Academic journal article Journal of Economic and Social Development

Challenge Funds and Inclusive Businesses - Key to Socio-Economic Development?

Academic journal article Journal of Economic and Social Development

Challenge Funds and Inclusive Businesses - Key to Socio-Economic Development?

Article excerpt


1.1. What is an enterprise challenge fund?

An enterprise challenge fund is a relatively novel mechanism in the development sector which is used, and funded by, the public sector to achieve sustainable social and economic impact. The first enterprise challenge funds initially emerged in the late 1990's and were funded by European development organisations such as DFID and SIDA as well as Australian DFAT (Brain, Gulrajani, Mitchell, 2014, p. 3). In the following years, as the enterprise challenge fund mechanism was proving successful more and more development agencies and foundations started contributing to challenge funds, most notably the Dutch government, DANIDA or the MasterCard Foundation. While the challenge fund mechanism as such does not necessarily have to be directly supporting the private sector, it may specifically target gender equity or education, very many of the challenge funds are enterprise challenge funds which support the development of the innovative private sector, which in turns achieves inclusive social and economic development. One of the world's largest enterprise challenge funds is the Africa Enterprise Challenge Fund (AECF) which has raised in excess of USD 250 m since its inception in 2008.

1.2. How does it work?

An enterprise challenge fund provides concessional financing to innovative businesses across emerging and frontier markets where access to finance is prohibitively expensive or, quite simply, very difficult to access. Typically, this concessional funding is provided either as grants or soft loans with minimal interest, if any, and a long grace period. While providing concessional funding an enterprise challenge needs to realise that one of its responsibilities is to stimulate and encourage business mind-set which means that the companies shouldn't fall into the trap of believing that there's such a thing as cheap capital - therefore additional conditions are normally put in place such as a matching requirement, which means that the company will need to match awarded funding at a special ratio. Normally companies will compete with one another to obtain funding by submitting concept notes outlining the inclusive nature of their business model, and a detailed business plan with financial models and projected cash flows. The Swedish SIDA, which is one of the world's largest development agencies funds several enterprise challenge funds with the aim to support innovations in ICT, renewable energy or agribusiness (SIDA, 2012, updated 2015). Companies which are deemed to bring about the highest social impact will be awarded funding. It is very important to note that an enterprise challenge fund, like the AECF, will only award funding to for-profit business ventures which, apart from being profit-oriented, also implement the inclusive business model concept which benefits the poor. The supposition is that if businesses can make a profit by engaging poor people, either as suppliers or as consumers, and thereby create financial benefit for these communities, then the socio-economic impact will be sustainable. This impact will be further strengthened when other companies, realising the potential profit of working with low income communities, start crowding in.

1.3.What is it supposed to achieve?

An enterprise challenge fund has two overarching objectives: to support private sector development (PSD) and, through these investments in the innovative private sector, bring about inclusive social and economic development. These two objectives, or elements, are typically measured by establishing how the enterprises are doing from a business and financial perspective, and, how many poor people are benefiting by working with these businesses and by how much. These two elements, however, comprise a number of components that are very significant as they contribute to the overall success of achieving private sector development and inclusive social and economic development. …

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