Amidst a volatile geopolitical context, policy making with regards to long-term regulatory and financial strategies is on uncertain grounds.
Introduction
For several decades, private philanthropic funds and official development assistance such as concessional loans (below market interest rate loans) and grants had been the main source of funding development projects such as in health, education and environment in low- and middle-income counties. For example, up to 80 donor countries and multilateral development banks (MBDs) like the World Bank provide financial contributions to support the . The funds provide critical financial facility needed to eradicate AIDS, tuberculosis and malaria as epidemics and to strengthen health systems in the global south. Other funds such as the supports climate adaptation in the world鈥檚 least-developed countries, including infrastructure, resilience, health-relevant adaptation.
However, since 2015, the development finance landscape began to experience a significant rise in private capital inflow to support critical sectors such health and education in the global south. MBDs and western country donors are drawing inspiration from market financing strategies to fund these projects. Rather than concessional fundings, donor countries and MBDs have now shifted to blended concessional finance; a strategic financial approach that combines public (non-commercial loans) and private funding (private loans) to mobilize private capital flows towards development projects.
A typical example is the recent inaugural World Bank originate-to-distribute loan securitization program. The program would allow the Bank to free up its balance sheet and enable it to provide more public and private loans to low- and middle-income countries. In this blogpost, I briefly comment on the shifting financing trajectory, and draw specifically on the World Bank program to illustrate possible implications for African borrower countries. My main point is that while the reality of MBD鈥檚 shrinking balance sheet may necessitate the turn to alternative financing sources, the trend may turn out to be the next frontier of debt vulnerability for African borrower countries.
Financier or Co-Financer? Private Capital in Development Finance
MBDs like the World Bank were conceived to provide concessional finance by providing low-interest loans and grants to promote economic and social development in low- and middle-income countries. However, with the aid purse growing lean, 鈥溾��. MBDs and donor countries鈥� financing strategy is gradually shifting from public financing to catalytic funding (also known as blended finance) by scaling private capital flows through what is often described as 鈥溾��. For instance, the United State under its 鈥淎merican First鈥� global health agenda is already pursuing directs with several African countries that will open up African鈥檚 health sector to US health companies who are to operate mainly for-profit.
Critics have argued that these growing trends constitute efforts to gradually and may well end up as empowering extractive operations of financial capital to the detriment of low and middle income countries. Indeed, the for Unlocking Commercial Finance for the Sustainable Development Goals and the recently released emphasised that its aim is to achieve direct mobilisation of commercial capital and offer an opportunity to move towards fully market-based financing (described as exit strategies for concessional finance according to Subprinciples 2.D of the 2025 OECD Guidance) in support of the SDGs. In other words, the private turn is not just about blending private (non-concessional) and public capital (concessional). It is aimed ultimately to handover to Western institutional investors, projects and programs in health, education and environments that some development stakeholders consider as global public goods and would be desirable to remain funded through grants and concessional loans.
On the other hand, the private turn brings immense benefits as argued by supporters. As I noted above, supporters argue its imperative based on the growing shortfalls in the financial pool required to drive economic prosperity and social development in African countries. But that is not the only reason. One important view relevant to this piece is that the turn reinforces decades held view by aid critics that concessional loans and grants have failed Africa countries (), and that reliance on market led finance would provide better incentives and environment for the right kind of fiscal and locally led development decisions. Scholars like Robert Wood in his 1986 monograph, From Marshall Plan to Debt Crises: Foreign Aid and Development Choices in the World Economy have long established that concessional funding is often a proxy for western countries conditionalities and used to enforce their development preferences that in many ways conflict with local initiatives. Principles 2 of the 2025 OECD DAC Blended Finance Guidelines emphasised the need to ensure that blended finance aligns with national and local investment blueprint. However, it is challenging to conceive how in practice the investment interest of private investors could easily align with local development priorities.
Financing Through Debt Securitization: The World Bank OTD Model and Thereafter
The recent World Bank loan securitization project is part of the growing trend to normalize private finance in development financing. In what is not a first amongst MBDs, the World Bank has now 鈥渆ndorsed鈥� the originate-to-distribute model (OTD), which resulted into a $510 million collateralized loan obligation (CLO) initially held on the balance sheet of the International Finance Corporation 鈥� the private arm of the Bank.
The debt securitization programme was done against the backdrop of the shrinking financial contributions of donor countries. What is interesting about the arrangement is not that it is the Bank鈥檚 inaugural loan securitization program but the implications it could have for African countries. In fact, the African Development Bank (AfDB) piloted loan securitization with its This imply that there is also regional appetite for funds and guarantees from private institutional investor like equity firms, venture capital funds, pension funds, and insurance companies from Western countries.
However, the Bank鈥檚 securitization . At the risk of oversimplification, in a synthetic loan securitization like the AfDB鈥檚 Room2Run, an MBDs merely transfers underlying credit risks by receiving loss guarantees from investors but yet retains the debt on its balance sheet. Generally, this allows the initially originator and borrower relationships and covenants to remain intact since only risk and not asset is transferred to investors. However, the Bank鈥檚 securitization model is a traditional loan securitization which means it completely sold off the debt and received payments from the sales. This frees up its balance sheet and enables it to originate more loans and possibly disrupt the initial contractual covenants between the borrower and originator. How beneficial the arrangement is to the borrower depends on the structure of the portfolio. A more detailed analysis is outside the scope of this blogpost.
There may be little cause for concern at this stage, as the inaugural program applied only to private loans issued by the IFC. However, it signals the start of a private turn by the Bank that may soon extend to public sector loans which could include concessional loans issued to low- and middle-income countries. As puts it, 鈥溾�hether the World Bank might securitize loans from its public sector operations鈥ould be more complex, given thinner margins, uncertain investor appetite, and the potential impact on the bank鈥檚 relationship with its clients.鈥� As discussed below, the originate-to-distribute (OTD) model, if expanded to concessional loans (a part of the Bank鈥檚 public sector loans) should be concerning when viewed from an aid dependency perspective.
Loan Treadmill? The OTD Model from a Debt Dependency Lens
The OTD model frees MDBs鈥� balance sheets which positions the bank to originate new loans more frequently and in larger volumes 鈥� a view expressed in the which noted that 鈥淢BDs could unleash hundreds of billions of dollars in new lending by taking on new calculated risks鈥�. The argument also includes that leveraging MBDs鈥� origination capacity would allow them to direct scarce concessional resources to the poorest and most fragile states since they are often unattractive to private investors. For example, emphasized how MDBs can use their role not only to mobilize private capital but to build institutional capacity, and foster investment climates that eventually enable African countries to finance their own development.
As suggested earlier, this creates a sort of transitional framework whereby fragile states receive non-intermediated concessional loans up to the point where they develop an attractive investment environment that then allow them to wane off aid packages in the long term. In my view, there is nothing novel or ingenious about this way of thinking. It has been the basis for aid packages for most of the last five decades especially for African countries which are largely dependent on concessional packages.
The problem potentially here is that while the OTD model could ostensibly 鈥渞educe鈥� reliance on traditional aid packages, it could also intensify developing countries鈥� dependence on credit-based financing although intermediated by MBDs. Since OTD expands capital availability for MBDs, that would ordinarily mean increased lending capacity, potentially resulting into a lending loop. In short, the mantra of 鈥渋nnovative capital鈥� could be self defeating for borrower countries as seen with traditional aid packages.
Moreover, other important development issues need remain unaddressed both from actors within and outside Africa. They include increased fiscal responsibility by African countries, tackling public corruption, and importantly, empowering borrower countries through a fairer reform of international financial and economic system and tackling commercial illicit financial flows. Tackling illicit financial flows such as corporate tax avoidance and evasion, trade mispricing by multinationals operating in Africa could truly empower African states to retain needed development financial resources within their financial system.
Also, while the OTD model promises financial scalability for African countries, skepticism that a market led development financing would privilege mainly high yield investment sectors as opposed to social and cultural development spending is a fair concern. Several commentators have noted that the current financing trajectories risks deprioritising sectors that are socially vital but commercially unattractive, such as publicly funded rural healthcare, education, etc. As , 鈥淲hy are we mobilizing? Is it to achieve a number, or because capital is scarce and then securitizing works efficiently鈥� If the aim is to encourage institutions to engage with certain economies, then securitization might do that but it's one step removed鈥�. For securitization specifically, investors only buy structured financial products. They do not engage directly with the underlying enterprises or infrastructure projects. In short, access to more money for African countries is worth celebrating but it may truly be one step removed in the complex mix of solutions to the financial impoverishment of several African countries.
Conclusion
Overall, the shift towards blended finance such as the World Bank OTD model has both empowering and constraining implications. The point is that the former alone should not be mainstreamed. It has the prospect to give African states access to deeper capital pool. Yet it could constrain their developmental priorities to market friendly sectors or perpetuate another cycle of dependency. African states bear the burden of prudence in this evolving financial landscape. The success of these trajectories may depend on whether African countries can use it strategically as a temporary means to access needed capital while building a strong domestic market economy and financial environment capable of directly attracting and sustaining foreign investment and independent growth.
The author, Damilola Awotula,聽is a PhD (DCL) candidate at 黑料网爆吃瓜鈥檚 Faculty of Law and a Research Fellow at the 黑料网爆吃瓜 Business Law Platform.聽