
Donors deploy subsidies to catalyze private sector investment in many nascent and imperfect markets, including agri-SME finance. This type of blended finance can mitigate the rural and perceived risk of agri-SME lending, reduce the high costs of serving rural areas, and address other bottlenecks to clearing market transactions.
However, fully unpacking the different approaches to subsidy in agri-SME finance is difficult, as is understanding and linking it to the impact case. In order for the sector to more efficiently and effectively deploy subsidies, we need a more sophisticated way of comparing the subsidy-to-impact tradeoffs of different models. In our latest State of the Sector report (and summarized in this blog post), we present some examples that can currently be observed in the market as a first step in more fully interrogating blended finance approaches.
The current landscape of blended finance
In recent years, the landscape of blended finance approaches in the agri-SME sector has become more sophisticated. Capital providers have become better at matching the diverse investment profiles of agri-SMEs, in terms of growth ambition, profitability, value chain, risk exposure, and investment readiness.
In the figure below, we lay out seven key ways in which blended finance is structured in the agri-SME market, and the particular pain points addressed by each approach.
Addressing finance market pain points through blended finance

Local commercial banks, for example, often make use of risk share, incentive payments, and technical assistance; social lenders, on the other hand, leverage a broader set of approaches. In general, capital providers tend to use more than one of the blended finance channels to achieve their objectives.
The bottom line: More approaches are being tried today than ever before, and combinations of different approaches are starting to address constraints in more sophisticated ways. But comparison between approaches is still very difficult—more research and learning is required.
Specialized funds as a blended finance channel
Since 2017, when ISF developed a typology of specialized funds, a number of new examples have emerged, often focused on impact themes such as climate resilience or gender inclusion.
In particular, recent years have seen the emergence of more high-risk “impact venture” funds and other accelerators dedicated to supporting niche and high-growth ventures. These more commercially oriented funds are heavily investing in agtech in a small subset of countries, including Kenya, Nigeria, South Africa, India, and Singapore. Earlier grant-based investment by donors such as Mastercard Foundation, Gates Foundation, and USAID laid the groundwork; however, early-stage venture funds represent an opportunity to transition agtech and digital agriculture start-ups from grant funding to a more commercial model.
It’s also worth noting that, in the current landscape, very few funds are set up and managed by local or regional teams. Local fund managers can provide deep local insight, operate with lower cost structures, and offer stronger links for local investor participation. Yet they often lack the track record and network required to access international funding. Growing local fund management capacity will be an important step in refining this specialized fund channel.
Landscape of specialized funds

Interestingly, despite the strong push for climate finance, very few funds focus specifically on agri-SME climate resilience. Those that do often retrofit their existing investments into a climate-focused category; but this doesn’t mean that the financing is truly helping farmers adapt to climate change.
The role of public capital providers
Blended finance structures have traditionally been seeded by public or private donor capital providers. According to Convergence, in 2019 international and development finance institutions deployed USD 1.9 billion in concessional capital and mobilized another USD 5.1 billion of their own financing at commercial terms, across sectors. But this financing has failed to catalyze significant private capital—with ratios of USD 1.1 in private capital mobilized for every dollar of concessional capital.
Our analysis confirms that DFIs are the primary source of blended capital, but they operate within stringent mandates. DFI ticket sizes are usually in excess of USD 10 million and the targeted rate of return is often at commercial levels. Thus, the expectation that DFIs might bend their risk-taking rules in order to mobilize more private capital is misplaced. On the other hand, overseas development assistance and philanthropic investors, are often first to fund innovative blended finance structures. Their development and impact agendas often give larger latitude for innovation and concessionality.
Interviews with various capital providers revealed a few clear dynamics that influence the use of subsidy in agri-SME finance, namely:
- A lack of transparency. There is no common language or taxonomy of the different blended finance structures and approaches in the market. Capital providers don’t disclose their financial terms. And the evidence base for the efficiency of blended finance structures is limited. This overall lack of transparency makes collaboration and evaluation of impact difficult.
- Limited coordination of investments. Even among DFIs and ODA donors, there is limited coordination of investment strategies at a national level. In addition, each DFI is recognized for its different sector specialization, products, risk appetite, or level of concessionality. Collaboration and—where possible—co-investment would be beneficial to the sector, but this requires more intentional strategy and intergovernmental dialogue.
- Large, repeated, and unchallenged allocation of grants to technical assistance programs with limited tracking of efficiency. The impact and sustainability of technical assistance efforts are difficult to measure. Some interviewees are advocating for a reallocation of funds with the aim of accelerating the mobilization of private capital for climate resilience and food systems transformation.
What's next?
We’ve painted a picture of the blended finance landscape where, while innovation has increased over the last decade, traditional approaches seem stuck in a repeat cycle. A lack of transparency, coordination, comparative learning, and genuine private sector participation leave significant room for improvement. In order to realize the promise of blended capital approaches to agri-SME finance, the sector must develop more sophisticated ways of comparing the subsidy-to-impact tradeoffs inherent in these models.
For more recommendations, read the full report.

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