Blended finance utilizes a variety of instruments to achieve its de-risking and catalytic effect:

1. Concessional Loans & Grants:

   • Concessional Loans: Loans offered with more favorable terms than commercial loans (e.g., lower interest rates, longer maturities, grace periods).

   • Grants: Direct financial contributions that do not need to be repaid. Used to cover early-stage development costs, technical assistance, or to absorb initial losses.

2. Guarantees & Risk-Sharing Facilities:

   • Public or philanthropic entities provide guarantees against specific risks (e.g., political risk, currency convertibility risk, default risk). This reduces the exposure of private investors. For example, a partial guarantee from a DFI can cover a percentage of a commercial loan, making the remaining portion more attractive to banks.

3. Equity Investments (Concessional):

   • Public or philanthropic entities take an equity stake in a project or fund, often accepting a lower expected financial return, thereby improving the overall risk-adjusted return for commercial equity investors.

4. Technical Assistance (TA) Facilities:

   • Grants or specialized support provided alongside financing to improve project viability, strengthen management capacity, conduct feasibility studies, or enhance environmental/social safeguards. TA helps improve the "bankability" of a project.

5. Layered Fund Structures:

   • Creation of investment funds with different "tranches" of capital, where concessional capital forms a junior (first-loss) layer, protecting senior (commercial) investors.