In May 2024, the UNHCR reported for the first time in history, more than 120 million people worldwide were displaced by conflict — a staggering 1.5% of the global population. This record number underscores an era of compounding crises, where protracted conflict, economic instability, and climate change drive millions from their homes, often leaving them in precarious conditions for decades. As these crises persist, the international community confronts a dual imperative: we must meet the urgent humanitarian needs of affected populations, while also creating pathways to long-term resilience and stability.
Traditional humanitarian aid models, while essential for immediate response, lack the scope and flexibility to address long-term needs in protracted crises. Their focus on short-term relief and rigid funding structures often prevents the transition to sustainable, adaptive solutions that foster stability and self-reliance. The widening funding gap also highlights that public and philanthropic resources alone are insufficient. With the right incentives and standards in place, private investment can act as a crucial partner, not only by achieving scale, but also by driving innovation and delivering lasting impact – strengthening local economies, fostering self-reliance, and paving pathways to long-term stability.
However, fragile contexts pose significant challenges that deter traditional investment. Security threats, political volatility, legal uncertainties, and underdeveloped markets create a high-risk environment. Without effective mechanisms to manage these risks, traditional investors remain cautious, leaving fragile regions deprived of the capital essential to foster stability and resilience.
The Potential of Blended Finance
Blended finance realigns incentives by leveraging public and concessional funding to reduce risks and enhance returns for private investors. It also facilitates the creation of new revenue streams and innovative financing structures, enabling businesses in challenging contexts to access capital tailored to their specific needs. Below, we illustrate three use cases that demonstrate how blended finance can solve some of the challenges that humanitarian and development players face in conflict-affected and fragile settings.
Use Case #1: Investing in durable infrastructure
In crisis contexts, emergency responses provide vital relief to affected populations, but as crises endure, what were meant to be temporary fixes often turn into expensive, long-term solutions. Typically operating on tight annual budget cycles, humanitarian organizations have a restricted ability to invest in the upfront capital required for durable infrastructure. They rely on stopgap measures (e.g. the transportation of water in trucks, running pumps on diesel generators) which not only incur high recurring costs and pose environmental challenges, but also jeopardize the continuity of services once the crisis ends and humanitarian organizations depart.
The WASH Blended Finance Facility, designed by KOIS and UNICEF with support from Proparco, the Conrad N. Hilton Foundation, and the Global Financing Facility offers a solution to this problem. In this approach, investors finance a portfolio of long-term infrastructure projects, while donors provide guarantees to de-risk the investment. By enabling access to investment, the private sector takes over the provision of WASH services for NGO and UN off-takers, offering a more sustainable, affordable, and inclusive model owned by and providing jobs for local communities.
Use case #2: Supporting longer-term development programming
When transitioning from emergency assistance to long-term redevelopment of communities, efforts are directed towards service provision rebuilding as well as sustainable income generation for affected populations. Results-based financing has proven particularly effective to support longer-term development programming where public service is lacking and commercially viable models do not exist. This approach is also adapted to interventions deemed too risky due to the limited evidence on what works, complex causal relationship between activities and desired outcomes especially in unstable and rapidly evolving settings, as well as the time needed for results to materialize.
The Refugee Development Impact Bond (DIB) in Jordan structured by KOIS in collaboration with the Near East Foundation, the IKEA Foundation, the Novo Nordisk Foundation, Norad, Ferd, and US International Development Corporation (DFC) exemplifies an innovative approach to these challenges, with a results-based financing structure that shares risk across partners. The DIB directs funding toward Syrian refugees and members of their host communities to support them in the creation of home-based businesses. The DIB enables flexible resource allocation through multi-year funding provided as upfront financing by investors (e.g., impact investors, development finance institutions (DFIs), commercial investors), which is reimbursed with interest (i.e. 5.1% of maximum annualised rate of return in this case) by outcome payers (e.g. governments, foundations, development aid agencies) based on independently verified outcomes, such as enterprise creation and livelihoods improvement. This approach enables the service provider to adapt programming to changing conditions on the ground while ensuring accountability and maximizing impact. The Refugee DIB was supported by design funding from both Convergence and the IKEA Foundation to come to life. Design funding is a critical tool in the blended finance toolkit which supports innovative and complicated blended finance structures reach feasibility and proof of concept and plays a pivotal role in catalyzing more funding into these challenging settings.
Use case #3: Supporting local businesses
Another challenge that blended finance can address is the difficulty private businesses in fragile contexts face in accessing the capital they need to grow and scale. These businesses – particularly small and medium sized enterprises (SMEs) have significant potential to create jobs, enhance local services, innovate and drive long-term change by addressing humanitarian needs. Indeed, in fragile contexts where states are often absent or too weak to provide essential services, the role of the private sector becomes even more critical. The private sector can step in to fill the gaps left by underdeveloped or absent public service delivery, providing essential services such as healthcare, education, and access to clean water.
However, investors face high real and perceived risks when considering these businesses, including macro risks such as economic volatility and weak regulatory environments, as well as operational risks like inadequate infrastructure, limited management capacity and lack of technical expertise within the businesses themselves. Blended impact investment funds, like the Refugee Investment Facility by iGravity and the Danish Refugee Council and the World Food Programme Innovation Bridge Fund, aim to address these challenges by using donor funded first-loss capital or guarantees alongside technical assistance. While the former de-risks investments by absorbing a portion of the financial risk, the latter enhances the operational capacity of SMEs, making them more investable. By improving both the financial and operational viability of businesses, blended finance funds can create conditions for investors to engage in markets they would otherwise avoid.
The Path Forward: Scaling Proven Models
Blended finance can unlock significant investment in fragile contexts. Blended finance has the potential to mobilize public and private capital in the world’s most challenging environments. While several pioneering projects highlight the effectiveness of tailored, risk sharing models in driving impactful investments and supporting the emergence of the private sector in fragile contexts, these initiatives are only the beginning of what’s possible.
The critical next step is to transcend isolated success stories and focus on scaling these strategies to ensure they reach the communities most in need, and at a larger scale. Achieving this will require robust collaboration across public, private, and philanthropic sectors, as well as a concerted effort to unlock additional capital and strengthen local ownership to ensure solutions are both sustainable and contextually relevant.
One such example is the Refugee Humanitarian Development Peace Outcomes Fund currently being designed by KOIS and Finance for Peace with the financial support of the SDG Impact Finance Initiative. The proposed USD$100 million Outcomes Fund aims to mobilize public and private capital at scale through innovative results-based financing to fund humanitarian, development, and peacebuilding projects as well as market-based organizations in displacement-affected areas in Sub-Saharan Africa. The Outcomes Fund builds on KOIS’s historical work in humanitarian and results-based financing, leveraging a larger scale vehicle to reduce transaction costs, centralize evidence and learnings, and facilitate a coordinated approach that both builds the enabling environment and provides the necessary financing for businesses in fragile contexts to thrive. It will also be used to test sustainable results-based financing models which go beyond grants and leverage more private capital.
Blended finance has the power to transform fragile contexts by unlocking capital, fostering collaboration, and driving sustainable solutions at scale; now, it is time to build on these successes, expanding proven models to reach more communities and creating lasting impact in the face of compounding global crises.
