What is a Challenge Fund?

As its name suggests, a challenge fund is a grant made to projects with the potential to overcome a particular challenge, in the case of FRICH, relating to poverty alleviation. The concept is founded on the principle that business can be a powerful agent of positive change, by bringing poor communities into global supply chains and providing new markets for their products and services.

By providing funding to public-private partnerships with innovative strategies, the funding can act as a catalyst for new business models that might otherwise struggle to attract commercial investment.

Challenge funds work by reducing the financial risk incurred in launching a new business model and can tip the investment decision to test ideas from a “no-go” to a “go”. Once up and running, however, successful projects should be able to be replicated in other markets and with other products, delivering broader systemic change 

The challenge fund mechanism, pioneered by the UK government’s Department for International Development (DFID), builds on the strengths of the private sector by helping to speed up the introduction of commercially viable new business models that can reduce poverty and foster development. 

An open and competitive process allows DFID to identify experienced private sector partners that are also committed to poverty alleviation through business development. However, the funds back projects and not individual firms, institutions or organisations.

Grants are to co-fund projects on a performance basis with grant recipients normally funding most of the costs and at a minimum 50 per cent. The fund re-imburses the balance on achievement of performance targets.

Dfid Challenge Funds:

Financial Deepening Challenge Fund (FDCF): 1999-2007

Business Linkages Challenge Fund (BLCF): 2000-2008

Remittances and Payments Challenge Fund (RPCF): Bangladesh 2006-2009

Africa Enterprise Challenge Fund (AECF): 2007