This is the second blog in the insights series from the Working Group on Innovative Finance for Early Childhood Development (ECD), co-convened by the Education Finance Network (EFN), the Education Outcomes Fund (EOF), the Brookings Institution and the Early Childhood Development Action Network (ECDAN). Over a period of seven months, the group brought together experts from twenty-five organizations for five in-depth discussions on the opportunities and challenges of applying innovative finance mechanisms in ECD interventions.

Governments, development partners, and communities have long funded essential services that support children’s health, nutrition, protection, and early learning, driven both by the belief that every child has the right to survive, thrive, and reach their full potential, and by the wider social benefits that follow. Blended finance can add a complementary role to this public-first system, bringing in additional resources for quality provision without implying privatization or a shift away from public responsibility. Blended finance means using public or philanthropic funds strategically to attract additional private investment for social outcomes (OECD DAC Principles;Convergence). In practice, this can involve combining grant or concessional (below-market) funding with private capital, along with technical support to help organizations manage and grow. The goal is to make investment possible in areas that are vital for development but often seen as too risky or too small for commercial finance alone.

This piece looks specifically at how blended finance can strengthen non-state ECD provision, complementing rather than replacing government funded instruments like debt swaps or KPI linked loans. Drawing on insights from the Working Group on Innovative Finance for ECD, it explores practical ways innovative finance can support early childhood systems. 

Many ECD providers fall into a “missing middle.” They are too large for short-term grants but too small or informal to qualify for traditional bank loans. Financial institutions often view them as risky or unprofitable, given their small loan sizes and limited financial records. Well-designed blended approaches can help fill this gap by reducing risk for lenders, improving the capacity of providers, and aligning finance with public subsidy systems, while ensuring that public authorities retain responsibility for setting standards, regulating provision, and guiding sector priorities.

Three practical insights from the working group help illustrate areas where blended finance can add value.

First, provider capabilities matter. Basic coaching and simple management tools can help ECD centers understand their costs, keep better records, and meet local regulations. Stronger financial management makes future lending or investment more viable. In South Africa, the social enterprise Grow ECD provides free mobile tools, training, and business support that help centers become compliant and improve quality, which in turn builds trust with lenders. Their approach also combines small loans with grant funding, tailored to each center’s ability to repay, and has shown very low default rates – proving that capacity building can make ECD businesses both stronger and lower-risk.

Second, alignment with providers’ real income patterns is essential. Finance works best where there is a realistic and predictable income stream, such as affordable parent fees supported by public subsidies or employer contributions to childcare. In lower-income or humanitarian settings, flexible repayment terms are critical. Kumwe Hub, for example, co-designed a refugee-owned childcare model in Rwanda’s Mahama Camp that used philanthropic capital for start-up costs and introduced a gradual repayment plan for parents. This ensured affordability while building community ownership. In just 16 months, the pilot daycare became fully self-sufficient, serving 30 children daily, creating 8 jobs, enabling parents to gain 4 additional income-earning hours per day, and increasing their weekly income by 108%. Building on this success, the program is now expanding in Rwanda and will soon launch in Kenya.

Third, bringing providers together and structuring support well can help unlock scale. Working through networks, hubs, or digital platforms makes it easier for lenders to reach many small ECD centers at once. Grouping centers into quality assured portfolios also lowers costs for lenders, and simple risk sharing tools can encourage them to offer loans. Philanthropy can support quality by lowering interest costs when centers show verified improvements, which helps increase both access and standards. The Blended Finance Company uses these ideas by blending different types of capital, often alongside technical assistance, to support responsible local lending and help the market grow. Beyond funders, civil society organizations, NGOs, and impact focused microfinance or fintech groups play an important role by offering capacity building, financial literacy, and help with loan processes. These partnerships show how thoughtful structuring and collaboration can turn blended finance principles into practical support for ECD providers.

Responsible blended finance in ECD requires safeguards to ensure that concessional funding truly supports low-income families and quality standards. Capital should always be paired with technical and regulatory support to help providers register, plan and operate sustainably. Whenever feasible, local-currency lending should be used to avoid foreign-exchange risks, and public subsidies should lower the cost for families rather than increase profits. These principles, grounded in global experience, help ensure that blended finance strengthens inclusion and quality rather than distorting markets.

The enabling environment matters as much as the financial tools themselves. Governments can clarify subsidy pathways, simplify registration, and, where appropriate, test guarantee or co-financing arrangements with local banks. Development finance institutions and philanthropies can fund early-stage risk-sharing and technical assistance aligned with national priorities. Implementing organizations can build standardized, data-driven pipelines that make it easier for investors to engage responsibly. Employers can also play a role by supporting workplace childcare or cost-sharing partnerships that reduce burdens on parents while improving access to early learning.

Expectations should remain realistic. Blended finance is not a silver bullet, and overall investment levels in the sector remain small compared to the need. The working group conversations indicated that ECD actors are engaging with different themes and various challenges, from strengthening provider capabilities and supporting financial viability to designing financing that fits local realities. These insights underline that the greatest impact comes when blended finance builds on what already works, helping scale models that are affordable, high quality, and aligned with public policy.

This blog article was co-authored by Nirav Khambhati, from The Blended Finance Company, and Saskia Sickinger, from the Education Finance Network (EFN) / Dalberg Advisors, and is part of a four-part blog series drawing on insights from a Working Group on Innovative Finance for ECD.

Disclaimer: This article reflects insights shared within the working group and the personal opinions of the co-authors.