Designing a new instrument for donors to engage with the private sector

Despite recognition of the key role of the private sector, and particularly the financial sector, in generating economic growth and reducing poverty around the world, traditional approaches to supporting private sector development had yielded a very limited response.

Furthermore, there was concern within the UK Department for International Development (DFID) that many interventions that supported the commercial financial sector were creating: (i) market distortion (ii) rent-seeking and donor dependency (iii) a lack of financial sustainability (iv) a wasteful attempt to “pick winners” and (v) limited positive systemic change.

Nathan’s brief was to design DFID’s very first challenge fund, targeted at the financial sector, and the first time a challenge fund had been designed for development outcomes. The aim of the Financial Deepening Challenge Fund (FDCF) was to encourage UK and local financial service providers to widen and deepen the range of financial services available in Africa and South Asia. It was launched in April 2000.

With a total fund of £15 million, it offered organizations in 15 countries (12 in sub-Saharan Africa, plus India, Pakistan, and the UK) a chance to win grants of between £50,000 and £1 million.

Results: The challenge fund became an important instrument for DFID and has been adopted by numerous donor agencies around the world. The FDCF funded a diverse portfolio of 28 projects for innovative pro-poor financial products and services, with a commitment of approximately £56 million of applicant resources. It led to the creation of the first mobile banking platform, now known as ‘M-PESA’.

In Kenya alone it has benefitted over 9.5 million customers or over 40% of Kenya’s adult population. By the end of 2010, around $3.7 billion (equivalent to 10 percent of Kenya’s GDP) had been transferred over the system since its launch. It has now been adopted globally.