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Challenge Funds – The Karandaaz Experience

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By Hussam RaziThe views expressed in this blog are the authors own and do not necessarily reflect the views of Karandaaz Pakistan.

Karandaaz has run 10 rounds of challenge funds in Pakistan, and some of the findings provide valuable insights that are worth sharing.

Karandaaz Pakistan is a unique player in the financial inclusion space in the country. With support from the UK’s Foreign, Commonwealth and Development Office (FCDO) and the Bill & Melinda Gates Foundation (BMGF), its objective is to work towards a financially included and economically empowered Pakistan.

To accelerate its efforts towards advancing financial inclusion, Karandaaz works in the following areas:

  • Catalysing access to finance for SMEs
  • Promoting financial inclusion through Technology
  • Fostering Innovation and Entrepreneurship
  • Undertaking research and surfacing insights to bridge knowledge gaps

While these programmes aim to impact the unserved and underserved populations and enterprises, Karandaaz also seeks to create a demonstration effect in the financial ecosystem in Pakistan. We do so through impact focused interventions, by partnering with financial institutions, digital financial service providers (DFSPs), women entrepreneurs and start-ups. We provide technical assistance grants for experimentation in digital financial services (DFS) and support innovative models to address financial inclusion gaps in the country. Our focus on innovation and experimentation is therefore a distinctive feature of our strategy. We adopted a widely appreciated mechanism, introduced by FCDO, of running a Challenge Fund to spur innovation in the financial sector in Pakistan. The idea of a challenge fund is to enable local entities and populations to identify best-fit solutions through a transparent and competitive process.

The FCDO defines a challenge fund as:

‘a competitive mechanism to allocate financial support to innovative projects, to improve market outcomes with social returns that are higher/more assured than private benefits, but with the potential for commercial viability’.

We felt that given Karandaaz’s unique position in the financial sector in the country, sponsoring and administering challenge funds will enable local actors to design solutions that are most suited to bridge gaps in the financial service mix offered in the country. In the past 4 years, Karandaaz has run 10 challenge rounds.

In our effort to continuously improve our programme interventions, we have learnt the following through administering the challenge rounds:

Undertaking in-depth research prior to launching a challenge fund is crucial:
Undertaking a problem analysis is imperative to running a successful challenge round. This research would involve, at the minimum, identification of the main stakeholders in a problem-solving journey, realizing the challenges that a problem-solving process can potentially face and understanding the external environment around a particular problem. Designing a challenge round based on this research, identification of clear expectations and especially defining success matrices is necessary to ensure that a challenge round is effective in its administration and results.

It is important to include sector experts throughout the process,
and not just at the ideation stage. We have observed that donor expertise, due to lean team structures and ambition to target large scale impact, is concentrated at the wider sectoral level. To conceptualize innovation and realize impact, expertise is required in niche areas. Therefore, an independent consultant can provide specific market knowledge and align the grantee towards achieving maximum impact. Moreover, subject specialists must be engaged at key points during the project lifecycle for timely advice and course correction.

When working with larger institutions, buy-in from top management is necessary
to drive the project and achieve the potential impact. We have historically attracted interest from various teams within larger organizations, who have seen the challenge rounds as a platform for testing and scaling their ideas. These ideas, otherwise, would not get significant traction due to corporate targets and structures that impede innovation. However, we have learnt that while the teams may be eager and motivated to participate, lack of interest from top management results in the teams having conflicting priorities, which slows decision making and implementation. This affects the ability of the grantee to be optimally involved in the project.

When working with larger institutions, risk sharing is essential:
Our experience demonstrates that if the grantee institutions (larger financial industry actors) have skin in the game, they are more likely to align their efforts in achieving the desired outcome. Our learning here emanates from the fact that financial institutions have substantial capital that can be invested to compliment the grant amount, and without their complimentary investment, grantees are likely to face conflicting priorities further down the project lifecycle. Therefore, to scale ideas, having a participatory transactional structure may be more effective.

Having a progressive programme of support:
When working with startups or small businesses as part of challenge fund rounds, we have found that financial grants may only be one of the ingredients for success. Grants, if accompanied with a progressive programme of support, such as need specific trainings (on financial, structural, operational aspects), mentoring and the possibility of further capital injection, can be more effective in achieving scale and sustainability of ideas. This programme of continuous support also serves as an incentive to graduate out of the challenge round. Grantees with clear growth potential can prove to be game changers if provided longer term support and useful linkages.

Some ideas will fail:
An important learning we have had is that out of all ideas supported, some will not succeed. This may be a due to a variety of reasons, including poor design, the lack of regulatory support, to diverging priorities of the grantee etc. It is essential that key performance indicators (KPIs) and clear milestones are attached to a grant to track performance. At the same time, donors should be ready to walk away from projects mid-way if results are not convincing.

Distant donor engagement will not work:
Many good ideas lose steam because of some of the issues discussed above. However, proactive and regular donor engagement can keep implementation on track and ensure senior management support, in case of larger organizations.

While Karandaaz remains committed to solving some of the pressing issues in Pakistan’s financial inclusion ecosystem, our learnings have helped us adjust our strategies and designs of challenge rounds. We have capitalized on these learnings to ensure that outcomes are effective and sustainable.

After running the first round of the Women Entrepreneurship Challenge (WEC 2017), we evolved our design by adding mandatory Business Development Support for all shortlisted applicants. This enabled the applicants to refine their ideas, enhance their capacities for pitching the ideas to judges, and completing the necessary pre-requisites of formalizing their businesses. After running the second round of the Women Entrepreneurship Challenge (WEC 2018), our learnings suggested that institutionalizing the challenge round will enable wider impact and more comprehensive support. Our new, better designed, programme is now called Women Ventures, which accepts applications throughout the year and has invested in more than 29 women led businesses throughout Pakistan.

The Fintech Disrupt Challenge run by the DFS team at Karandaaz also went through a cycle of improvements. Round 1 of the challenge solely comprised of a grant whereas business development support and mentorship were also provided in Rounds 2 and 3. We also realized that Fintechs face challenges in securing partnerships with larger financial institutions and through Karandaaz’s platform, we were able to actively bridge this gap. Additionally, to create awareness of our winning grantees, we invested in marketing collateral to advertise the Fintechs’ association with Karandaaz, which led to confidence in the Fintech and its idea, from the wider industry.

As we invest in additional women led businesses through the Women Ventures programme and showcase the outstanding potential they possess, we are certain that financial institutions will follow suit. Similarly, as most Fintechs supported by Karandaaz have now secured formal partnerships with commercial banks, we believe we are now geared towards creating a significant demonstration effect in the financial inclusion ecosystem of Pakistan.