Challenge Funds Incentivize for Innovation
About two billion people in the developing world are financially excluded. In many parts of Africa, more than 80 percent of the population does not have access to basic financial services. Even with a proliferation of financial products for low-income groups, many people do not know how to use these services, or do not trust them. With rapidly changing financial markets, increasingly complex financial products, and the expansion of technology across formal and informal economies, the need for financial capability amongst the world’s poor is greater than ever.
Many countries have committed to support the spread of new, responsible modes of financial service delivery to help poor, underserved consumers better manage their finances. Amongst these, several particularly innovative models have emerged which demonstrate a transformative effect on low-income households. One such model is the challenge fund (CF) mechanism, an effective and versatile financing instrument to channel public money for development. The core feature of a challenge fund is its open and competitive application progress, providing successful applicants a once-off, limited duration grant to help them overcome risks and uncertainties that inhibit innovation, research and development, investment, and pioneering of new approaches. Without CF support, such activities are unlikely to happen at all, or if they do, may only happen much later.
A distinguishing characteristic of the CF mechanism is that, while application is open and competitive, disbursements are made to a limited number of applicants – those deemed to reflect the best ideas and offer the greatest prospect of success and long-term impact. Additionally, if successful applicants are private institutions, they are required to match or exceedthe funds requested (in cash or in kind), ensuring buy-in from the implementing agency.
Based on these principles, the Financial Education Fund (FEF) was founded in 2008 – a DfID-funded challenge fund designed to support innovations which improve financial literacy to increase access to financial services for the poor in Sub-Saharan Africa. From around 150 applicants in the initial stage, the FEF awarded grants to 15 recipients in eight African countries, and has successfully facilitated financial education projects and initiatives across a range of delivery channels.
Perhaps one of the best examples of the FEF’s catalytic effect is the “Elewa Pesa” (Understand Your Money) project initiated by Faulu Kenya, a microfinance company that offers credit products to the low-income market using the group-lending model. The premise of this project was that educated people make for better clients, and so Faulu sought to equip nearly 50,000 clients at 26 branches with the financial knowledge and skills to facilitate prudent money management. Professional trainers provided financial education through training workshops complemented by DVD clips, comic strips and worksheets, followed by interactive coaching sessions with Faulu loan officers.
An impact evaluation conducted towards the end of the pilot highlighted the project’s successful results: recipients of financial education showed increased knowledge of key financial topics, less risky financial decisions and improvements in behavior. Faulu staff, too, showed significant improvements from their involvement in the curriculum, becoming more knowledgeable and better equipped to answer clients’ questions, more engaged in coaching and advising them, and even saving more themselves.
FEF funding was instrumental in allowing Faulu to share the risk of a new initiative, rather than shouldering the costs of innovation itself. This strategy is also demonstrated well by another of the FEF’s grantees: Opportunity International (OI) – an organization which provides microloans, savings, insurance and training to low-income people around the world. The “Opportunity for All” project was implemented in four countries – Malawi, Ghana, Uganda and Mozambique – and aimed to build the financial capacity of poor communities with limited access to and knowledge about financial products and services. The project developed multimedia financial literacy training modules which were screened in banking halls and in more rural populations via portable DVD players. Throughout its FEF-funded project term, OI managed to reach more than 100,000 people in the four countries.
Though the Faulu and OI FEF-funded components have come now to a close, both organizations continue to implement financial education as part of their core service offerings, and are working to expand their programs using their own funds.
Above all, FEF success stories showcase the ability of the challenge fund mechanism to stimulate pro-poor innovation and investment in poor communities, and to test a diversity of ideas and approaches. Recipients of FEF grants went beyond conventional classroom training to pilot innovative teaching methods such as edutainment and multimedia (including TV drama series, radio shows, and boardgames), as to experiment with alternative teaching structures like peer-to-peer training and mentoring. Financial education delivered through these channels reached more than 12 million people across urban, peri-urban and rural areas.
This, ultimately, reflects the compound value of the challenge fund – both as an innovative mechanism itself, and in its ability to catalyze innovation amongst its grantees. By doing so, challenge funds are able to hone in on powerful models and methods for improving social outcomes. In the financial capability space, this vehicle could serve as a powerful facilitator of financial education for low-income people with the potential for considerable scale, impact and sustainability.