Demystifying development finance

As an essential part of the development finance ecosystem, IFAD links small-scale farmers with global financing so they can sustainably feed the world while building thriving rural communities.

But how exactly does this complex system work? We answer your questions.

Development finance is funding used to achieve social, environmental and economic outcomes that benefit people and the planet.

Typical forms of development finance include grants, which do not have to be repaid, or loans, which do. These can come from public sources, like governments, or private sources, like banks and businesses.

When multiple countries come together to establish a development bank, the result is known as an international financial institution (IFI). IFIs are a linchpin of the global development finance system, funding a wide range of programmes aligned with the Sustainable Development Goals.

IFAD is an IFI, but we are also a specialized agency of the United Nations, with a critical mandate to eradicate poverty and hunger by investing in rural people.

With decades of experience in rural development, IFAD is hands-on when it comes to the design and execution of the projects we fund. This means that while providing governments with grants and affordable long-term loans, we also use our technical expertise to develop innovative solutions to the challenges faced by rural people.

Thanks to our unique position in the development finance system, IFAD provides a means for people who would normally be overlooked by financial systems to benefit from public and private funding.

A significant portion of our funds are contributed by Member States of all income levels. In its current replenishment cycle, IFAD has secured pledges of over US$1.4 billion.

In 2020, IFAD became the first UN fund to receive a credit rating. This means we can tap into the power of global capital markets and channel borrowed funds to rural people, supplementing the resources available through official development aid.

Today, IFAD has AA+ credit ratings from both S&P and Fitch, which assures potential investors that IFAD is financially sound. This, along with our strong mission and proven impact, makes IFAD’s bonds particularly attractive to institutional investors, like pension funds and insurance companies. We allow them to make secure, long-term sustainable investments that yield returns not only for themselves, but for the world.

Finally, IFAD uses existing financing to mobilize even more funds from co-financiers, like governments, private sector companies, international donor funds and other IFIs.

Small-scale farmers and their communities often struggle to access finance and are frequently overlooked by global investors. But to effectively build sustainable food systems and protect natural resources, they urgently need it.

By working with IFAD, rural communities and their most marginalized members – such as women, Indigenous Peoples and persons with disabilities – participate in projects that enable them to increase their production, conserve water, protect land and biodiversity, and earn decent livelihoods.

• In Egypt, PRIDE is working with local communities to restore desert valleys and store rainwater. This has prevented flash floods and made it possible to irrigate crops during the dry season. As a result, farmers are seeing their fig crops double or even triple.

• In Sierra Leone, RFCIP is helping to ensure that rural people have access to finance to grow their businesses. Through this initiative, Julius used his wife’s teaching salary as collateral to take out a US$280 loan and invest in his honey business. Using the profits, he built a guesthouse and has since branched out into cocoa cultivation.

• In Viet Nam, the 10 members of the Dinh Cu River Blood Cockles Cooperative received US$5,000 from AMD and collected US$2,300 of their own funds. They invested in 800 kg of seed clams, improvements to the riverside mudflats and new nets. Today, they have a stable annual income of US$5,000 – and since the cockles thrive in salty water, their livelihood is protected against climate change.

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While the development finance system may seem complex, it has a simple goal: to create a better world for all. For decades, IFAD has played a critical role in achieving this goal and will continue to do so in the years to come.