In recent years, the concept of innovative finance has become increasingly popular in the international development community, especially as a way to mobilize more funding to achieve the Sustainable Development Goals. Innovative finance is based on the premise that there is not enough money from governments and philanthropic organizations alone to address pressing global issues like poverty, climate change, and access to electricity and clean water. Filling the gap requires that funders restructure and reorganize their development support, often to attract private capital. To that end, innovative finance enthusiasts pursue broad approaches like blended finance and specific structures like impact bonds.

The aims of innovative finance are laudable, especially its intention to disrupt the status quo of traditional approaches to funding. These traditional approaches often include set and inflexible timelines, budgets, and activities designed by donors who are removed from the local context. As such, millions of scarce aid dollars are wasted each year on ineffective programs, channeled via bureaucracy that forces service providers to focus on compliance rather than results.

Some innovative finance solutions respond to this challenge by seeking to maximize the social outcomes of grants. In this area alone, the list of offerings has proliferated to include social and development impact bonds, social success notes, social impact incentives, beneficial outcomes-linked debt contracts, social impact guarantees, and impact-linked finance.

But this proliferation highlights a troubling trend: The “productization” of innovative finance for development, which attempts to create and market new, standardized financial products like the commercial finance sector. Yet there is a limit to applying commercial finance thinking to the development sector. Productization makes the product the end instead of a means. It places funders’ attention more on the form and label of the funding than the social outcome they aim to achieve. It can also conflate the efficacy of the underlying intervention with the funding structure that sits on top, fostering claims, for example, that “a development impact bond helped alleviate poverty.”

Read the full article about innovative finance by Jonathan Ng and Rob Mills at Stanford Social Innovation Review.