Loan-buy downs is not a new concept, but most of its known usage is limited, and often in health.

It usually involves three parties — the lender, the borrower, and the donor that would be willing to pay all or part of the loans provided. The donor sometimes pays only for the principal amount, or the interest the loan incurs.

The World Bank — together with other known global health donors such as the Bill & Melinda Gates Foundation and Rotary International — piloted this over a decade ago in Nigeria and Pakistan as a means to boost both countries’ efforts to eradicate polio. The donors set up trust funds that essentially paid for loans provided by the World Bank through its soft-loan window — the IDA — to both countries.

But these came with conditions. In the case of Nigeria, there were pre-agreed targets, meaning the money put down by the donors in the trust funds would be used to pay IDA loans if the country were able to achieve pre-agreed polio immunization coverage targets, thereby freeing the government of potential debt.

Not all loan buy-downs come with specific performance objectives; sometimes it’s used to encourage borrowing for social sectors, such as health, which can be particularly relevant to middle-income countries that often borrow, but only for big infrastructure projects because of their perceived direct links to economic benefits.

Read the full article on loan buy-downs by Jenny Lei Ravelo at Devex International Development