Examining the promise and challenges of blended finance for social impact

While this journey has its challenges, the prospect of transforming lives and communities is significant

Funding for social development has always been a formidable challenge, with private investors often being reluctant owing to perceived risks and low returns. The social impact space for decades has relied heavily on traditional grants and donors. However, global economic realities have long been indicating that non-profit organisations should move towards innovative financing sources. Blended Financing models have been affording hope and resilience to several organisations and efforts. These blended financing structures leverage public, philanthropic, and private funding to make impactful projects more lucrative and promising for private investment in the social sector by reducing the risk-to-return ratio of social sector projects, which are otherwise deemed too risky. The blended financing market in India has demonstrated incredible growth from 2010 to 2022, reaching USD 1.1 billion, a growth rate exceeding the global average.

Blended structures like guarantees, returnable grants, and outcome-based contracts create win-win situations for social purpose organisations by ensuring access to capital, mitigating risks, and building longer-term partnerships. Interestingly, guarantees account for 40% of the social project market, making revenue-generating projects less risky for investors and mobilising private capital. For instance, USAID-USDFC have been instrumental in unlocking approximately USD 540 million in commercial capital since 2015 through a partial pari-passu guarantee facility, benefiting a range of sectors including clean energy, WASH, healthcare, agri-tech, forestry, etc. However, this tool is only applicable to businesses that are revenue-generating. In these cases, the guarantees enhance the creditworthiness of recipients and lower investment risk for investors.

For not-for-profit entities, Impact Bonds take centre stage. Under this outcomes-based financing framework, private investors furnish the initial working capital, and if the project accomplishes its planned social objectives, they receive repayment along with interest. There have been certain innovations in this space in which the outcome funder has been a CSR funder instead of a risk investor. For example, in the Haryana Early Literacy Development Impact Bond, the outcomes funder has provided incentives to the implementation partner to exceed outcomes.

Despite their promise, impact bonds have met with mixed reviews. While some argue that the tool is too complex and compliance-heavy, others opine that it doesn’t support the holistic growth of the implementing partners. Furthermore, since impact bonds are tailored to draw private investment based on accomplishing specific outcomes, they may not contribute towards achieving the real objectives of the social sector. Moreover, primary data collected through key informant interviews (KII) further suggests that outcomes-based blended finance instruments have shown a low leverage of 2.2% only.

In addition to Impact Bonds, Returnable Grant is another tool in the blended finance arsenal, comprising characteristics of both a grant and a loan. They have a track record of supporting social entrepreneurs and communities. These grants offer a unique advantage as they can leverage small amounts of initial capital to unlock significant additional funding. SAMHITA’s use of returnable grants, for instance, has demonstrated that INR 5 crore catalytic capital was able to unlock INR 45 crores from SIDBI’s capital, and a total of 500 crore debt capital.

In addition, returnable grants have shown an almost 97% repayment rate across more than 14,700 participants owing to the fact that these grants are strategically aligned and tailored to the specific needs of organisations, ensuring maximum impact and effectiveness in achieving their goals. With this, SAMHITA has contributed substantially to cultivating an environment where innovation, entrepreneurship, and long-term sustainability thrive.

There remain some areas of concern alongside these positives that blended financing models bring to the social impact space. Shreds of evidence point towards the current blended finance structures’ prioritisation of revenue-generating projects (social enterprises) and overlooking non-governmental organisations (NGOs) that focus on contributing to society without implicit revenue returns. Data shows that 51% of the blended finance market is dominated by guarantee and equity-based instruments, while impact bonds which can be used by NGOs, form only 1% of the blended finance market. In addition, the existing blended finance structures are top-down and often exclude the perspectives and needs of the recipients of blended finance.

However, the increasing realisation that a solution lies in mutual understanding is interesting. It is becoming evident that investors and NGOs should collaborate more closely to fund overlooked and underfunded developmental sectors. This calls for a paradigm shift in perspective, where blended finance focuses on meaningful impact and involves recipient organisations in customising financing instruments to meet the demands of the social sector.

In an era where associations fuel progress, blending finance sources for social impact is a step in the right direction. While this journey has its challenges, the prospect of transforming lives and communities is significant. As we strive for a more inclusive and responsive approach to blended financing, we are bridging the gap between investors and projects and paving the way for a brighter future for everyone.

(This article is authored by Priyanshi Chauhan, Research Associate, Centre for Innovative Finance and Social Impact, ISDM & Ria Sinha, Research Lead, Centre for Innovative Finance and Social Impact, ISDM)