Nepal is facing a significant shortfall in funding its Sustainable Development Goals (SDGs). The National Planning Commission (NPC) has projected a total investment need of Rs 21.065 trillion by 2030, averaging over Rs 3 trillion each year. For 2026–2030 alone, the annual SDG financing gap is projected at Rs 1.02 trillion, which accounts for around 33% of the total required investment for that period. Recognizing this challenge, the NPC has called for exploration of blended finance, climate finance and other innovative mechanisms alongside traditional funding. The stakes are high: without new approaches, Nepal risks falling significantly short of its development ambitions.

Nepal’s SDG roadmap highlights several development priorities that require urgent capital. Key among these are Industry, Innovation and Infrastructure (SDG 9), which accounts for 24% of the financing requirement; Affordable and Clean Energy (SDG 7) at 12%; and No Poverty (SDG 1) at 11%. Other critical sectors include Zero Hunger, Quality Education, Good Health, Gender Equality, Clean Water and Sanitation, Sustainable Cities and Climate Action. The SDG financing gap underscores that new sources of capital must be tapped to fund these priorities.

Blended Finance: A Practical Tool for Emerging Economies

This is where blended finance comes in. It simply means combining public or philanthropic funds with private capital to support development projects. It uses public money in a “catalytic” way to attract private investment by offering them risk buffers or incentives, aiming to deliver both social impact and competitive financial returns. Instead of relying solely on government or donor funding, it blends different types of funding in one structure to unlock larger capital flows for sustainable development.

The concept gained global momentum with the launch of the Catalytic Capital Consortium (C3) by the MacArthur Foundation in 2019, committing $150 million to bridge financing gaps in impact investing and scale private capital in underserved markets toward the UN SDGs.

Blended finance mechanisms have been adopted by major climate initiatives, notably South Africa's Just Energy Transition Investment Plan. Launched during the COP26 in 2021, the $8.5 billion partnership between South Africa and international partners supports the country’s transition from coal to clean energy while addressing unemployment and inequality.

Blended finance uses a mix of tools such as concessional loans, guarantees, first loss capital and technical assistance to attract private investment into development projects. It brings together public, private and philanthropic actors, with development finance institutions (DFIs) helping bridge development goals and financial returns. This helps make projects more viable and investable.

Why Nepal Needs Blended Finance

For emerging economies like Nepal, blended finance is not just a concept but a necessity. In Nepal’s case, significant financing gaps cannot be met by traditional sources. Private investors remain cautious due to political, currency, operational, and financial risks, while domestic entrepreneurs often struggle to access credit because they lack sufficient collateral or credit history

The Lucas Paradox, outlined by Robert Lucas in 1990, explains that capital does not flow to low-income nations despite their potentially higher marginal returns due to weak productivity, governance, institutional quality and human capital. International investors view Nepal as a small, frontier market hindered by regulatory hurdles and foreign exchange restrictions. In 2023, Nepal attracted only $73.8 million, or 0.5% of its GDP, in FDI. In South Asia, Sri Lanka drew $711.8 million (0.84%), Bangladesh attracted $3.0 billion (0.34%) and India welcomed $28.07 billion (0.79%) FDI during the year. These figures highlight Nepal’s weak investment climate compared to its SAARC peers. Nepal’s listing on the FATF grey list, its BB minus Fitch credit rating and poor ease of doing business rankings further reflect its weak investment climate.

Blended finance can help address real-world risks that deter investment. For example, although Nepal Electricity Authority (NEA) has an AA rating, there are doubts regarding its ability to meet growing PPA obligations, especially from solar and hydropower projects. In other cases, like the Nyadi and Upper Syange hydropower plants, delayed transmission infrastructure prevented power evacuation, causing major losses. Blended finance can mitigate such risks through credit guarantees or contingency coverage, transferring risk to more willing capital providers and enhancing project bankability.

Blended finance directly tackles the risk-reward mismatch. By using public/philanthropic funds to mitigate risks or improve returns, blended finance can make commercially unattractive projects bankable to private investors. This approach has gained momentum across developing countries where financing needs are acute and public resources scarce.

Blended Finance Initiatives in Nepal

Encouragingly, Nepal is beginning to experiment with blended finance models, with several local initiatives leading the way. Some of them are outlined below:

Green Bonds for Clean Energy:

Nepal recently issued its first-ever green bond worth $60 million through NMB Bank, anchored by the IFC and supported by BII and MetLife. It is financing renewable energy and green projects such as solar farms and electric vehicles thereby creating around 8,000 jobs. Enabled by collaboration between IFC and the Government of Nepal on regulatory reforms, this bond showcases how blended finance can mobilize private capital for sustainable development.

Hydropower Public-Private Partnerships: The Upper Trishuli-1 (216 MW) is a flagship blended finance project in Nepal. The project has mobilized $650 million from IFC, ADB, FMO and private investors, with the Multilateral Investment Guarantee Agency (MIGA) of the World Bank Group providing $135 million in political risk guarantees.

The 82 MW Lower Solu project, Nepal’s largest private energy venture, is the first independent power project backed by both domestic and international lenders. Led by FMO with DEG, OFID and local banks, it secured a Rs 2.78 billion GuarantCo guarantee covering 90% of local bank exposure, reducing risk and enabling long-term financing.

These examples highlight blended finance’s role in mobilizing private capital for large infrastructure. Nepal’s Energy Forecast Framework aims for 28,500 MW generation by 2035, mostly from hydropower. This requires investment of $46.5 billion. The funding plan includes $6 billion from the government, $10 billion from domestic banks, $2 billion from climate finance, $12 billion from the diaspora, $8.5 billion from FDI/grants/loans, and $8 billion through Nepal Electricity Authority (NEA) reinvestment. This showcases a diversified, de-risked approach to energy financing.

Renewable Energy and SME Funds:

Donor-supported blended finance facilities are also taking root in Nepal. Nepal Renewable Energy Program (NREP) launched in 2019 by the government's Alternative Energy Promotion Centre (AEPC) with support from the UK Government is one of them. NREP’s Sustainable Energy Challenge Fund (SECF) offers partial guarantees and grants to de-risk off-grid and renewable energy projects. By March 2025, it had mobilized over 20 million British Pounds in private investment, supporting 22 MW of solar rooftop installations, more than 50 EV charging stations and electric cooking for 45,000 households. Similarly, Udaya, launched in 2024 in Koshi Province, has a total budget of Rs 1.149 billion, co-funded by the Swiss Agency for Development and Cooperation (61.7%) and the provincial government (38.3%). It includes a Rs 600 million Provincial Guarantee Fund and a Rs 280 million Challenge Fund to reduce lending risks and strengthen SMEs. This aims to unlock private financing for over 3,000 small businesses.

Mitigating Risks in Nepal’s Investment Landscape

To mobilize private capital at scale, Nepal must directly address the major barriers that currently deter investors. Some of these barriers include:

Rigid Collateral Requirements:

Nepali banks rely heavily on fixed-asset collateral (like land or buildings) for lending. This poses a huge obstacle for new projects that lack high-value collateral. As a result, many promising businesses remain underfunded. Blended finance can address this by providing credit guarantees or first-loss capital that mitigates the bank’s loss in case of default, effectively standing in place of collateral.

FATF Grey Listing and Perceived Country Risk: In February 2025, Nepal was added to the Financial Action Task Force (FATF) “grey list” due to anti-money laundering weaknesses, increasing reputational risk and investor caution. As Nepal works to exit the list, blended finance can help ease concerns. Tools like guarantees and first-loss capital from DFIs and MIGA mitigate political and regulatory risks, as these institutions often continue support if credible reforms are underway, making private investment more viable.

Exit Challenges for Investors: Nepal’s early-stage capital market offers limited exit options, with few acquisitions or public listings, creating divestment uncertainty. Foreign investors also face foreign exchange controls and the central bank approval for profit or capital repatriation which causes delays. While Nepal has Double Tax Avoidance Agreements (DTAAs) with 11 countries, it lacks such agreements with key FDI sources like the UK and US. This raises double taxation risks and reduces investment appeal.

Likewise, the Nepal Stock Exchange (NEPSE) has yet to record a successful FDI exit. This highlights an untested and uncertain market. These factors undermine investor confidence, especially for long-term commitments. Blended finance can help attract patient capital and co-investors with flexible exit expectations, supported by risk-sharing tools. For example, India’s Educate Girls Development Impact Bond tied returns to educational outcomes instead of profits. This shows how DFIs and impact investors can create flexible exit models aligned with development goals.

Preparing for LDC Graduation

Nepal is set to graduate from Least Developed Country (LDC) status in 2026, marking progress but phasing out access to special international support, such as trade benefits and highly concessional aid. As aid declines and the 2030 SDG deadline approaches, Nepal will need to find new financing sources. Blended finance offers a practical way forward. By combining public or donor funds with private investment, Nepal can use its remaining concessional financing to encourage private sector participation in development thereby increasing private capital and reducing reliance on grants.

The Role of Private Equity and Venture Capital

Private equity and venture capital (PEVC) firms can play a vital role in blended finance by investing in high-potential but underfunded sectors like SMEs, agriculture and clean energy. Their involvement helps validate projects and attract further investment. When paired with risk-sharing tools or co-investments from development partners, PEVCs are more likely to enter riskier markets. In Nepal, involving local PEVCs as anchor investors can build trust and mobilize more private capital for private sector growth.

Policies and Platforms for Blended Finance

While project-level blending is important, Nepal also needs supportive policies and institutions to mainstream blended finance. Key areas to focus on include:

Public-Private Partnership (PPP) Frameworks:

Nepal has made progress in creating a clearer path for private investment in public infrastructure through the PPP and Investment Act 2019. The Office of the Investment Board Nepal (OIBN) now maintains a pipeline of projects and is building capacity to manage PPPs. The Gokarna Forest Resort is a successful partnership between the Nepal Trust and the Yeti Group, converting a protected forest into a luxury eco-resort. It balances tourism with conservation, generating revenue, creating jobs and preserving biodiversity. However, challenges like slow approvals, political shifts and limited PPP understanding persist.

Thematic Bonds and Capital Market Innovation:

The successful issuance of the green bond with NMB Bank in 2025 is an encouraging sign for Nepal’s capital market. The government and regulators should build on this by facilitating more thematic bond issuances and even exploring sovereign SDG bonds. Nepal Rastra Bank and the SEBON can create enabling regulations and potentially offer incentives (for instance, priority sector lending recognition or modest tax breaks) to encourage banks and corporates to issue such bonds

Green Finance Taxonomy and Policies: NRB has introduced the Nepal Green Finance Taxonomy to guide banks and financial institutions to identify and prioritize green investments such as clean energy, energy-efficient buildings and electric vehicles. This helps financial institutions direct more funding toward eco-friendly projects. Though not yet mandatory, this initiative is a positive step toward integrating climate goals into financial decisions, creating a more supportive environment for blended finance in green sectors.

Conclusion

Blended finance is a strategic tool to help Nepal achieve its vision of a prosperous, inclusive and sustainable economy. By institutionalizing it now, Nepal can mobilize private capital to drive growth, promote clean energy and improve public services while reducing aid dependency. As Nepal graduates from LDC, building the right frameworks over the next five years is critical to reach the SDGs and beyond. With strong coordination and commitment, blended finance can transform Nepal’s development ambitions into lasting results.

(Team Ventures is an industry-agnostic alternative investment firm with a diverse portfolio spanning the energy, technology, real estate, manufacturing, financial institutions, agri-infrastructure, and electric vehicles segment.)

(This opinion article was originally published in  June 2025 issue  of New Business Age Magazine.)