Published by
Gatsby Africa / British International Investment

Private sector development (PSD) initiatives and the development finance community often share similar high-level goals around poverty reduction and sustainable growth in lower- and middle-income countries.

In recent years, approaches to achieving these goals have become less transactional and more transformational in nature, with growing interest from both sides in supporting lasting, sector-wide change.

The evidence shows that successful sector transformation relies on multiple enabling factors – such as markets, finance, investment, and policies – coming together to unlock growth. As more development finance institution (DFI) and PSD strategies start to converge on transformational change,
there is – in theory at least – scope for each side to support and complement the work of the other.

PSD can play an important role in strengthening the underlying conditions for markets, firms, and investors; while DFIs and other investors can help seed and scale market-based innovations that contribute to systemic change objectives.

If, in theory, PSD and development finance can play a complementary role in driving transformational change within sectors, in practice there has been limited alignment between their strategies and activities to date. 

This study aims to contribute to a body of evidence on how these two approaches – development finance and PSD – might be better applied in tandem. It focuses on exploring and mapping the factors that influence the level and quality of alignment, and making practical recommendations on what can be done to close the gap in future.

The work intends to provide a springboard for action, enabling PSD and development finance actors to access and benefit from the unique perspectives, skills and resources of the other; and ultimately to meet shared transformational change objectives more effectively.

This report was initiated and funded by Gatsby Africa and British International Investment. The Market Systems Development Working Group of the DCED and FMO provided technical inputs and comments.