Securitisation is a financial process that converts illiquid assets into tradable securities. In a development finance context, MDBs can use securitisation as a tool for balance sheet optimisation, to increase private capital mobilisation and enhance their financial firepower. This is because securitisation enables them to transform the long-term loans on their balance sheets into securities that can be sold to institutional investors, rather than waiting years for the long-term loans they extended to be repaid.
When multilateral development banks (MDBs) use securitisation to transfer risk to the private sector, they can create new and scalable pathways to attract investors and mobilise private investment into emerging markets and developing economies (EMDEs).
As a result, MBDs can recycle their capital more quickly and extend new loans sooner. For EMDEs, this means faster access to financing for infrastructure, climate action, health, and other critical priorities. Through using innovative approaches like securitisation, MDBs and DFIs can make the most of scarce development funding, making it a powerful potential tool for private capital mobilisation for development.
The development finance landscape faces its greatest challenges yet. Public money is under pressure everywhere. This makes it more critical than ever that MDBs and DFIs identify new approaches to unlocking and mobilising investment.
Trillions of dollars held by institutional investors – who primarily invest in public markets, such as stock exchanges – remain largely untapped for sustainable development. Making public markets work better for developing countries, and reorienting even a small proportion of investment through them, could unlock billions in new finance.
This could be a breakthrough for development finance.
However, the private sector’s ability to invest in development finance assets is constrained, because there is a limited number of emerging market investment products available on public markets.
The UK’s MOBILIST programme was created to help overcome this challenge by expanding the universe of listed instruments that investors can use to build emerging markets portfolios that are aligned with the Sustainable Development Goals. One of the ways to do this is to help MDBs and DFIs carry out or support securitisation transactions that create securities that can be listed on a stock exchange.
Public markets hold unparalleled potential for private capital mobilisation in developing countries. To illustrate this, Sifma’s Capital Markets Fact Book estimated that in 2024, $255 trillion was channelled through public markets globally. This is roughly 100 times the amount of capital held on MDB balance sheets.
Securitisation works by offering a way to pool financial assets (such as loans) or risk in such a way that it can be transferred to a third party. The securities or derivatives backed by the asset pool are then sold to investors, who receive cash flows generated by the underlying portfolio.
Different securitisation structures can help commercial banks and MDBs to use securitisation as a tool for managing their balance sheets more effectively. This video provides a simplified illustration of a basic true-sale securitisation.
MDBs and DFIs are increasingly encouraged by their shareholders to utilise risk transfer mechanisms and to focus on catalysing more private capital mobilisation to EMDEs. This signifies a major shift from an originate-to-hold to an originate-to-share business model for MDBs, as recommended by the G20’s landmark Independent Review of Multilateral Development Banks’ Capital Adequacy Frameworks (the CAF Review) (2022). Securitisation can enable MDBs to implement these reforms without jeopardising their financial stability and can help accelerate MDB lending by generating cash, enhancing risk management, and strengthening credit rating metrics.
High credit ratings are at the core of the traditional MDB business model. AAA ratings allow development banks to borrow at low interest rates, which they can then pass on when lending to governments in developing countries. This means that MDBs choose to limit their lending to a level that ensures that their high credit ratings stay in place. Securitisation allows MDBs to manage their balance sheets in a way that enables them to extend more loans without bringing their credit ratings down.
Markets for both true-sale and synthetic securitisation have grown significantly over the past decade. According to M&G Investments, the total market for asset-backed securities reached $6.9 trillion in 2024 and is projected to grow to $11.7 trillion by 2034. In the development finance sector, pioneering deals have overcome initial technological barriers and expanded market awareness, creating an opportunity to transform one-off large transactions into an established asset class.
The assets are legally transferred to a special purpose vehicle that issues the securities.
The assets stay on the originator’s balance sheet and only the associated risks are transferred by using credit derivatives or guarantees.
Creating an MDB asset class that meets the needs of institutional investors could be a game-changer for financing development at scale.
Listing financial instruments backed by MDB assets on a public market gives investors access to diversified, structured products that match a range of risk-return preferences. They can participate in funding underlying EMDE businesses that they would not have been able to invest in before.
Publicly listing asset-backed securitisations could also significantly accelerate investor education on investing in MDB assets, enabling the asset class to grow over time. Listed securitised instruments create publicly available prices, ratings, and analyst reports for assets that are otherwise too complicated to trade and difficult to value.
An MDB asset class that helps to correct investors’ misperceptions about both emerging markets and MDB portfolios offers great potential for a scalable route to impact.
Securitisations are structured using tranches – portions of the transaction with different risk-return profiles. Cashflows from the underlying assets are allocated to investors based on a waterfall structure: senior tranches have first priority on payments from the pool and are shielded by subordinate mezzanine and equity tranches that absorb losses first. This benefits the issuer as senior tranches can attain high credit ratings, even if the underlying loans have lower ratings. Investors can choose to invest in different tranches according to their risk-return preferences.