An edited version of this article has been published on the OECD’s blog.
Investing in frontier markets is one of the hardest things a DFI can do. But it is also one of the most important. BII has long prioritised investing in the most difficult places, and over the years we have been able to deploy a greater proportion of our capital into frontier markets than most DFIs. In this article we share some of the lessons we have learned. We will draw upon these lessons as we prepare our next 5-year strategy, and we hope other development finance actors will benefit from them too.[1]
But first we must remind ourselves why this endeavour is so important, and so difficult. The “central and transformative promise” of the SDGs was to leave no one behind. That promise is not being kept. The World Bank’s 2025 Global Economic Prospects report uncovered how the world’s poorest countries have fallen behind over the past 15 years.[2] Their people’s incomes have barely increased, with per capita growth averaging less than 0.1 percent annually over that period.
Investing in these “frontier markets” brings many challenges for investors, from macroeconomic volatility to a capricious legal and regulatory environment. That means they are outside the consideration of most commercial investors. As a result, they receive very little foreign portfolio investment (stocks and bonds) and very little foreign direct investment, other than in the extractive industries.[3] Their domestic financial sectors are also small, supplying a limited set of expensive financial services to few firms. Domestic credit to the private sector averages just 26% of GDP in economies that are classified as Least Developed Countries (LDCs) by the UN.
As a result of persistently low foreign and domestic investment, their economies suffer from inadequate infrastructure and consist largely of small informal businesses. Businesses in LDCs have on average just $3000 worth of physical capital (buildings, machinery, computers etc.) per citizen, compared to over $18,000 in lower-middle incomes countries that are not classified as LDCs.[4]
DFIs such as BII cannot solve all these countries’ problems, but we can help businesses to raise capital and grow. This is not easy. The challenges that make investing in frontier markets difficult for commercial investors also apply to DFIs. Added to this, DFIs also face – for good reasons – constraints that other investors do not.
We must invest in firms that can comply with our policy on responsible investing. Our hands-on investment process entails relatively high transaction costs, which means that, when investing directly, we want to deal with larger firms that can absorb large sums.[5] However, there are few large firms in frontier markets. If we exclude Ethiopia, which is a relatively large economy and something of an exception, then all 30 remaining African LDCs have in combination about the same number of businesses with more than 100 employees as two upper middle income countries (South Africa and Egypt).[6] While we can use local intermediaries to help us reach smaller firms, we must find ones that comply with our standards and – just as importantly – have a viable business model that aligns with our objectives.[7]
Although inadequate infrastructure holds frontier markets back, history teaches us that countries can get into trouble by over-investing in poorly chosen infrastructure projects that exceed demand and ability to repay construction costs (either from customer fees or taxation).[8] So, we must be careful only to support well-chosen projects.
Despite these challenges, in the absence of commercial investment, DFIs have a critical role in bridging financing gaps and investing in the places that need it most. And experience also shows that it is possible for DFIs to make valuable investments in frontier markets.
Over the decades BII has made numerous successful investments in these markets, in electricity supply, digital connectivity, transportation, financial services, agriculture and forestry. These investments are creating economic opportunities and improving lives. They include partnering with the first private telecoms operator in Ethiopia, Safaricom Ethiopia; climate lending for small businesses in Zambia, with Zanaco; and using our unique ability to sponsor new ventures to create platforms such as Africa Gateway, which is developing the first deep-sea port in the DRC.
Here is what we have learned.
- A successful investment will require more than money – it also requires persistence and partnerships. Investment opportunities in frontier markets are harder to find, and investors will face hurdles that take time to overcome. DFIs need dedicated teams that are prepared to confront a range of environmental, social and business integrity issues. And they must accept that the investment process will take longer. If DFIs understand this, and even better – work together – investments can see success. The Africa Resilience Investment Accelerator (ARIA), for example, is a coalition of DFIs including BII, FMO (the Dutch DFI) and Proparco (the French DFI). Launched in 2021, its goal is to unlock investment opportunities in Africa’s frontier economies in the long-term. Since then, ARIA has unlocked more than $45 million in DFI investment and provided support to local businesses to help them become investment-ready: to date it has delivered 40 technical assistance projects to 30 companies in frontier markets. It has dedicated teams working to uncover investment opportunities in Benin, the Democratic Republic of Congo, Ethiopia, Guinea, Liberia, Togo and Sierra Leone – where we recently agreed a risk-sharing facility with Ecobank to increase its lending businesses.[9]
- Build the right local partnerships. Something we often hear from our investees in frontier markets is that they face challenges that can only be overcome through a good working relationship with local government. Our close working relationship with our shareholder, FCDO, helps us understand local priorities. Investing alongside the right partners is part of how we mitigate the risks of frontier investing.
- Set realistic financial return expectations. Our experience shows that it is possible to invest profitably in frontier markets. Frontier markets offer a range of investment opportunities with different risk return profiles, some of which should be attractive to commercial investors, especially if accompanied by the right risk mitigants. However, our development mandate means that we will sometimes make investments with a risk/return combination that purely commercial investors would not accept. We might expect a low single digit return from a portfolio of investments in LDCs, shading into low single digit negative returns in the very poorest group of low-income countries.[10]
- Set realistic investment volume expectations. The volume of capital deployed in frontier markets will always look small when compared to larger economies, many of whom have their own urgent development needs, particularly for large climate investments. This needs to be clearly understood and communicated from the start. Otherwise, there is a risk of success being mistaken for failure, resulting in the loss of external and internal support.
- Give professionals the right financial tools. Risky enterprises call for risk-bearing capital. But our most risk-bearing instrument, equity, can be hard to use in countries where equity investors’ rights are badly protected. Frontier markets often need flexible ‘mezzanine’ debt products, which have some of the risk-bearing characteristics of equity, and at the same time, the ability to lend in local currencies, to take foreign exchange risk away from borrowers.
- Find the right intermediaries or explore new solutions. Frontier markets often need smaller amounts of capital, best delivered via intermediaries. We have worked successfully with banks and fund managers in frontier markets. But every intermediary has its strengths and weaknesses and it can be a challenge to find a partner with a successful business model that is also aligned to our objectives. We cannot expect to always find such organisation ready and waiting. That means that sometimes we must help create organisations in order to solve development problems where no investable solution exists. One example is Gridworks, an electricity transmission and distribution platform that BII created in response to the absence of existing developers serving that market in Africa. It’s now developing projects to distribute electricity in Burundi and build grids in isolated cities in the DRC. Another example is Growth Investment Partners Zambia, a new initiative designed to fill the gaps left by conventional models in the Zambian financial system.
Working in frontier markets requires humility. It is not about individual actors taking credit. It is a team endeavour, with different players each playing a role, where a “win” comes from the cumulation of efforts over time.
We will continue to learn and adapt our approach to investing in frontier markets, to give them the best chance of growing their economies and fulfilling the aspirations of their people. We hope others will do the same.
[1] We are approaching the end of our 2022-2026 strategy.
[2] Chapter 4 Falling Graduation Prospects
[3] As a DFI our conception of a frontier market differs from that of mainstream international investors. The Wikipedia definition of a frontier market is “more developed than an LDC but too small, risky or illiquid to be an emerging market”. Frontier market classifications by MSCI, FTSE and S&P contain mostly non-LDC LMICs. Most of the countries we regard as frontier markets are and unclassified by MSCI, FTSE and S&P and regarded as “beyond the frontier” by investors.
[4] IMF Investment and Capital Stock Database
[5] Our report Investing for Impact in African Private Equity explains how we can reach more smaller firms by investing through intermediaries than we could do if investing directly.
[6] Author’s calculations using data from Cruz et al. (2025).
[7] Our report Investing for Impact in African Private Equity explains how pooling capital with other investors in a fund makes it possible to invest smaller sums whilst covering costs.
[8] Adarov and Panizza (2024) show how low-quality investments have historically increased the occurrences of public financial crises.
[9]ARIA has produced several reports about investing in Frontier markets: lessons learned by DFIs in frontier markets; investment needs and opportunities; the case for donor-DFI collaboration; examples of successful donor-DFI collaboration and lessons from investing in financial institutions in frontier markets
[10] This is not including investments made by our concessional blended finance Kinetic facilities
