Risk-Sharing Finance Expands Investment in Developing Nations

A growing number of developing economies are turning to insurance-backed lending structures as a means of attracting greater private investment and addressing persistent financing shortfalls. As governments struggle to mobilise sufficient public resources to meet long-term development needs, innovative risk-sharing arrangements are increasingly reshaping the landscape of international development finance.

The financing challenge remains immense. Estimates suggest that developing countries require approximately US$4 trillion in annual investment to achieve the Sustainable Development Goals (SDGs). However, public expenditure, bilateral aid and funding from multilateral development institutions continue to fall significantly below this level. Consequently, investment in essential sectors such as transport infrastructure, energy, climate resilience and employment generation remains constrained, limiting prospects for sustainable economic growth.

In this context, private institutional capital has become increasingly important. Among the largest potential sources of long-term investment is the global insurance industry, whose assets continue to expand rapidly. The worldwide insurance market is projected to reach nearly US$9.8 trillion by 2027, reflecting the sector’s growing financial capacity.

Despite its scale, only a relatively small share of this capital currently finds its way into developing markets. Less than a quarter of insurance-related investment is directed towards these economies, largely because insurers continue to view them as carrying elevated levels of financial and political risk. Regulatory uncertainty, weak project pipelines, concerns over credit quality and the complexity of long-term investment commitments have all contributed to limiting capital flows.

To overcome these obstacles, international financial institutions have increasingly adopted insurance-backed credit risk-sharing mechanisms. Rather than investing directly in development projects, insurance companies assume part of the credit risk attached to loans provided by multilateral development banks.

Under this arrangement, development banks remain responsible for originating and managing loans, while insurers provide protection against a portion of potential losses arising from borrower defaults. This transfer of credit risk enables development lenders to release regulatory capital, allowing them to extend substantially more financing without requiring equivalent increases in their balance sheets. In many cases, every dollar of insurance coverage can support approximately two dollars or more in additional development lending.

One of the most prominent applications of this model is the International Finance Corporation’s (IFC) Managed Co-Lending Portfolio Programme for Financial Institutions. The programme enables insurance companies to provide credit protection for portfolios of loans made to financial institutions operating across developing economies.

The initiative has already demonstrated considerable financial leverage. During 2023, the programme mobilised around US$3.5 billion in insurance-backed credit protection. That additional risk capacity is expected to facilitate nearly US$7 billion in new lending over the coming years, enabling the IFC to expand its support without significantly increasing its own capital requirements.

The benefits are increasingly visible across participating economies. More than 70 financial institutions have accessed financing under this framework, contributing to expanded investment in projects spanning 27 developing countries. Notably, 24 of these nations are classified among the world’s poorest and most economically vulnerable, where access to affordable finance has traditionally remained limited.

Small and medium-sized enterprises (SMEs), women-owned businesses and agricultural borrowers have emerged as some of the principal beneficiaries. Financing directed towards these sectors has risen by between 20 and 40 per cent, improving access to credit for businesses that play a vital role in employment creation and local economic development. Greater availability of finance is also helping strengthen financial inclusion in regions where access to formal financial services remains comparatively low.

Many economists regard this evolving financing mechanism as a significant structural development in international finance. Instead of relying exclusively on larger aid budgets or increased sovereign borrowing, the model expands lending capacity through more efficient allocation of financial risk. Development banks, insurance providers and private investors collectively create a framework capable of mobilising substantially greater volumes of capital.

Nevertheless, the model also raises important policy and financial questions. As risk is redistributed across multiple institutions, debate continues over who ultimately bears responsibility should large-scale financial losses occur. The resilience of insurers, the exposure of development banks and the vulnerability of borrowing countries all remain central considerations.

External economic conditions may also influence the model’s future effectiveness. Periods of global recession, heightened geopolitical tensions or severe climate-related events could reduce insurers’ willingness to assume additional credit exposure. Likewise, projects delivering high social impact but relatively modest financial returns may become less attractive if commercial pressures intensify within the insurance sector.

Climate finance represents another area where insurance-backed lending could become increasingly valuable. Developing countries are estimated to require between US$1 trillion and US$2 trillion annually to finance climate mitigation and adaptation measures. Innovative risk-sharing arrangements therefore offer an opportunity to attract private capital into projects that might otherwise struggle to secure funding through conventional financial markets.

At the same time, many developing economies continue to record financial inclusion rates below 50 per cent. Expanding access to finance through insurance-supported lending could therefore contribute not only to infrastructure development but also to broader economic participation by businesses and households that have historically faced limited borrowing opportunities.

Although regulatory reforms and stronger policy coordination remain necessary to unlock greater investment, insurance-backed lending is increasingly being viewed as more than a temporary financing solution. It represents an evolving framework capable of combining public-sector development objectives with private-sector capital. If successfully expanded over the next decade, the model could significantly strengthen investment in infrastructure, climate resilience and SME development across the developing world, provided that effective risk management and sustainable returns remain at the heart of its implementation.