Development policy loans and investments

Since 2016, part of Finland’s development cooperation has been provided in the form of development policy loans and investments. The investments are especially used to finance private-sector climate projects and the green transition in developing countries. Development policy loans and investments differ from grant-based support in that, in the former, the invested capital will return to the investor. 

Nepalese woman studying weaving.
Women in the municipality of Thaprek in Central Nepal are studying weaving now. They are saving time from carrying water, thanks to a new water distribution system built with Finland's development cooperation funds. Photo: Narendra Shrestha / Kehityslehti

The Government of Finland decided to introduce development policy loans and investments to complement grant-based development aid in 2016. 

Development policy loans and investments aim to achieve development impacts in the partner countries in accordance with Finland's priorities for development policy. The difference between grant-based support and development policy loans and investments is that in the latter the invested capital is expected to return with a profit. This expectation of investment income and reflows is one of the conditions for this form of assistance, as development policy loans and investments must be deficit neutral in the budget. In addition, the investments must comply with the criteria of the Official Development Assistance (ODA).  

The development policy loan and investment plan adopted in 2019 and its particular allocation objectives guide development policy loans and investments in 2020-2023. The objectives are that 75 per cent of investments at portfolio level will be allocated to climate and 6 per cent to Africa. Another objective is that at least 85 per cent of investments take into account gender equality objectives in a crosscutting way. 

Development policy loans and investments boost business activities

The same principles apply to both development policy loans and investments as well as grant-based development assistance. Because of the expectation for investment income and reflows, development policy loans and investments are best suited to financing state or business investments and to supplementing gaps in developing countries' financial markets to enable business development.

Least developed countries and lower income countries are the primary targets of development policy loans and investments. These countries have demanding operating environments and underdeveloped markets, which is why they have a particularly great need for public financing. At the same time, they are a high-risk environment for investment.

One objective of development policy loans and investments is to bring about financial leverage, that is, to stimulate the flow of other public or private money to the same target of investments. Finland’s input may enable other financiers to contribute, for example, by offering longer periods of payment or by seeking a more moderate return, to make the investment project profitable as a whole.

The preparation of development policy loans and investments is a slow process. The Ministry for Foreign Affairs conducts thorough consultations with the parties representing the target of investment in order to make sure that the required criteria are met. At the same time, the Ministry for Foreign Affairs works in close cooperation with the Ministry of Finance and Statistics Finland.

Development policy loans and investments in more detail

The development policy loans and investments of the Ministry for Foreign Affairs use three kinds of financial instruments: partnership loans, impact investing loans and fund investments.

Partnership loans are a lending instrument for supporting by means of core funding development finance institutions that are important for Finland’s objectives and other international financial institutions that use loan-based financing instruments. The Ministry has granted partnership loans to the International Fund for Agricultural Development (IFAD)(Link to another website.) and to the African Development Fund (ADF)(Link to another website.), which operates under the African Development Bank.

The appropriation for development policy loans and investments can be used for loans to different kinds of impact investors. Impact investors are private companies that focus on promoting sustainable development and aim at positive social impacts in all their investments. The Ministry has granted impact investor loans to the Finnish development finance institution Finnfund (Link to another website.)and to the FCAI Investments (FCAI)(Link to another website.), which is owned by Finn Church Aid.

The appropriation for development policy loans and investments can also be used for investing in funds. So far, climate finance has accounted for most of the fund investments, and investments have been made in funds developed by or co-developed with international development banks. Finland has made fund investments in the following funds: the bilateral Finland–IFC Blended Finance for Climate Program, co-established with the International Finance Corporation (IFC), which is part of the World Bank Group(Link to another website.); Finland–LAC Blended Finance Climate Fund, co-established with IDB Invest(Link to another website.), which operates under the Inter-American Development Bank (IDB)(Link to another website.); the ADB Ventures Investment Fund 1(Link to another website.), established by the Asian Development Bank(Link to another website.); and the High Impact Partnership for Climate Action (HIPCA)(Link to another website.), established by the European Bank for Reconstruction and Development(Link to another website.).