Sumitomo Mitsui Banking (SMBC) and Citigroup are among banks targeting new deals in the market for blended finance, defying a number of headwinds, including a significant decline in government spending on development aid.

Deals blending public and private funds totaled $18 billion last year, down 21% from 2023, according to Convergence, a global network of more than 190 institutions and a data provider for blended finance. Over the past three years, banks doing the most blended-finance transactions include SMBC, Citigroup, BNP Paribas and Mitsubishi UFJ Financial Group, it said in a report released Wednesday.

The deals tend to target environmental and social goals, and rely on public de-risking tools such as guarantees to attract private capital. With climate-focused transactions making up more than 60% of total financing last year, blended finance has been touted as key to raising the $300 billion in annual contributions pledged by countries at the COP29 climate summit in Baku, Azerbaijan, last year.

Jeanne Soh, head of structured finance in Asia at SMBC, said she¡¯s seen rising interest in blended finance during the past few years. The bank has been working with various development-finance institutions and does around seven to eight deals a year, she said.

SMBC is seeking to grow blended finance-related revenue by about 10% year-on-year, Soh said. ¡°This is going to be a growth sector for us, and a key focus for the bank.¡±

Citigroup, meanwhile, is looking into a type of blended-finance instrument that would allow sovereign issuers in emerging markets to refinance their debt and put savings toward developmental goals such as food security and education, said Stephanie von Friedeburg, a New York-based managing director in the bank¡¯s public-sector group.

The market for these so-called debt-for-development swaps ¡°is really starting to grow,¡± she said.

At the same time, the market for blended finance faces a shortage of funds as richer nations, including the Netherlands and Germany, cut back on developmental aid. In the United States, President Donald Trump has taken a sledgehammer to USAID, which had been one of blended finance¡¯s most active investors.

As a result, the market now finds itself ¡°on a precipice,¡± Convergence CEO Joan Larrea said in an interview.

Larrea also pointed to other problems that are hampering growth. Blended finance is ¡°plagued by major issues,¡± she said. That includes a lack of strategy among donors to target private-sector funding, a failure to share data and insufficient standardized structures, which make it harder to scale and replicate transactions, she said.