In 1996, a first funding mechanism was created in SAARC, ‘South Asian Development Fund (SADF), merging the SAARC Fund for Regional Projects (SFRP) and the SAARC Regional Fund. SADF objectives were to support industrial development, poverty alleviation, protection of environment, institutional/human resource development and promotion of social and infrastructure development projects in the SAARC region. SADF started with a resource base of US$5 million (contributed on pro-rata basis by SAARC Member States), and till its closure in June 2008, had funds amounting to approx. US$ 7.0 million. Till its closure, SADF completed techno-economic feasibility studies for sixteen project studies.

During 2002-2005, SAARC Member States considered instituting various sectoral funding mechanisms e.g. Poverty Alleviation Fund, Infrastructure Fund, South Asian Development Bank, Media Development Fund, Voluntary Fund for the Differently Able Persons. A primary reason was that the existing South Asian Development Fund (SADF) was found to be inadequate i.e. in terms of required quantum of funds and its limited scope of work. In order to avoid proliferation of funds, the SAARC Financial Experts (September 2005) looked at the entire gamut of issues relating to funding of SAARC projects and programmes; and, amongst others, agreed that in lieu of proliferating sectoral financing mechanisms, the SADF be reconstituted into the SAARC Development Fund (SDF). And, SDF would have a permanent Secretariat, with three Windows (Social, Economic, Infrastructure). The Thirteenth SAARC Summit (Dhaka, 12-13 November 2005) finally decided to reconstitute the SADF into SDF to serve as the “umbrella financial mechanism” for all SAARC projects and programmes.

The Social Window would primarily focus poverty alleviation and social development projects. The Infrastructure Window would cover projects in the areas namely energy, power, transportation, telecommunications, environment, tourism and other infrastructure areas. The Economic Window would primarily be devoted to non-infrastructural funding.