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The international aid system is under pressure, beset by concerns about the efficacy of its programmes and rising opposition from western taxpayers who argue money should be diverted to pressing problems at home.
US President Donald Trump’s actions since retaking office in January has now left the aid model on the brink of collapse. Trump’s assault on the US Agency for International Development, saying it was staffed by “radical left lunatics”, has thrown aid programmes around the world into chaos. His former ally Elon Musk, then tasked with cutting the annual federal budget, called the humanitarian organisation “a viper’s nest of radical-left marxists who hate America”. The agency has since been shuttered.
The US is not alone in taking a step back from the international aid system. The UK has said it will cut its international aid budget by almost half starting from 2027. With more western countries poised to concentrate on defence spending in the coming years, aid budgets are likely to become squeezed even further.
There is a realisation that an alternative model is needed to fill the gaps left behind by the aid cuts. Development finance institutions (DFIs) could provide the answer.
DFIs are agencies that invest in the private or public sectors in developing economies. Multilateral DFIs such as the World Bank’s International Bank for Reconstruction and Development offer loans to developing countries. Bilateral DFIs such as France’s Proparco, and the UK’s British International Investment invest in the private sector and unlike traditional aid agencies who are often viewed as “charities”, these are profit-seeking enterprises providing finance either as loans or equities in businesses.
They plough profits earned from successful investments back into new ventures. Two-thirds of BII’s investment in the past decade have been funded by profits. BII does not invest in tobacco, extractive industries including oil and gas and the arms industry but invests in logistics chains that may serve these industries.
“DFIs have a huge role to play because we complement banks who are the main providers of capital in these markets,” says Leslie Maasdorp, BII’s chief executive who took over in January.
Maasdorp says DFIs such as the one he runs provide an essential source of financing for businesses shut out by the “restrictive” practices of private capital in their home countries who require “very prohibitive collateral requirements” and “impose very onerous terms” on small and medium scale enterprises.
“We step in to promote the growth of SMEs . . . our fundamental thesis is that the private sector is the core engine of growth of job creation,” he adds. BII invests in businesses capable of “shaping” the markets and can have a more systemic impact in their countries such as being able to “crowd in” alternative forms of private capital such as pension funds to also invest, Maasdorp says.
According to its most recent annual report, BII committed £1.09bn to African companies in 2024, nearly 40 per cent more than its 2023 total of £725mn despite what it described as the “difficult investment environment caused by macroeconomic headwinds”.
BII also reported post-tax profits of £213.3mn last year compared with a £44mn loss in 2023. European DFIs invested an estimated €12.4bn in new projects last year, according to the 15 member club of European Development Finance Institutions, with most of the funding going towards climate finance, SMEs, and gender‑focused finance. The US International Development Finance Corporation, founded during Trump’s first term after initial reticence from the administration, committed $12bn in funding across food, energy, health and infrastructure projects in developing countries.
DFIs offer patient capital, investing in projects such as infrastructure that require longer-term capital and whose returns may not materialise immediately. DFIs also invest in strategic industries in clean energy and climate resilience and women entrepreneurs who make up a substantial part of small businesses but are frequently left behind in terms of financing opportunities.
“The liquidity that DFIs have in certain parts of Africa, commercial banks don’t have that liquidity,” says Justin Faye, a partner in the energy and infrastructure team at the law firm Linklaters who has experience working on large projects across the continent. “Banks are unable to do long-term financing for regulatory reasons. In west and central Africa, commercial banks are not necessarily able to finance deals over 15 to 25 years and that’s something DFIs can do and their money usually comes cheaper than commercial banks,” Faye adds.
DFIs are also investing in organisations such as InfraCredit, a Nigerian-based local currency debt guarantor of infrastructure projects. This enables them to partner with organisations with local knowledge of pressing problems. Last year, InfraCredit secured a $30mn facility from BII to support decentralised renewable energy projects in Nigeria, the country with the world’s biggest energy access deficit. It was the culmination of long-running discussions on how both companies could work together, says its chief executive Chinua Azubike.
“BII did not attempt to force a solution,” Azubike says. “Instead they sat with us to understand our experience and incrementally add value to accelerate progress. That’s what we found particularly attractive in working with them.”
In a world of aid cutbacks, there is scope for DFIs to step up their involvement in programmes aiming to reduce poverty. DFIs only account for about 2 per cent of foreign assistance and there are calls for an expansion which could involve increased government funding, safe in the knowledge that there are prospects of a return on investment.
“We face several challenges,” BII’s Maasdorp concedes. “We’re going into a new era of limited expansion in the size of fresh capital available. We have to look at how we can do things differently and where the scope for innovation is. The second major problem is that there is often big macroeconomic shocks that can lead to major impact on investment and countries can often go into fiscal distress.”
