Aid is collapsing. Africa’s development banks must make the same money work twice as hard

In the face of falling aid, development banks need to use all the financial instruments available to them to make their capital go further. Africa's development banks can no longer count on donors or treasuries. The way through is not more money, but better use of the money already in hand. By bundling loans that have proven themselves, selling them to investors, and lending the proceeds again into the early-stage projects nobody else will finance, a development bank can fund close to twice as much development over a decade from the same capital. This is developmental capital velocity: how many times the same money can finance development before it is exhausted.

In 2025, global official development assistance fell by 23 per cent to £129 billion. It was the steepest fall on record, the second yearly decline in a row, and grants fell almost three times faster than loans. More cuts are expected until at least 2028. For Africa's state-backed development banks, the era of meeting shortfalls with fresh donor money or a treasury top-up is closing.

For decades, development finance has measured itself by how much has been lent and how healthy the loan book looks. The question that now matters is different: how many times can the same money finance development before it is exhausted? This is called developmental capital velocity.

A well-run institution can roughly double the development it finances over a decade without a single new dollar. The tools already exist; what is missing is the objective. . An institution that cannot expect new money to come in has three options: save its profits to build up new capital, which is slow; issue complex funding instruments, which are costly and limited; or make its existing capital work harder. Only the third is fully within its control. A bank that lends a billion pounds and holds the loans for twenty years locks that money away for a generation; one that lends it, recovers the money by selling the loans on to investors, and lends it again produces a multiple of the development from the same resources.

From holding loans to recycling money

This recycling method is not new. The bank bundles a set of loans that have proven themselves, meaning eighteen to twenty-four months of on-time payments, and sells most of the bundle to investors at its market value. Selling loans on in this way is called securitisation, a word that earned its bad name in 2008. The bank keeps the riskiest slice, so it suffers first if its own lending decisions were poor. The development banks, one binding rule completes the design: the cash raised must flow into new lending for early-stage, high-impact projects commercial banks will not touch: a first-of-its-kind solar plant, a rural water system, a toll road years away from earning its first cent. With that rule, a one-off transaction becomes an engine turning old loans into new development.

A fair question follows: why would a bank trade safe, proven loans for risky new ones? Because taking that risk is the reason a development bank exists.

Its mandate is to finance what commercial lenders will not, and a seasoned loan that now repays like clockwork is a job already done, one that ordinary investors are happy to hold. Passing that loan on frees the bank's scarce capital for the work nobody else will do, which is exactly why its owners fund it.

The African Development Bank's Room2Run transaction shifted the risk on a billion-dollar loan portfolio to private investors in 2018 and committed the freed funds to new lending. Nigeria's InfraCredit has been guaranteeing infrastructure bonds into pension portfolios since 2017. A review commissioned by the G20 concluded in 2022 that development banks could lend substantially more from capital they already hold. The market plumbing is improving too: the Johannesburg Stock Exchange has just announced plans for a pan-African digital marketplace by 2031, which would make bundles like these easier to hold and trade across borders.

Consider a development bank with capital of £100 million. At ten pence of capital per pound of lending, that supports a one-billion-dollar loan book. Once the loans have proven themselves, the bank bundles the book, sells 85 per cent to investors, and keeps the riskiest 15 per cent.

The trap is to assume that selling 85 per cent of the loans frees 85 per cent of the capital; on that assumption, a decade of recycling would nearly triple the bank's development lending. The true figure is lower, and the reason sits in how two different rules apply. The ten-pence rule covers ordinary loans spread across a whole book, where losses arrive one at a time. The slice the bank keeps back is different: it absorbs the first losses of the entire bundle, so regulators require the bank to back it with capital almost pound for pound. Guarantees from strong institutions can cover the upper part of that slice, and the core stays at the bank's own risk, which is exactly what keeps its lending careful.

Counted properly, each sale frees about 48 of the original 100 million. Recycled every two years across a decade, that finances about 1.9 times the lending of simply holding the loans. The gap between two and three is the price of keeping skin in the game, and institutions should report it openly.

The same arithmetic creates an incentive that development finance usually struggles to manufacture. How large a slice the bank must keep is set by regulators, rating agencies and the investors themselves, and it rests on the loan book's loss record: a bank whose past loans have performed well is allowed a thinner slice, which frees more capital, which raises velocity, approaching 2.7 times.

Careful lending stops being a brake on ambition and becomes its engine.

Speed is also a hazard

Any system built on selling loans must confront the spectre of 2008: when lenders expect to sell their loans, they take less care making them, which increases risk. Three safeguards are conditions of legitimacy and must never be considered as optional extras. The retained slice keeps the bank exposed to its own mistakes. A strict sequencing rule allows new lending commitments only with money already in hand from completed sales, and never against sales it merely expects to make, because betting on future sales is how several celebrated structures collapsed in 2008. And the reinvestment rule stops recycled money drifting quietly into safe, easy assets that flatter the numbers while betraying the mandate.

Velocity, in other words, is a dial and never the destination; the destination remains development, pursued within firm safety limits.

The practical test belongs in the boardroom. Instead of approving a loan sale because it needs cash, a board should ask: does this transaction make our capital turn faster while keeping every safety limit intact? If any limit fails, the answer is no, however attractive the number.

The collapse in aid is unlikely to pass; the OECD projects decline through 2028, and donor politics suggest longer. African development finance can respond by shrinking its ambitions to fit its money, or by making its money work harder than the system was designed for. Institutions that can no longer count on being refilled may need to rely on recycling.

DISCLAIMER: This article was originally published on the [LSE Africa at LSE blog](https://blogs.lse.ac.uk/africaatlse/2026/08/25/aid-is-collapsing-africas-development-banks-must-make-the-same-money-work-twice-as-hard/) under a [Creative Commons Attribution 4.0 International (CC BY 4.0) licence](https://creativecommons.org/licenses/by/4.0/). It is republished here with minor formatting changes; the text and argument are the author's own.