Does private lending in emerging markets deliver competitive returns? Evidence suggests it does

By Cesaire Meh and Florian Moelders

Investors often assume that lending in emerging markets carries higher risk without higher returns. More than three decades of loan-level data suggest otherwise – and the distinction matters. Perceptions of risk shape whether capital reaches the businesses that drive growth, job creation, and investment in developing countries.

A new paper finds that private lending in emerging markets and developing economies (EMDEs) can deliver returns competitive with widely used public market benchmarks. Unlike previous research, which examines public corporate bonds, we analyse privately issued corporate debt, direct loans to firms, which constitute much of corporate financing in developing countries. The analysis draws on loan-level cash-flow records from the International Finance Corporation (IFC), the private-sector arm of the World Bank Group, covering 4,109 loans totaling approximately $115 billion across 127 countries from 1992 to 2024.

Post-crisis returns beat public benchmarks

To assess performance, the paper uses the public market equivalent (PME), a standard measure that compares the actual returns of IFC loans with what investors would have earned by putting the same cash flows in a public benchmark index. A PME above 1.0 means the loan portfolio outperformed the benchmark.

Performance has been stronger since the global financial crisis (GFC), and in line with public bond markets across the full 2002-2024 period:

• Post-GFC (2012 onwards): The IFC loan portfolio outperformed both the CEMBI Broad Diversified emerging-market corporate bond index (PME of 1.02) and US Treasuries (PME of 1.10). Over the last five years, these figures rise to 1.05 and 1.14, respectively.
• Full period (2002-2024): The portfolio earned a PME of 0.98 against the CEMBI and 1.07 against Treasuries. The slight underperformance against the CEMBI reflects GFC-era vintages, which absorbed elevated defaults during the crisis.
• Year-by-year variation: Returns track the global credit cycle. Loans originated just before the 2008 crisis returned $0.81 against the corporate bond benchmark — the weakest vintage — while loans originated in recovery years, such as 2021, outperformed by 13 percent.

Fragile markets: Higher defaults, similar returns

The hardest test is whether these findings hold in the markets that investors are most reluctant to enter, fragile and conflict-affected situations (FCS), and the poorest International Development Association (IDA)-eligible countries. They do. Default rates are higher in these environments, but benchmarked returns are statistically indistinguishable from the overall portfolio average. This suggests IFC prices default risk appropriately even in markets that private investors have typically avoided.

The distribution of outcomes tells a similar story. FCS returns are a little more dispersed, 11.3 percent fall below a PME of 0.8 against 9.5 percent elsewhere, and 13.5 percent exceed 1.2 against 10.6 percent, but the two distributions overlap closely, and lending in fragile settings produced a spread of outcomes much like lending everywhere else. An important qualification applies, however. The loans in our sample are made on fully commercial terms; blended finance loans, where concessional capital absorbs first-loss risk, are excluded. These results should not be interpreted as evidence that private capital will flow to fragile and low-income markets at scale without concessional support. IFC’s blended-finance operations continue to play an important role in helping investors participate in these environments.

What does this mean for investors and policymakers

Developing economies face financing needs that cannot be met through public resources alone. Mobilising private capital depends, in part, on whether investors believe lending to firms in these markets can generate competitive risk-adjusted returns. More than two decades of data suggest it can.

The implication is not that every loan or every market will outperform. Rather, the evidence suggests that private lending in EMDEs is commercially viable across a broad range of economies, including many that are often considered too risky for private investment. This matters because when firms can borrow, they invest, hire, and grow. In developing economies, where small and medium enterprises often account for the majority of employment, closing the financing gap could translate directly into more and better jobs for workers who have few alternatives.

Investors, development finance institutions, and policymakers should work together to improve market data and transparency so that investors can better distinguish perceived risk from actual risk. Doing so could unlock significantly more private capital for the businesses that are, in most developing economies, the primary engines of job creation and economic opportunity.

The findings, interpretations, and conclusions expressed in this post are those of the authors and do not necessarily represent the views of the World Bank Group, its Executive Directors, or the governments they represent.