each guarantee. Based on the expected loss, Sida charges a fee to the bank or organization receiving the guarantee, which can be subsidized by Sida. In 2021, Sida's active guarantee portfolio stood at SEK10.3 billion (US$1.2 billion), which mobilized SEK27 billion (US$2.9 billion) from the financial market. Total losses in the portfolio amounted to just SEK106 million (US$11.6 million)—approximately 1% of the total guaranteed volume.

USAID Development Credit Authority reports a 2.4% default rate across 74 countries. From its establishment in 1999 until its consolidation into the US DFC in 2019, USAID's Development Credit Authority ( DCA) issued 542 guarantees across 74 countries, resulting in more than 250,000 individual loans—with a cumulative default rate of just 2.4%. These guarantees mobilized US$4.8 billion in local private financing for micro, small, and medium-sized enterprises, agricultural enterprises, and infrastructure projects.

What are the challenges of guarantees?

Commercial terms vs. concessionality

Many development guarantees that are classified as ODA are offered on commercial terms, raising questions about development additionality. In addition, DFIs and other guarantee providers have an incentive to provide these given they charge fees for each guarantee. Growing guarantee portfolios for their bankability at the expense of increasing lending with development goals in mind poses a risk and can lead to the prioritization of development goals for finance providers.

Debt burden risks

The extensive use of development guarantees can contribute to unsustainable debt accumulation by borrowers, including sovereign governments and private institutions. By facilitating access to commercial financing that might otherwise be unavailable or unaffordable, guarantees may encourage borrowing beyond a borrower's repayment capacity by obscuring the true cost of borrowing.

Transparency gaps

Transparency in reporting terms of blended finance approaches is missing and is needed to better assess their effectiveness. Limited disclosure of pricing, expected losses, and impact achieved makes assessing the effectiveness of guarantees and what models are most effective in achieving development results difficult.

Mixed evidence of effectiveness

The evidence on guarantee effectiveness remains mixed across sectors and contexts, and a lack of transparency in how guarantees are structured, reported and evaluated makes it difficult to draw firm conclusions. Existing evaluations raise concerns around additionality, effects on lending behavior and ability to generate demonstration effects. An independent evaluation of the IFC's Global Trade Finance Program (GTFP) found that between 56% and 71% of participating banks (issuing and confirming) had not used the programme for transactions they would have done anyway, with additionality highest in the riskiest and lowest-income countries. A FERDI working paper on DFI blended finance intermediary programmes in Africa found that supported banks actually reduced their lending relative to control banks by approximately 8%, possibly due to limited absorptive capacity. In the infrastructure sector, an independent evaluation of GuarantCo and the Emerging Africa Infrastructure Fund projects found mixed demonstration effects: two projects increased local banks' familiarity with similar projects and ESG requirements, while one led to complete replication without GuarantCo participation.

Geographic concentration

OECD data shows 87% of mobilized private finance targets middle-income countries; only 12% reaches low-income countries. This raises concerns that guarantees may not reach countries with greatest needs and where risk-sharing may have the most additional results attracting private finance.

Conclusion

Development guarantees offer significant catalytic potential—but they are not a silver bullet. Realizing their promise requires attention to design, transparency, and accountability of the instrument. Moreover, it is key to be cognizant that guarantees are complementary instruments, not substitutes for additional resources. Scaling guarantees alone will not close the SDG financing gap.

The remarkably low loss experience of MIGA, Sida, and USAID DCA ( now US DFC) over decades provides compelling evidence that guarantees can achieve significant development outcomes at minimal fiscal cost. This track record should encourage donors to consider expanding their use of guarantees—while putting a strong emphasis on additionality, transparency, and targeting the most underserved markets and understanding that guarantees are not a substitute for providing financing but a complementary tool.

However, not all development actors are equally positioned to offer guarantees. Effective guarantee provision requires strong credit assessment and risk management capabilities, sufficient balance sheet strength to absorb potential losses and risk tolerance aligned with development mandate. Donors lacking these capabilities should consider partnering with established providers rather than building parallel infrastructure and contributing to facilities or platforms that can achieve scale and lower transaction costs.